Economic implications of an ageing Australia

That's what the report's called, and it's out today. Here's an excerpt of the press release:
The Productivity Commission has highlighted the immediate challenges for governments posed by demographic trends, in its final report on the Economic Implications of an Ageing Australia.

The study found that ageing pressures are about to accelerate as the baby boomer generation retires. Ageing will reduce economic growth at the same time that it intensifies demands for public services, such as health, aged care and the age pension. With present policy settings, age-related spending will exceed the growth of tax revenue. This will open a fiscal gap equal to around 6½ per cent of GDP by 2044–45.

With the workforce shrinking as a proportion of the population, per capita GDP growth will fall to as low as 1.25 per cent per year in the 2020s, about half the rate in 2003–04.

The Commission’s Chairman, Gary Banks said “The ageing of our population is a long-term phenomenon. But its effects will be felt sooner than many imagine. The actions of governments today will determine how well Australia copes with ageing pressures in the future.”

The Commission demonstrates that, in the absence of other policy actions to reduce fiscal pressure, taxation levels would need to rise by 21 per cent by 2044–45, or the debt burden of ageing would become twice as large as Australia’s GDP.
It's clear that The Productivity Commission doesn't understand basic economics if they think that a 21 per cent rise in taxation levels would help at all. Let's look at what would change using some examples:

A small-to-medium-sized business owner runs a company that employs 10 people at minimum wage of $24,304.80 a year. Therefore, the total wage cost of his employees (not including him) is $243,048 a year. Now when these 21 percent tax hikes come in, the tax brackets change dramatically. Even presuming that the tax-free threshold stays the same, the employees on minimum wage go from paying $3,463.44 in tax to paying $7,307.45 in tax - an increase of $3,844.01 every year.

Now for the employees to get the same amount of money after tax as they did before the tax hikes, they'll need to earn an extra $7,537.27 before tax, each. Which puts the total wage cost up to $318,420.70, a rise of almost 24% in income to cover a 21% hike in tax rates. But the real question is this? How is the business owner meant to bring in an extra $75,372.70 a year when all income earners over $6,000 have less money to spend, and for those earning minimum wage, their tax more than doubles?

This means that only two other ways exist if the people want to get paid the same as they did before:

1. Government grants to the small business of $75,372.70 a year. But how does this help when the Government needs the money to pay for spiralling health and welfare costs, and they only get $38,440.10 of it back in tax? Can the Government seriously afford to throw money at the workers when huge government revenue is so important?

2. Fire some workers to bring the wage bill back to $243,048 a year. The workers, to bring home the same after-tax pay as before, are now on $31,842.07 a year, which means they can afford to hire seven workers full-time, and one part-time. But this has multiple negative effects:
- Due to a reduction in the number of workers by 25%, workers will either have to increase their productivity to match the previous output or lose income as a result, putting them back even further, and causing more firings.
- One worker will no longer have the money he had before, and two will not have any money at all, forcing them to rely heavier on government benefits like unemployment, health care etc, forcing the Government's costs up.
- These workers will stay on unemployment benefits, because nobody is going to have more money to hire anyone except the Government, who are going to busy funneling all their spare money into a crumbling socialised health care system trying to keep the elderly alive and healthy.

Now in all the three scenarios I've put forward, there's one constant: among the two groups (government and people), one is noticably worse off and one is no better off. So I ask again, how is raising taxes by 21% going to do anything but make Australians even more reliant on a Government that won't be able to cover its costs?

(Cross-posted to The House Of Wheels.)

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