Time to listen to the evidence for a rethink of super tax concessions

Treasury Secretary John Fraser now has plenty of company in calling for a ‘fundamental rethink’ of retirement income policy. AAP/Lukas Coch

Evidence doesn’t matter when it comes to policy development. At least it doesn’t matter as much as it should in theory.

In theory, the full range of evidence is sought and nothing is off limits. In theory, objective evidence will show a clear path forward that is obvious to everyone. And in theory, as soon as new evidence is available, it will result in policy action.

This is the “evidence-based policy” mantra that echoes through forums for Australian scholars and bureaucrats, that academics rely on to train future policymakers, and that can even be found in the vision statements of Commonwealth departments.

But of course there can be big difference between theory and reality. Especially when that reality is a government minority in the upper house and one of the most complex Senates in living memory.

Let’s take the current superannuation debate for example.

Over the last six months a public consensus has emerged among academics, think tanks, community organisations, elements of the superannuation industry and most politicians about superannuation. They now agree that superannuation tax concessions are growing rapidly, are unevenly distributed and are in need of reform. Indeed, even new Treasury Secretary John Fraser has said we need a “fundamental rethink” of retirement income policy.

Clearly, this public consensus has emerged because the latest evidence is in. We finally have a clear path forward about which everyone is agreed. Well, not quite.

The evidence is old, political interest is new

First, the evidence hasn’t changed. For many years, academics, bureaucrats and financial planners have known that the system of tax concessions for superannuation was fundamentally flawed. They have asked why – when the supposed purpose of superannuation is to reduce the number of Australians relying on the aged pension – does our system shovel billions of dollars of taxpayers’ money to wealthy people who were never going to get a pension anyway?

Back in 2007, Australia Institute research showed that it was cheaper for the federal government to provide the age pension than it was to fund so called “self-funded retirement” via tax concessions. Since that time, dozens of analysts using a variety of methods and data sources have confirmed that finding.

Despite all the available evidence, up to now, the response has been policy inaction. For instance, both major parties went to the 2013 federal election promising to give the superannuation industry “certainty”, which is just good spin for ignoring the problem.

Second, what has changed in the past six months is not the size or rigour of evidence regarding the problem, it is the political significance of the problem. To put it another way, the research that is behind this new-found interest in reforming superannuation is not economic data, it is polling data.

In opposition, the Coalition had a simple (but effective) political strategy in the lead-up to the 2013 federal election. Promise to do popular things like scrapping the carbon tax, avoid promises to do unpopular things such as cutting the age pension, and suggest the Rudd/Gillard/Rudd budget deficits constituted a “budget emergency” caused by a “reckless” government.

Similarly, on entering government, the prime minister and treasurer had a clear budgetary (and re-election) strategy:

  • Step one: use the Commission of Audit to confirm that the budget emergency was even worse than previously thought.

  • Step two: use the commission’s findings to justify unpopular decisions (such as a GP co-payment and cuts to the age pension).

  • Step three: wait two years until things had settled down in the electorate before announcing tax cuts for middle and high-income earners in the lead-up to the 2016 election.

This could have been an effective strategy, if only the Senate had not refused to support spending cuts that were not signalled before the last election.

Where does superannuation fit into all this?

So what has this got to do with the role of evidence and the emergence of a public consensus around superannuation policy? Well, a lot.

Where the Coalition government has succeeded is in convincing people that the budget deficit needs fixing. As anyone with a household budget understands, if you can’t cut your spending, then the only other way to avoid running up your debt is to increase your income. This is how common sense has come to prevail where tax concessions on superannuation are concerned.

According to Treasury, tax concessions on superannuation cost the Commonwealth government around $30 billion per year. Again according to Treasury, more than one-third of that lost revenue goes to the top 10% of income earners.

Treasury estimates from the March 2015 Tax Discussion Paper show much in superannuation tax concessions (in green) goes to the top income earners. Commonwealth Government March 2015, CC BY

So, if you want to have a big impact on the budget deficit, there are few policy areas that promise as much as the reform of superannuation tax concessions.

To reiterate our point, it is not that evidence is unimportant for policy development (often it is), but if it is a competition between politics and evidence, bet on politics every time.

We suggest that this is a principle that goes beyond the example of superannuation.

If we look to the international policy context, a similar story is playing out in relation to corporate tax evasion. Everyone who has taken the time to look at the evidence has known what Apple and Google have been up to with their tax for a decade. But in Europe – where unemployment and deficits remain high after the global financial crisis – it is politics (not new evidence) that has led to taking the “double Irish sandwich” off the tax-evasion menu.

This is equally the case in Britain. Poor polling in the lead-up to the May 7 general election has provided the political incentive for their Coalition government to enter into a new partnership with the Australian government to chase down firms that shift their profits offshore.

Key MPs can tip balance towards evidence

In our recent book on Minority Policy, we argue that the conventional Australian approach to evidence-based policy inevitably results in complaints that good policy is being ruined by bad politics. This offers little to help understand the nuances of policy development in minority government contexts and does even less to support better links between evidence and policy in these contexts. In response, we suggest that the focus of those dedicated to improved public policy should be the question of when does evidence matter and when doesn’t it?

We argue that an understanding of the motivations and priorities of the parliamentarians who are, or might soon be, in a position of holding the balance of power can provide a powerful new lens through which the policy development process can be understood.

Like government ministers, Jacquie Lambie, Nick Xenophon and Clive Palmer all claim to consider evidence before making their decisions. But politicians representing different sections of the electorate can value different types of evidence, or can consider the same evidence but come to different conclusions. It is no longer just the evidence preferred by the minister that matters.

The evidence about superannuation tax concessions has been in for years, but it is the political will that has been out. However, the mood has clearly changed. There is now public consensus for a “fundamental rethink”.

Those interested in the role of evidence in informing and shaping policy can learn a lot by watching closely to see when it matters, when it doesn’t, and what might explain the difference.