Funding High-QualityAged Care Services:A Summary

May 2021

Australians have been rightly shocked by exposés ofwidespread mistreatment, neglect and abuse of el-ders in our aged care system. Long-standing prob-lems in the aged care system became even moreacute during the COVID-19 pandemic, which posed afrightening threat to older Australians (especiallythose in residential care facilities). Three-quarters ofall deaths due to COVID-19 in Australia occurred inaged care facilities – most of those in poorly-man-aged private homes.

In response to continued scandals, in 2018 the Com-monwealth government appointed the Royal Com-mission into Aged Care Quality and Safety. TheCommission held 25 hearings and received over10,000 submissions. It compiled exhaustive evi-dence of systematic failures in the aged care system,blaming in particular inadequate government fund-ing, unfair and precarious employment arrange-ments, and the conflicts of interest facing private for-profit providers.

The Commission’s final report, issued in March 2021,included 5 volumes and 2800 pages of text. TheCommissioners made 148 specific recommendationsto urgently repair the system and better care forAustralia’s seniors.

Ultimately, aged care must be considered as a publicservice – and quality care must be provided as a ba-sic right to every older person who needs it, regard-less of their financial circumstances. The Royal Com-mission’s clarion call to build an aged care system

based around a universal entitlement to high-qualitycare represents an opportunity to break with thisshameful legacy of inaccessible or inadequate carefor our elders.

There is no doubt this will require the investment ofsignificant resources. But as with any governmentexpenditure, the matter boils down to a question ofsocial priorities. Given the contribution that our oldergenerations have made to building our country andour economy, laying the foundation for the prosper-ity that most of us enjoy today, the least we can doin return is ensure they receive high-quality clinicaland social supports, dignity, and fairness when theyneed them.

Our research shows that providing top-quality, uni-versal aged care is economically and fiscally feasible– so long as we make it the national priority it shouldbe. This report describes the existing dimensions ofAustralia’s aged care system, including the 400,000workers who provide hands-on care to seniors (bothin residential facilities and in their own homes). Itemphasises that the quality of care is inseparablefrom the quality of jobs for those who deliver thecare. And it shows the Commonwealth governmenthas ample fiscal latitude to fund the Royal Commis-sion’s urgent recommendations. Indeed, our reportidentifies five specific funding options, any one ofwhich would raise enough funds to fix the crisis inaged care — and fulfil our generational obligation tocare for those who did so much for us.

A Crisis of Care

This report summarises findings of a detailed 80-page report, Funding High-Quality Aged Care Services, by David Richardson and Jim Stanford,May 2021, published by the Centre for Future Work and available at https://www.futurework.org.au/commonwealth_has_ample_fiscal_capacity_to_implement_aged_care_reforms.

Photo by Jeremy Bishop on Unsplash

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A Vital Service, A Valuable Industry

Aged care services are not just a ‘cost item’ on thegovernment’s budget. They provide vital care thatallows older Australians to live their final years withcomfort and dignity. Moreover, the aged care sectoritself constitutes a vital industry in Australia’s overalleconomic fabric.

About 400,000 Australians are employed in deliver-ing aged care services: both in residential care facili-ties, and to seniors in their own homes. The industrygenerates $22 billion in annual GDP. It pays out $20billion per year in wages and salaries to the workers,across a wide range of occupations, who providecare. That income, in turn, supports additional con-sumer spending that is vital to Australia’s economicwell-being. A significant share of that revenue even-tually flows back to governments in the form of in-creased income tax and GST revenues.

For all these reasons, investing in needed repairs tothe aged care system will be important in Australia’sbroader post-COVID recovery. Fixing aged care willlift national incomes, employment, and tax revenuesat a time when Australia needs more of all of those.Moreover, strengthening the generational ‘pact’which underlies aged care – with each successivegeneration of elders knowing they will be well-caredfor as they age – has valuable and efficiency-enhanc-ing economic effects. It allows Australians to makeimportant decisions throughout their lives (abouteducation, careers, home ownership, investments,and more), safe in the knowledge that they will re-ceive quality, dignified care when they need it.

Fixing a Broken System

The Royal Commission made 148 recommendationscovering a wide range of urgent reforms. A centralconclusion is Australia must establish a right toquality aged care as a universal entitlement, regard-less of a senior’s ability to pay. Financial barriers anduser fees must be reduced or eliminated over time.This would ensure that every elder Australian re-ceives quality care when they need it.

The Commissioners also specified many needed re-forms in governance, transparency, and accountabil-ity for aged care providers. It proposed stronger reg-ulatory oversight to ensure quality care, and a starrating system to assist aged Australians and theirfamilies access good care.

The Commission made several recommendations re-lating to employment practices in aged care. TheCommissioners noted the quality of care cannot beseparated from the quality of work in the sector. Theconditions of aged care jobs (including pay, training,safety, and stability) inevitably shape the quality ofcare those dedicated workers can provide. Commis-sioners identified that permanent employment(rather than reliance on casual, agency, or gig jobs)is essential for quality care. They also highlighted theneed for binding minimum staffing ratios and timeallotments, registration and regulation of supportworkers, and much better training opportunities andclearer career paths.

HowMuch is Needed?

The Royal Commission report did not explicitly costits recommendations for improvements to aged care,including the important changes needed in workingconditions (such as minimum staffing ratios, train-ing, higher wages, and registration). But the Com-missioners did broadly estimate the likely incrementin government funding they feel will be required tosupport necessary reforms. Volume 3 of the reportindicated Australians should expect an increase intotal government support for aged care of at least$10 billion per year (or around 0.5% of GDP). Otherstudies confirm that broad order of magnitude of ad-ditional resources is needed to improve aged carequality.

$10 billion per year will strike some observers as alarge commitment. But in comparison to other coun-tries, and other periods in Australia’s history, mobil-ising resources on this scale to fulfil our obligation tothe people who built our economy and society, is infact very reasonable and affordable:

Aged Care:Economic Importance

Total Revenues $27 billion

Value-Added (GDP) $22 billion

Employment $400,000

Wages and Salaries Paid $20 billion

Income Tax Paid $3 billion

Consumer SpendingSupported

$15 billion

Supply Chain Purchases $5 billion

Funding High-Quality Aged Care Services: A Summary || 3

• Australian government funding for agedcare is 0.4% of GDP lower than themedian of other industrial countriesstudied by the Royal Commission.

• Aggregate taxes collected in Australiahave declined by close to 2% of GDPsince the turn of the century.

• The ratio of aggregate taxes to GDP inAustralia is 5 percentage points lowerthan the average for other industrialcountries.

Allocating additional resources worth $10 billion peryear to reforming aged care, therefore, is a modestcommitment in historical and international context.It would offset only some of the reduction in aggre-gate tax rates that has occurred in Australia in recentyears, and close just one-tenth of the gap in theoverall tax base between Australia and other OECDcountries. In other words, this commitment is abso-lutely viable in fiscal terms – and urgent in moralterms.

Options for FundingAged Care Reform

Given Australia’s challenging economic circum-stances, as we recover from the COVID-19 pandemicand recession, incremental funding for aged careservices should simply be integrated into the Com-monwealth government’s existing budgetary flows.The government already expects significant deficitsfor several years. Those deficits are both inevitableand desirable, to support recovery from recession.And the economy needs more government spending,funded through deficits, for years to come. In thiscontext, it is neither necessary nor appropriate toworry about ‘funding’ each dollar of incremental ex-penses on aged care (or other public services). Sothe government must move ahead immediately withimplementing the Royal Commission recommenda-tions, without waiting to design and implement spe-cial revenue measures.

In the longer-term, as normal economic and fiscalconditions are restored, government can mobilise in-cremental resources to support these reforms. Thisreport identifies five separate revenue measures, anyone of which (or a partial combination of them)would raise at least $10 billion per year in additionalrevenues to fund repair of aged care services. Two ofthese measures were in fact proposed by the RoyalCommissioners. The others represent additional op-tions for closing tax loopholes and concessions thatare both unfair and unimportant — relative to the ur-gent need to the repair aged care system.

Option #1:1% Increase in Medicare LevyRoyal Commissioner Briggs proposed a 1% flat ratelevy to fund aged care improvements, similar instructure to the existing 2%Medicare levy. The levywould apply at the same rate to all taxpayers whoexceed the normal tax-free threshold (currently$18,200 per year). This would raise over $10 billionper year. This flat-rate system is the least ‘fair’ of allthe revenue measures considered in this report,since it applies at the same rate to all taxpayers re-gardless of ability to pay. Nevertheless, most Aus-tralians in all income brackets have indicated a will-ingness to support aged care services with modestnew taxes (as confirmed by surveys conducted forthe Royal Commission). And the combined impact ofcollecting revenue through a flat-rate levy, and thendedicating it to a universal essential service, wouldstill enhance social equality. In this system, mostAustralians would pay less than $300 per year in ad-ditional tax.

Option #2:Progressive Aged Care LevyCommissioner Pagone proposed an alternate ap-proach to funding aged care reforms, through a setof adjustments in existing personal income tax ratesand thresholds. (Commissioner Pagone also favoursa ‘hypothecated’ system, which keeps revenues in aseparate account to solely and completely fund agedcare services, without recourse to other revenuesources; we think hypothecation is unnecessary andinflexible.) A new levy could be designed to preserve(or even enhance) the progressivity of the existingincome tax system, so that high-income individualspay a larger amount to the task of repairing aged

Five Options to FinanceAged Care Reform

Any one of these measures would raise at least $10 billionper year to implement Royal Commission

recommendations:

Increase Medicare Levy by 1%

Progressive Aged Care Levy

Retain the 37%Personal Income Tax Bracket

Reform Taxation of Investmentand Capital Income

Reform Company Taxes

care. By adjusting tax rates at each threshold, the ex-isting progressive distribution of taxes would bemaintained – while raising an equivalent amount ofnew revenues ($10 billion per year). In this system,anyone earning under $170,000 per year would payless new tax than under a 1% flat-rate levy (whilethose above that income would pay more).

Option #3:Retain the 37% Personal Income Tax BracketThe Commonwealth government has legislated ma-jor reductions in income taxes for high-income earn-ers, planned to begin in 2024. The biggest of these‘Stage 3’ tax cuts is the complete elimination of the37% tax bracket, which currently applies to incomebetween $120,000 and $180,000 per year. Thismeasure would reduce federal revenues by at least$16 billion per year. But the savings are tightly con-centrated among the most well-off segments of Aus-tralian society. Over half the total benefit is capturedby the richest tenth of society. 80% of savings arecaptured by the richest fifth of taxpayers. The bot-tom 60% of Australians receive absolutely nothing.High-end personal tax cuts are very ineffective atstimulating new spending and growth (since high-in-come households save much of their tax savings).Merely cancelling this unfair and ineffective tax cutwould free up enough revenue to move ahead imme-diately with repairing aged care services.

Option #4:Reforming Taxation of Investment & Capital IncomeOther very expensive tax concessions also dispro-portionately benefit high-income individuals — suchas various measures reducing taxes on financial in-vestments, investment properties, and other specu-lative assets. For example, capital gains income forinvestors is taxed at only half the rate of other in-come (such as wages and salaries). Dividends fromshares are also taxed at much lower rates. Most ofthese savings are pocketed by the richest 5% of tax-payers (who own a very disproportionate share of fi-nancial wealth). Halving those capital gains anddividend preferences (increasing the capital gains in-clusion rate to 75% from 50%, and allowing frankingof 50% of imputed company taxes instead of 100%)

would increase federal revenues by over $10 billionper year, enough to fund aged care reforms.

Option #5:Reforming Company TaxesThe COVID-19 recession was the first downturn inAustralia’s history when company profits went up,instead of down. The corporate share of national in-come reached an all-time record high during thepandemic – over 30% of GDP. Yet company taxesdeclined, thanks to various credits, incentives, andloopholes. A package of modest measures tostrengthen company tax collections (includinghigher levies on major banks, reforms to petroleumtaxes, elimination of access to offshore tax havens,and proportional revenue taxes on global digital gi-ants like Google and Facebook) would also raise over$10 billion per year. Again, that would be sufficientto move forward with implementing the Royal Com-mission recommendations.

AMatter of Priority

In sum, there is no question that Australia – one ofthe richest countries in the world – can afford to pro-vide top-quality, safe, respectful care to the elderswho built our economy and our society. There aremany revenue options readily available to the Com-monwealth government to support the ambitiousand quick implementation of the Royal Commis-sion’s recommendations. That effort must start im-mediately. Funding to support those reforms can ul-timately come from any one of many differentsources. The fairest of all would be to simply main-tain high-income personal taxes at their existingrates, rather than cutting them as planned. Other op-tions would also ensure that the cost of caring forour seniors is fairly shared among those who canmost afford to pay.

There is no economic or fiscal ‘constraint’ holding usback from doing right by Australia’s elders. The onlyquestion is whether society, acting through our gov-ernment, places enough priority on caring for our se-niors with the quality and dignity they deserve.

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For more details, please read our full report: Funding High-Quality Aged Care Services,by David Richardson and Jim Stanford, available at https://www.futurework.org.au/commonwealth_has_ample_fiscal_capacity_to_implement_aged_care_reforms.

Centre for Future Work, www.futurework.org.auLevel 1 Endeavour House, 1 Franklin St, Manuka, ACT, 2603, (02) 8268 9707