Former Treasury head Ken Henry calls for specific new tax levy for aged care

Former Treasury secretary Ken Henry and Treasurer Peter Costello disagree over aged care funding reform but both warn of an overly complex sector that doesn’t support older Australians to access the right care.

Peter Costello had trouble filling in paper work for a relative’s application for aged care services. Picture: Eamon Gallagher.

Former Treasury secretary Ken Henry says it is time for Australia to introduce a dedicated fund built on taxpayer contributions and ­devoted solely to aged-care services.

His former minister Peter Costello disagrees, as does the department Dr Henry once led.

But Dr Henry and Mr Cost­ello agree there are deep problems with the aged-care system, which leaves older people ­“bewildered”. The former treasurer said it was too complex even for someone as financially literate as him to navigate.

Appearing before the aged-care royal commission’s hearing into the funding and financing of aged care, Dr Henry said he normally opposed hypothecated levies, but aged care was one sector where it could work.

“It’s rare for the public to see the social benefit from their taxes,” he said. “But here’s a case where the government could demonstrate very clearly the connection between what people are providing by way of tax revenue and the enormous ­social benefit that come from the aged-care system that they’re supporting.”

Mr Costello was not convinced. He told the commission previous such levies either collected far too little — such as the Medicare levy, which accounts for only about 15 per cent of public spending on health — or too much, such as the petrol tax, which collects more than its ­intended purpose of paying for roads.

He also warned that governments of the day would change the purpose for which the levy had been collected. “The money from the Building Australia Fund found its way into the Drought Fund. The money in the Higher Education Endowment Fund has found its way into the Emergency ­Response Fund,” Mr Costello said.

In a submission to the commission, Treasury also argued against such as dedicated fund.

“Hypothecating taxation revenue for specific purposes (for example, aged care) can limit spending flexibility and inhibits the government’s ability to manage its cashflows most ­efficiently,” it said.

“Hypothecation also reduces the government’s ability to direct or redirect resources in a way that reflects its priorities and ­unanticipated events.”

Dr Henry said the aged-care sector had caused him “discomfort” during his time as Treasury secretary and that sense had not dissipated since he left the job in 2011. “The system overall is horribly complex and it contains a very high level of uncertainty for people who are elderly, people who are vulnerable, people who are suffering emotional and psychological stress,” he told the commission.