Count more of family home in assets test to repair budget: Grattan Institute

The Grattan Institute says its recommendation would save the federal government about $4 billion a year.

It is among a raft of measures the institute says will reduce government spending, with the structural deficit expected to be about 2 per cent of gross domestic product, or nearly $50 billion, every year, by the end of the decade.

The report, Back in black? A menu of measures to repair the budget, shows Australia is on track for 25 years of deficits.

It says the government must cut spending and raise taxes to rein in the country's structural budget deficit.

The report says many age pension payments are made to households with substantial property assets - "almost 40 per cent of the government's spending on the age pension goes to people with more than $750,000 in assets".

Under current rules, only the first $224,500 of home equity is counted in the assets test.

Grattan Institute figures show the average value of an Australian home is $880,000 and the median is $705,000 nationally ($765,000 in capital cities).

"The exclusion of most home equity means well-off households - provided their wealth is largely in the family home - can continue to qualify for the pension," the report says. "This means taxpayers end up underwriting future inheritances."

It suggests changing the test so all equity is counted above a "generous threshold", citing an example of $750,000, which it estimates would contribute about $4 billion a year to the budget, growing over time.

This move, it contends, would mean that asset-rich but cash-poor older people would not need to sell their homes if they did not want to.

Instead, it suggests people could draw down on the equity in their home via the Home Equity Access Scheme.

"If their home equity dropped to the threshold, then they would qualify for the pension, so they would still be left with significant positive home equity," the report says.

Other suggestions to lower government spending include cutting "wasteful" spending on major defence and transport projects (several billion dollars a year; undoing Western Australia's special deal on the GST (about $5 billion a year); trimming spending on hospitals, pathology and pharmaceuticals (about $2 billion); and reducing spending on "politicised" grants and advertising ($1-$2 billion).

The report also offers items to boost government revenue, including better targeting tax concessions on superannuation, gradually raising the age at which people can use their super, from 60 to 65, and raising the GST from 10 per cent to 15 per cent with compensation for vulnerable households.

"None of these options are easy, but if the government is serious about budget repair, it will need to enhance at least some of them," said report lead author and Grattan Institute chief executive Danielle Wood.

What are your thoughts on the proposal to count more of the family home in the age pension assets test? Email edit@thesenior.com.au