16 October 2005

Dear Sir,


I refer to the Treasurer's invitation of 21 September 2005 for submissions for the 2006-07 Budget.

My May 2005 report to the Australian Chamber of Commerce and Industry on "Commonwealth Spending (And Taxes) Can Be Cut - And Should Be" outlined the strong case that exists, on both economic and social grounds, for Australia to move towards a small government society. Such a move would likely enhance economic activity and employment, as well as increasing the role and responsibilities of individuals and improving the functioning of society. It would also avoid, or at least greatly diminish, the need for future increases in taxation to fund assistance to the increasingly ageing population.

It is relevant that, internationally, Australia has a larger sized government than commonly supposed: allowing for compulsory superannuation contributions, our government size is close to the OECD average. And, although there has been a downward trend in Europe (albeit from higher levels), that has not occurred here.

The report pointed out that

* ABS national accounts data show that, excluding interest, Commonwealth spending has increased as a percent of GDP under the present Coalition Government. (Indeed, if GST revenue being paid to the states in 2005-06 is added to total spending in that year - as it should be for comparative purposes such spending would be estimated at 26.1 per cent of GDP compared with 25.6 per cent in 1996-97).

* Extensive "tax expenditures" - substitutes for direct expenditures delivered through the tax system - add another 17 percent or 3.8 per cent of GDP to Commonwealth spending levels.

* Analysis of Commonwealth spending/revenue concessions indicated immediate potential for saving over $19 billion pa or about 2 percent of GDP.

* Such savings could mainly be achieved by reducing benefits to higher income groups but by "compensating" most of them through tax cuts. This is possible because those groups receive 30 percent of social security (including selected education and health) benefits and thus receive back nearly half the taxes they pay. Most of such "churning" is a useless product of a society that has become bureaucratised by political parties buying votes.

* The main potential for savings in expenditure/revenue concessions would come from social security and welfare ($8,635 mn), health ($3,690 mn), education ($1,689 mn), housing ($1,278 mn) and industry assistance ($1,317mn). With the much higher than expected States' revenue from the GST, a major reduction would be justified in specific purpose payments to the States in these areas ie a greater responsibility would be passed back to the States.

Such savings would allow substantial reductions in taxation. Income tax could, for example, easily be reduced to a flat 30 percent - and some.

In the event, the Budget for 2005-06 failed to take any substantive action along these lines with the result that Commonwealth expenditure is apparently estimated to be maintained at 22.2 - 22.4 per cent of GDP over the whole period 2005-06 to 2008-09, from 22.6 per cent in 2004-05. (I say "apparently" because there appears to be a minor inconsistency between estimates shown in Table 1 of Statement 2 of Budget Paper No. 1 and those in Table 1 in Statement 13).

My main submission for 2006-07 is, therefore, that a start should now be made to effecting a substantial reduction in the size of government along the lines suggested in my report to ACCI. (A copy of that report was sent to the Budget Policy division but a further copy, either hard or electronic, can be supplied if that would be useful). A minimum aim should be to reduce Commonwealth spending over the period 2006-07 to 2009-10 to no more than 20 per cent of GDP.

I further submit that there is a need for a major uplift and revision in the way the spending and revenue figures are presented in the Budget papers. Three major aspects require attention.

First, to the extent practicable, access should be provided to data on Commonwealth spending on an historically consistent basis. For one thing, whereas Table 1 of Statement 13 in Budget Paper No.1 for 2005-06 shows total spending for the years prior to 1999-00 on a cash reporting basis, from that year accrual accounting has been used. As mentioned in my ACCI report (page 13), neither Treasury nor the Department of Finance were able to supply historically consistent budget spending figures before and after 1999-00 either in aggregate or by function. The ABS was, however, able to supply me with data on an historically consistent basis, albeit with only a limited functional dissection. This indicates that some such data is available.

While recognising that the change to accrual accounting undoubtedly absorbed considerable staffing resources in Treasury and Finance, it is now time for the Budget papers to publish data both in aggregate and, with as much dissection as possible, by function on as historically a consistent basis as practicable.

Accrual accounting aside, there is also a lack of comparability after 1999-00 due to the failure to include the GST revenue paid to the States in lieu of the general revenue grants paid up to the year the GST commenced in 2000-01. By contrast, the Australian Bureau of Statistics (quite properly) treats the GST as a Commonwealth tax and its payment to the states as federal government spending. Regardless of whether or not the GST is regarded as a Commonwealth tax, it is little short of absurd that Commonwealth spending data is not published inclusive of GST payments to the states.

Second, while The Treasury issues a Tax Expenditure Statement (TES) each year, the extent of such "expenditures" - estimated at $34.5 billion or 3.8 per cent of GDP in 2005-06 - is now such as to warrant the inclusion of a section in the Budget Paper No 1 summarising such expenditures and at least attempting to explain their obviously significant economic and social implications. Moreover, action should be taken to remedy the situation, acknowledged in the 2004 TES, that these expenditures "do not receive regular scrutiny through the budget process". That failure should be remedied in the context of the 2006-07 budget process.

Third, the present structure of the budget papers falls a long way short of explaining the rationale of spending policies. There is only limited analysis of the beneficiaries of such spending, and very little detail by income groups. I draw your attention to some of the tables in my report to ACCI (particularly Tables 3-7) and to the section on page 21 that outlines the enormous extent of churning of taxes back whence they come. The public exposure of this churning would be a significant advance and should be a major priority for 2006-07.

In short, there is a strong case for a major change in the presentation of budget revenue and spending data so as to improve the understanding of what government purports to be doing.