Big spend can now end

Australian Financial Review
3rd May 2005

The federal budget should have one core objective, argues Des Moore

What message will the 2005-06 budget on 10 May convey to Australians? "Liberals believe in limited government", the party's platform says, and Prime Minister Howard claimed in his April 12 address on federalism that "our goal is to expand individual choice, freedom and opportunity, not to expand the reach of central government".

With an imminent majority in the Senate, the Coalition certainly has an almost unique opportunity to give practical effect to its avowed small government philosophy. Indeed, an exciting potential exists to commence a definitive turning of the tide against the expansive post World War II era of government.

The Howard Government has made no substantive progress to date in the small government direction, either in practice or philosophically.

Indeed it has gone backwards. My report to the Australian Chamber of Commerce and Industry of 2 May shows that since 1995-96 federal spending, excluding interest, has actually increased as a percent of GDP - and remains higher than in Whitlam's final year. And with the now extensive so-called "tax expenditures" (basically tax concessions) Commonwealth spending is really about a sixth higher than the published figures.

Note too that Australia has a larger sized government than commonly supposed. Counting our 9 per cent compulsory superannuation contributions as a tax (which they effectively are), our government size is close to the OECD average.

But a great opportunity beckons. Analysis of Commonwealth spending and revenue concessions reveals potential for saving over $19 billon (2 percent of GDP) - not all in the budget but in the immediate future. And that would only be a start towards smaller government.

Savings can mainly be achieved by reducing benefits to higher income groups while, at the same time, minimizing the political shock by offsetting tax cuts. Advocates of a flat rate 30 percent income tax have often failed to identify how that would be financed. My proposal shows that it (and more) can be achieved through spending reductions that are both economically and socially advantageous.

A combination of large expenditure and tax cuts is readily achievable because over 30 percent of government direct and indirect benefits are paid to higher income groups, which means they currently receive back nearly half the taxes they pay. Why? Most of this "churning" has no social policy rationale. It is in fact a useless product of a society that has become bureaucratised by political parties buying votes.

The main scope for savings comes from reducing social security and welfare ($7.3 billion), health ($2.9 billion), education ($1.7 billion), and housing ($1 billion). Assistance to businesses should not escape either. Direct budget outlays to industry are readily reducible by 20 per cent ($457 million), as are other unwarranted tax concessions to business ($860 million) and high income individuals ($2.3 billion). With the states receiving much higher than expected revenue from the GST, identified savings can be effected by reducing specific purpose payments to the states for areas where they are the major deliverers of services - and where the Commonwealth should butt out.

The strong growth in per capita incomes makes it absurd to have 2.7 million or 20 per cent of the working age population receiving income support compared with only 15 per cent at the end of the 1980s and 4 per cent in 1969. [Social assistance benefits alone now contribute 14.3 percent of gross household disposable income, compared with just 8 percent under Whitlam].

Yet with increased standards of health and education, individuals are more able to take care of themselves and the proportion of the population needing federal welfare and health assistance should have been falling - and should be continuing to do so. A progressive reduction in the proportion receiving government assistance would make a major contribution to dealing with the longer-term problem identified in the Intergenerational Report.

Indeed, combined large reductions in spending and taxes (including of existing high marginal rates) would increase economic activity and employment without increasing inflation. And such an increase in activity would itself produce an increase in taxation revenue ie fiscally responsible tax reductions would be partly self-financing. From a social perspective, welfare dependency would be reduced as an increased proportion of individuals and families would assume more responsibility for their own welfare. There would be less of a nanny state.

Can the Howard government answer the following pointed observation made by Adam Smith 200 years ago? "It is the highest impertinence and presumption in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense . They are themselves always and without exception, the greatest spendthrifts in the society".