Budget demands a leap of faith
The Age, 9 May 2006
The Federal Government needs to pay more than lip services to smaller government and reduced spending, writes Des Moore
Not so long ago the budget debate involved much discussion about whether to stimulate or restrain economic growth. Today the budget is seen less as an instrument to "fine tune" the economy and more in the context of who should benefit from possible changes in tax and expenditure.
This reflects various developments, including increased stability in the economy, the continuing relatively low rates of unemployment and inflation and the recognition that Keynesian economic management now has limited application. Even monetary policy acts with a significant lag, dependent on subjective judgments about likely inflation over the next eighteen months.
Importantly, broad bipartisan agreement also now exists on desirable budget
outcomes and not increasing the size of government. Indeed, Labor's announced policy of not raising the proportion of gross domestic product taken in taxation and on running budget surpluses raise the question of how the Coalition differs from Labor on the role of government in society.
Senior Ministers have claimed, of course, that since 1996 the Coalition has effected a major reduction in the size of government. Treasurer Costello wrote on this page (27/3) that "from 1995-96 through to 2005-06 the Australian Government's spending has declined from 26.3 per cent of GDP to 21.6 per cent". However, this comparison has no valid basis. The 1995-96 figure includes large general revenue grants to the states while the later one excludes the even larger GST payments now made in lieu of those grants. Mr Costello should be ashamed of presenting a totally distorted picture of federal accounts and for claiming "Liberals hold dear to be disciplined with government spending".
My May 2005 report to the Australian Chamber of Commerce and Industry on
"Commonwealth Spending (And Taxes) Can Be Cut - And Should Be" showed that the decline in federal spending of about 1 per cent of GDP since 1995-96 all reflects lower interest costs. Moreover, virtually all that decline occurred in the Coalition's first year (1996-97) and total spending has increased since then. Australian Bureau of Statistics data, which (unlike the budget papers) rightly includes as federal expenditure GST payments to the States, shows that discretionary spending by the Coalition (ie excluding interest) has actually increased by nearly 1 per cent of GDP since 1995-96 and about 1.5 per cent since 1996-97.
The Coalition has thus made no substantive progress in implementing its avowed small government policy. [In practice, the two major parties' positions on the overall role of government are remarkably similar.
This is illustrated by the Coalition's reluctance in the lead-up to tomorrow's budget to indicate preparedness to lower rates of taxation, let alone implement changes in the structure of taxation.] Treasurer Costello has been a reluctant bride who has had to be almost dragged to the altar to deliver tax cuts out of the expected large surplus of close to 2 per cent of GDP in 2006-07.Naturally, we will be expected [later] to express gratitude for the return of some of the loot our political masters have collected from us.
Regrettably, the Prime Minister has seemed almost as reluctant as his Treasurer to reduce the level of taxation. Teacher Howard has delivered several talks to class about the importance of assisting families and of government helping to "reinforce social norms and values that are under assault in various ways". But while few would deny the government a role in such matters, it surely does not require spending programs of the scale adopted by the Howard Government.
For example, does Mr Howard's favourite program of family tax benefits need to be provided to over 3 million people and include all dependent children up to 21 years? Even if that program is accepted as socially necessary, a Coalition expounding self-reliance could surely reduce the eligibility of higher income households to the other feast of social security, health and education benefits.
Astonishingly, households with incomes in the top two quintiles receive over
30 per cent of such benefits and they are equivalent to nearly half the taxes these households pay. Much of this churning is unnecessary and should
be eliminated.
As my ACCI report pointed out, federal spending could readily be reduced by
around $20 billion. Drawing also on the surplus, that would provide more than enough to cut the top tax rate to 30 per cent and would strengthen the underlying budget position. A government genuinely supportive of individuals taking an increased responsibility for themselves should ensure this budget starts the process.
From an economic perspective this would increase the availability of labour
and employment and help lift the low rate of personal saving. From a social
perspective, welfare dependency would be reduced. Please Sir, can we have
less of a "nanny" state.
(Sections in square brackets were deleted in the published version).