Pearls and Irritations

The biggest choice facing this country is between poor public services and inadequate government income support or more taxes. Unfortunately, I fear that next week’s Budget will seek to avoid this choice.

The purpose of government is to choose, and the best record of those choices and consequently a government’s priorities is its Budget.

Service demands and the Budget outlook

Prior to the Covid pandemic the principal objective of the three Coalition Governments was “to get the Budget back into the black”. In addition, their next most important priority was lower taxes, and if this was not possible, then certainly there would be no increase in taxes.

This meant that the Coalition needed to restrain government expenditure, or even better reduce expenditure, to achieve its principal objectives. Accordingly, in their first budget the Coalition tried to reduce public expenditure by actually cutting services and/or eligibility for services. But the public reaction to those cuts was so negative that from then on the Coalition adopted an alternative strategy.

Thus instead, of actually been seen to cut services, the Coalition tried to balance its budget by resorting to stealth. The funding for many services – ranging from hospitals to national institutions – was deliberately run down, but there were no clearly identifiable cuts to service provision.

With the passage of time, however, many or even most public services are now in very poor shape. This is evident from the many Royal Commissions and other enquiries into various services over the last few years.

Major enquiries urging billions of dollars additional spending include:

• The Royal Commissions into Aged Care and the National Disability Insurance Program
• The Defence Force Structure Review
• The Medicare Task Force
• The Economic Inclusion Advisory Committee
• The Women’s Economic Equality Taskforce

In addition, the Albanese Government has itself recognised that it needs to spend more on social and affordable housing – although the Government has promised much less than is being demanded by the Greens – and the Government has also promised major improvement in access to childcare.

The official projection, based on policies at the time of the last October Budget, is that every year for the next decade, government expenditure will exceed revenue by as much as 2 per cent of GDP, or about $50 billion in today’s dollars.

As the Grattan Institute points out, however, that estimate of future Budget deficits is likely to be an underestimate because:

1. there have been more significant spending announcements since the October Budget, such as increased pay for aged care workers and AUKUS
2. some of the estimates of spending growth by category appear optimistic – for example, the Grattan Institute cites hospital spending which is projected to grow less quickly than it has historically, and I would add higher education where the funding per student is projected to fall over the next three years, and VET funding which is projected to increase by only 1.3 per cent over the same three year period, notwithstanding a 20 per cent decline between 2019 and 2021 in the number of VET students
3. the official projections do not include areas where policy change is becoming inevitable, such as the low wages for early childhood educators, the extremely low level of income support through JobSeeker and rent assistance, and the eligibility for Parenting Payment.

After making a modest allowance for additional spending in response to these factors, the Grattan Institute thinks the structural Budget deficit will be closer to three per cent of GDP in 10 years’ time rather than two per cent. But my own personal assessment, is that if the Government meets public expectations for adequate services and income support, then the Budget deficit will be closer to four per cent of GDP, or close to $100 billion annually, unless there is offsetting action to reduce other expenditures, or more likely, to lift taxation.

On the face of it, with the economy at full employment, this projected budget deficit is quite inappropriate. Instead, we should be aiming for budget balance, and sooner rather than later. Furthermore, continuing deficits means that government debt will increase further, and according to the Grattan Institute, even with the present deficit, interest on government debt will rise faster than any other expenditure, other than the NDIS, over the next decade.

How to balance the Budget

In principle governments can balance their budget by either cutting expenditure or raising more revenue, or some combination of the two.

Realistically, however, there is little scope to cut expenditures further. Labor has inherited a situation where services have been under-funded and run-down. In its last October Budget, the Government did find savings equivalent to ½ per cent of GDP – but that is not much and reinforces the doubts that there is not much more that can be done to reduce budget outlays.

In the Grattan Institute’s analysis of Budget Repair, the biggest savings proposed would come from tightening up on infrastructure spending and defence. I agree, especially in the case of infrastructure. The other big savings proposed would be to undo the WA GST deal and include all equity in the family home over $750,000 in the Age Pension asset test. But both of these proposals would be extremely controversial, and even so the Grattan Institute’s recommendations for spending cuts would nowhere near restore budget balance.

Instead, as Ken Henry, the author of the last major review of taxation and former Treasury Secretary, said in his opening remarks in a recent speech:

The Australian tax system is in a parlous state. It is not capable of raising sufficient revenue to fund the activities of government. Certainly not today. Far less at any time in the future.

Since funding the activities of government is the purpose of taxation, there can be no avoiding the conclusion that the Australian tax system if not fit for purpose.

In sum, if we want decent public services and a caring society we have to be prepared to raise more revenue. And even if we increased total tax revenue by as much as 4 per cent of GDP, which I think is necessary, Australians would still be less heavily taxed than the OECD average, and about the same as Canadians and the British. Furthermore, all those other countries have a substantial budget deficit, whereas Australia would then have wiped its budget deficit out.

The next Labor Budget

While the Government is generally sympathetic to the various demands for better services and income support, it nevertheless insists that its response will be limited by budget constraints. However, although the budget deficit is a real constraint, the adequacy of government programs funding is essentially a matter of priorities. In other words, the Government’s remarks seem to be code preparing us for a Budget that does not do as much as many of us think is needed in terms of both service and deficit repair.

Of course, it is understandable that Labor is cautious about tax reform. The attempts of previous Labor Governments to introduce a super profits tax for resource companies and a carbon tax led to them losing office. While the policies of Labor, under Shorten’s leadership, to finance their social programs by increasing the capital gains tax and removing the tax advantages from negative gearing were thought to be the reason why Labor lost that election too. And presumably this is why Albanese is reported to have vetoed perhaps the easiest way to raise more revenue by amending the Stage 3 tax cuts.

The problem is that too often in the past, the debate about taxation has started from the premise that lower taxation is the obvious goal, and the over-riding priority. Too often the purpose of taxation – to pay for essential public services – was ignored. Too many people didn’t seem to appreciate that in opposing higher taxation they were opposing adequate provision of health, education and much else.

But while I am always reluctant to question politicians’ political judgement, I wonder if the Australian society has moved on from that era. In particular, I suspect that there is a much better and wider recognition that service quality has deteriorated, and income support is inadequate, both thanks to personal experiences, but also due to the various enquiries that have substantiated that conclusion.

Thus, I think there is a real chance that enough voters now accept that if we want government services then they must be paid for and that in turn means taxation has to increase. Certainly, the Government should be emphasising the link between service quality and adequate revenue.

While, unless the Government is prepared to take up the challenge and make the case for tax reform, it will leave many Labor supporters wondering what this Government really stands for. Will it make a difference?

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