John Menadue. Do our governments spend too much or do they raise too little in taxation?

May 1, 2014

This a repost and provides a summary of the submission that Ian McAuley, Jennifer Doggett and I made to the Commission of Audit.  John Menadue

The Minister for Health, Peter Dutton, has said that we must reduce waste and cut costs in health. (I responded to this in my blog on 3 February “Cutting waste and costs in health”).

The Minister for Social Services, Kevin Andrews, has said that our welfare system is ‘not sustainable’ and that we are headed down the high cost welfare path of European countries. (The ABC examined this assertion and found that it was incorrect. It found that ‘There is nothing to indicate that as the population ages, Australia is headed towards the big welfare spending of some European countries. Treasury projections to 2050 show welfare spending as a proportion of our GDP will remain steady over the next three decades.–makes-unfounded-welfare-claims.)

The Treasurer, Joe Hockey has said that ‘The days of entitlement are over and the age of personal responsibility has begun’. This has been interpreted by some as suggesting that government welfare and other entitlements should be reduced.

In a submission to the Senate Select Committee into the Abbott Government’s Commission of Audit, Jennifer Doggett, Ian McAuley and I contend that the problem is not that government expenditures or that the public sector is large in Australia compared with other countries. We contend that the problem is a short-fall of revenue and that on international comparison, our tax revenues are low.

In our summary to the Committee we say …

The Commission of Audit’s brief is based on assumptions that Australia is burdened with “big government” and that taxes are an impediment to business investment and workforce participation.

There is no evidence for either assumption. The trend in Commonwealth expenditure has been downwards since the mid 1980s, falling from a peak of around 28 percent of GDP to a range of 24 to 26 percent of GDP in recent years. In comparison with similar prosperous countries Australia has one of the smallest public sectors.

The problem a body such as the Commission should address is our inadequate tax base, which is the main reason the Commonwealth has had a structural deficit for most of this century. We aren’t collecting enough revenue to fund the public services needed if the economy is to thrive.

We should not shy away from raising taxes. Evidence from international comparisons and from surveys on competitiveness suggests that reasonable levels of tax do not impede countries’ economic performance. In fact, countries which compete on the basis of low taxes do so to compensate for competitive weaknesses, such as inadequate infrastructure and poor standards of education – in other words impoverished public sectors.

Such evidence, however, seems hard to convey to those gripped by a zeal to cut spending and taxes. Even in a “small government”/low-tax country like Australia it is possible to find areas where private funding and provision of services can displace public funding and provision.

But such displacement is usually at high economic cost, simply to achieve an arbitrary fiscal objective. There is no point in reducing taxes if the private costs are greater than the saving in taxes, with no improvement (and in many cases a deterioration) in the services provided. We illustrate this in the case of health care funding. This is an area of significant public outlay and where, because of ongoing growth in demand, there are voices – often the voices of self-interest – calling for a shift from public to private insurance. Such a shift would be costly on all economic criteria – technical efficiency, allocative efficiency and equity.

The rushed and secretive processes of the Commission are not the path to good public policy. There may be areas where a change in the public/private mix is justified on economic grounds, but these are not one-way towards the private sector as implied in the Commission’s brief. Because we already have a small public sector it is likely that a proper process, with research and consultation, would find a need for a net expansion of Australia’s public sector. By shutting off that possibility those who drafted the Commission’s brief are imposing a constraint which may be contrary to the community’s wishes and sound economics.

The full submission to the Senate Select Committee can be found by going to my website. Click on ‘John Menadue Web Site’ top left of this blog page.

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