Max Corden. Without revenue, Australia can only have half a budget debate.

The missing element in this week’s mid-year economic and fiscal outlook, and more broadly, in current government policy, stares Australians in the face. Revenue needs to be increased. Increasing taxes, reducing tax concessions and eliminating loopholes are all options, which I and other commentators have argued for.

For example, journalist Peter Martin has shown that if compulsory superannuation contributions were taxed as income, i.e. like wages (rather than being taxed at a concessional rate) there would be a net gain to the budget of approximately A$12 billion a year. But there are many other measures to consider, all designed to increase revenue. Prominent is the ending of negative gearing.

Many of these possibilities, and more, were discussed in the Henry tax review, with many more expected to be discussed in the forthcoming white paper on tax reform. But this should have been the first order of business. This is where the solution to the “budget crisis” lies. There is, indeed, no reason why there should be a crisis.

Corporations and households all borrow – and as a result go into debt. Why can’t governments do the same? At present Australia’s federal public debt is modest (relative to GDP) compared with the debt of most comparable countries. Why then create this air of panic or, at least, guilt?

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There are two explanations.

The first is that the Coalition has demonised deficits. In its view Labor produced deficits for several years but it – the Coalition – will produce surpluses by some specified time. It seems they believed in the demons they created, and as a result made unwise promises. Perhaps they genuinely believe that deficits are “bad””. Some of them even thought that the deficits of 2008-9, which were produced deliberately for Keynesian reasons to avoid excessive unemployment during the global financial crisis, were dangerous.

There is a second, more rational, explanation for being concerned about budget deficits and setting the attainment of a surplus as a target. Too much debt leads to having to pay higher interest rates and, with the accumulation of debt, a bigger burden on the budget. All this is obvious. But there is the problem of political discipline. Less discipline on spending leads to more debt. Someone who has a tendency to alcoholism is wise to stay off alcohol altogether. This is the argument from prudence. But it can be carried to extremes, as it is at present.

It is quite surprising that in the mid-year update there is a massive concern about a budget deficit and the objective of getting to surplus, relative to a concern about the state of the economy at a time when there is excessive unemployment. Is the government’s focus sensible?

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The blame game

Treasurer Joe Hockey blames (1) the sharp fall in the iron ore price, (2) the Senate and (3) the adverse inheritance from the previous government. With regard to commodity prices, one can never foresee world price changes precisely, but way back in the Howard years, when the iron ore price rose so much, there were plenty of people who saw the probability – not the certainty – of a later decline, and recommended caution (Ross Garnaut was one of them).

With regard to the cross-bench Senators, they have reflected public opinion. They simply bear out the observation that the biases of the budget, as originally presented by the Treasurer, were not in tune with Australian historical attitudes and public opinion.

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To what extent are the policy decisions of previous governments to blame for excessive spending commitments? The Gonski education reforms and the proposed establishment of a Disability Insurance Scheme under the Gillard government can take some of the blame. Perhaps there were other (possibly irresponsible) decisions as well. But what the budget statement seems to ignore is the severe harm done by the “Howard Gift”, namely the five personal income tax reductions and superannuation concessions of the Howard Coalition government.

The elephant in the room

Commentators like me are sometimes accused of being “economic rationalists”. Well, this is an area where more rational thinking is needed. The GST might be broadened and increased (though Hockey seems loathe to do so). Even the carbon tax might be reinstated, since it would both help to finance the budget substantially and bring about a desirable reduction in carbon emission. Both these widely-canvassed and very rational ideas, while economically sound, would encounter political and public opposition, particularly the broadening of the GST. Bipartisanship is needed here.

Given the missing elephant of revenue, the mid-year update can be summarised as follows: Government spending can and will be cut, but the possibility of increasing revenue is not considered. The Australian government is required to live within its means, the means being defined as ruling out measures that generate extra revenues. The aim is to minimise the size of government irrespective of the purposes and efficiencies of the various governmental activities.

The only hopeful sign is the admirable recent decision of the government to produce its tax white paper in 2015, which presumably includes the possibility of increasing revenue – the missing element in the budget update.

Max Corden is Professorial Fellow in the department of Economics at University of Melbourne.

This article first appeared in ‘The Conversation’ 19 December 2014.

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One Response to Max Corden. Without revenue, Australia can only have half a budget debate.

  1. Wayne McMillan says:

    Max I have great respect for your outstanding contributions to Economics over many years and your wise contributions to economic debate, but I do think that the current concern with budget deficits and tax shortfalls is alarmist to the say the least and at worst misconceived. The prevailing ideas surrounding Public Finance and particularly monetary and central bank operations is wrong. I make some quick observations and comments.
    1. A sovereign country with a fiat currency, that has a free floating exchange can never run out of money to spend.
    2. Fiscal policy should be focused on how an economy is performing and whether all of its resources are productively engaged, not being preoccupied about budget surpluses or deficits.
    3. Taxes are necessary only when you need to take excess funds out of the economy, so that inflation is controlled. Who is taxed and how they are taxed should of course be decided on issues of efficiency, capacity to pay, adequacy and effectiveness.
    4. Sovereign governments who issue their currency can ALWAYS create money to spend when an economy is in recession or depressed, they don’t need to borrow.
    5. Fiscal policy should be concerned about spending on necessary social and economic priorities i.e social and economic infrastructure and maintaining full employment NOT being pre-occupied by budget supluses or deficits
    6. Sovereign Governments can always find money to continue to spend until all resources in an economy are fully utilised productively.

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