Treasurer Scott Morrison has been expounding the above philosophy of his for months. But he couldnt be more wrong. Unfortunately the Secretary of Treasury has now followed up with nonsense that Australia should have a ceiling of 25% of GDP on government spending (I assume he is referring to Commonwealth Government spending).

Michael Pascoe (Michael Pascoe on Page 21 of February03,2016 issue of Sydney Morning Herald) nailed the ideological clamour and suggestion that lower levels of government spending result in improved economic performance and that Australia has a high level of government spending that should be reduced.

In the article, Pascoe says What can be clearly shown is that there is no correlation between relatively low government spending and the very best possible credit rating. Pascoe produces the latest figures from the right wing Heritage Foundations 2016 Economic Freedom Index, which compiles all government spending federal, state and local. This article points out that Australian Government spending is running at 35.6% of GDP. He adds that almost all countries with AAA status from Standard and Poors, Moodys and Fitch, have higher government spending as a proportion of GDP than Australia: Australia 35.6%, Canada 40.7%, Denmark 57.1%, Germany 44.3%, Hong Kong 17.6%, Luxembourg 43.6%, Netherlands 46.8%, Norway 44%, Singapore 18.2%, Sweden 53.2%, Switzerland 33.5%.

These figures make it clear that high levels of government spending do not necessarily result in poor economic performance. Pascoe concludes It turns out that having markedly higher government spending isnt so necessarily disastrous after all.

In a submission to the Senate Select Committee into the Abbott Governments 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 Audits brief is based on assumptions that Australia is burdenedwith big government and that taxes are an impediment to business investmentand workforce participation.

There is no evidence for either assumption. The trend in Commonwealthexpenditure has been downwards since the mid 1980s, falling from a peak of around28 percent of GDP to a range of 24 to 26 percent of GDP in recent years. Incomparison with similar prosperous countries Australia has one of the smallestpublic sectors.

The problem a body such as the Commission should address is our inadequate taxbase, which is the main reason the Commonwealth has had a structural deficit formost of this century. We arent collecting enough revenue to fund the publicservices needed if the economy is to thrive.

We should not shy away from raising taxes. Evidence from internationalcomparisons and from surveys on competitiveness suggests that reasonable levelsof tax do not impede countries economic performance. In fact, countries whichcompete on the basis of low taxes do so to compensate for competitiveweaknesses, such as inadequate infrastructure and poor standards of education inother words impoverished public sectors.

Such evidence, however, seems hard to convey to those gripped by a zeal to cutspending and taxes. Even in a small government/low-tax country like Australia it ispossible to find areas where private funding and provision of services can displacepublic funding and provision.

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

The rushed and secretive processes of the Commission are not the path to goodpublic policy. There may be areas where a change in the public/private mix isjustified on economic grounds, but these are not one-way towards the privatesector as implied in the Commissions brief. Because we already have a small publicsector it is likely that a proper process, with research and consultation, would find aneed for a net expansion of Australias public sector. By shutting off that possibilitythose who drafted the Commissions brief are imposing a constraint which may becontrary to the communitys 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.