On Friday, a former top econocrat did something no serving econocrat is allowed to do, and no politician is game to do: he set out the case for us to pay higher, not lower, taxes.

For years, politicians have sought our votes by promising smaller government and lower taxes. This often helped get them elected, but it hasnt worked as promised.

Theyve reduced the size of government by privatising government-owned businesses and outsourcing the provision of many government-funded services. But though theyre always announcing tax cuts, the hidden tax of bracket creep means theres been no real reduction in the tax we pay. Great.

The man advocating a radically different approach is Dr Mike Keating. He laid out the case for bigger government and higher taxes in a speech to the Australia Institutes revenue summit at Parliament House in Canberra.

The pollies seeking election by promising lower taxes take it as obvious that taxation is a bad thing a burden which, like all burdens, needs to be minimised.

But Keating says we should remember the purpose of taxation. Its to pay for a wide range of services that governments provide to us either directly (education, healthcare, child care, aged care, pensions and payments) or collectively (defence, law and order, roads). Some services we get while were young, some when were middle-aged, and many when were old.

Keating says theres a wide consensus among Australians about the things we expect the government to do for us. We recognise that all Australians are entitled to basic levels of education, healthcare, income support and shelter, and that governments have a responsibility to ensure the provision of these essential services, he says.

Recent Coalition governments promising us lower taxes always added the promise that this could be done without reducing essential services.

Keating says theres now widespread acknowledgement that these services that we pay for collectively are critical to building our community and to our sense of community.

So taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that are consumed collectively. Many of the services paid for by taxation add to our quality of life.

Indeed, he says, history suggests that our demand for these services, such as education and health, tends to rise rapidly as economic growth causes our incomes to grow. Theyre what economists call superior goods. The better off we get, the more of our income we devote to them.

The problem for governments which politicians themselves have worsened is the disconnect in peoples minds between our demand for government services and the taxation needed to pay for them. We refuse to join the dots.

We want increased access to more and better services on the one hand, and less taxation on the other, Keating says.

So, lets stop kidding ourselves. If we want more and better services from government, well have to pay for them with higher taxes, just as when we want more or better in a shop or a restaurant, we know well have to pay more.

But assuming we accept that truth, why do we already want the government to be bigger and better?

One way the previous government sought to square the circle of maintaining essential services while cutting taxes including next Julys stage-three tax cuts is by underspending on those services and hoping no one would notice.

Keating has thought of no less than seven areas where theres little doubt that we need to spend more.

First, although the previous government acted on the scandals exposed by the royal commission into aged care, and governments have spent more on childcare, both remain underfunded. Whats more, increases in the availability and quality of care services are likely to lead to higher costs because higher wages will be needed to attract the extra workers.

Second, the Albanese governments increased spending on social housing (what in the olden days was called the housing commission) is widely considered to be much less than needed.

Third, federal government grants for public hospitals will probably have to grow a lot faster than presently expected to reduce excessive waiting times. And the Medicare payments to GPs are still too low, risking shortages of doctors, particularly in the country.

Fourth, federal funding for universities hardly grew in real terms over the nine years of the Coalition government, and actually fell per student. Labor will be pressured to make this up. As for vocational education and training TAFE the new National Skilled Agreement requires the feds to cough up more.

Fifth, unemployment benefits this week labelled JobSeeker, maybe something else next week are very low compared with most other rich economies. And the recent leap in rents means the rent assistance paid to pensioners and others on benefits is now far too mean.

Sixth, its clear well need to spend a lot more on the AUKUS nuclear submarines and other defence capabilities. This could increase annual defence spending by at least 1 per cent of gross domestic product over the next decade.

Finally, measures to reduce carbon emissions and to fully develop Australias potential as an exporter of renewable energy will almost certainly require greater funding than the government is presently planning.

The Grattan Institute estimates that if present tax arrangements arent changed to cover the expected additional growth in government spending, the structural (underlying) budget deficit will be close to 3 per cent of GDP in 10 years. Keating thinks its more likely to be 4 per cent or $100 billion a year in todays dollars.

Continuing deficits of this size would be quite unrealistic, he says. He suggests not another review of the tax system, but a major, authoritative inquiry to assess how much revenue is needed to adequately fund all government services.

When the public has a better understanding of what wed get for our money, then maybe well be more prepared to accept the need for higher taxes.

Original article published by the Sydney Morning Herald on 28 October, 2023