Part 1 of this article discussed the implications for equity and inequality resulting from Labor’s recanting its previous opposition to the Government’s Stage 3 income tax cuts, as well as dropping its policies to reform the taxation provisions covering capital gains and negative gearing. Part 2 discusses the other major concern; the ability of a future Labor Government to now pay for the services that we need and want.
Service demands and their cost
Compared to their pre-pandemic level in 2019-20, total government payments were projected in the last Budget to grow in real terms over the five years to 2024-25 at an annual average rate of 2.7 per cent. While in the Intergenerational Report (IGR) real government payments were projected to grow even more slowly over the next forty years at an annual average rate of 2.5 per cent.
This projected growth in government payments is much less than the real average annual growth of 3.4 per cent over the past 40 years, and it reinforces doubts as to whether a continuation of present government spending policies will make adequate provision for legitimate future demands.
This Government has a history of making inadequate provision for the funding of essential services, and in a previous article commenting on the IGR, I identified the following functions that are likely to prove to be under-funded if present policies are maintained:
- The JobSeeker payment which is assumed to be indexed to CPI with no further increase. Over the next forty years, that assumption means that there will be no increase in the real incomes of unemployed people, while according to the IGR living standards for the rest of the community are projected to increase by 65 per cent. I hope and expect that this IGR projection for the JobSeeker payment is totally unrealistic, and that future JobSeeker payments will rise in line with the increase in community living standards.
- Aged Care; the additional funding so far announced by the Government is significantly less than all the expert opinion insists is needed if the recommendations of the Royal Commission are to be properly implemented.
- The NDIS; the Royal Commission into disability services is likely to recommend additional funding beyond that presently provided.
- Child Care; the Government’s recent additional funding is insufficient to ensure that all those mothers who would like to work more have the incentive to do so. Indeed, the Labor Party has committed to a significantly more generous scheme.
- Tertiary education; where the funding cuts experienced by universities are maintained forever. While, although the funding for VET was recently restored, in the IGR it is projected to continue at the level established when this Government entered office. In both cases this ill-equips Australia for the future supply of skills and innovation capability that will be required to support future economic growth.
- Funding for various aspects of public administration, particularly those relating to accountability, such as the Auditor-General and a National Integrity Commission.
In sum, a rough guess is that if the Government were to deliver on its promise to adequately fund all essential services, then over at least the next two decades, the average annual rate of increase in total government payments in real terms would need to average about 3 per cent or more, compared to the annual growth rate of 2.5 per cent projected in the IGR.
Furthermore, it seems most likely that many Labor supporters have been hoping that a Labor Government would accept this challenge and restore the funding of essential government services, and perhaps spend even more in the pursuit of greater equality of opportunity.
Paying for essential government services
Of course, that faster rate of increase in government expenditure to ensure the provision of essential services will have to be financed one way or another.
According to the Treasury projections in the IGR, taxation revenue will remain inadequate to return the budget to surplus over the next forty years. Furthermore, those revenue projections assume a significantly faster rate of economic growth than I think is realistic. So a more realistic revenue forecast would result in even less revenue, than presently being assumed by the Government.
The IGR report and its failure to expose the critical policy choices
A convenient suggestion to cover the likely shortfall in revenue is that the government could borrow more. Now that the Government has run up record deficits, some Labor spokespeople seem to think they could do the same, and thus have their (spending) cake and eat it at no immediate cost.
But frankly, the idea of running continuous deficits into the future is unrealistic and irresponsible. Budget deficits may be appropriate when there is excess private saving and spare capacity in the economy, but this situation is not expected to persist for much longer.
Sooner rather than later Australia is expected to return to full employment, in which case there will be no spare capacity. Continuation of budget deficits to finance essential expenditure after that would risk a combination of excessive inflation and an unsustainable current account deficit on the balance of payments.
In short, unless Labor is prepared to pursue policies to raise more taxation revenue, it is effectively committed to continuing the underfunding of essential government services. Indeed, already there are press reports that Labor is going to dump its pledges for free cancer treatment and dental care for pensioners now that they no longer have the key sources of additional revenue that would have paid for them.
Furthermore, this combination of low taxation and poor services will not help increase the rate of economic growth and increased living standards. Australia’s rates of taxation are too low to impact incentives.
The fact is that in Australia total government outlays (Commonwealth and State) were only 35.6 per cent of GDP in 2019 (pre-Covid). This is substantially less than the 47.0 per cent in the Euro area, 41.2 per cent in Canada, 41.0 per cent in the UK, and 38.3 per cent even in the US. In addition, both the UK and US Governments are actively pursuing extra revenue. Yet almost all of these countries that spend and tax more than Australia have a higher rate of economic growth per capita.
Thus, future economic growth in Australia will be more dependent on how the money raised by taxation is spent. Increased funding for innovation, education and skills, and building on Australia’s comparative advantage in green energy is much more likely to support higher economic growth in future and even pay for itself over time.
Conclusion
A common explanation of why Labor has dropped its policies for tax reform and raising more revenue is that it thinks the best way to win the next election is to present as small a target as possible, and then focus on the Government’s (poor) performance in handling the pandemic.
However, whatever the (uncertain) merits of this political strategy, it needs to be remembered that Australia’s economic performance was very mediocre prior to the pandemic. Relying on a continuation of small government policies will not allow us to break out of that stagnation.
Instead, Labor will have to develop policies to reduce economic inequality and low wage growth if it wants to achieve anything in government, and this will require more spending and revenue than is presently likely.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
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