Pearls and Irritations

Treasurer Scott Morrison has been expounding the above philosophy of his for months. But he couldn’t 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 February 03, 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 Poor’s, Moody’s 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 isn’t so necessarily disastrous after all.’

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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