How We Can Balance The Budget And Implement A Good Social Program

 Richard_Dennis.jpg

In the lead up to the 2014 Budget the Treasurer, Prime Minister and the Commission of Audit claimed repeatedly that government spending in Australia was growing rapidly and was causing some form of budgetary crisis.

Figure 1 makes clear that there is no evidence of such growth. All of the big increases in spending have corresponded to periods of slow economic growth and rising unemployment. The dashed line Figure 1 shows the average level of spending during the Howard Governments. 

 Dennis_Figure_1.jpg

Figure 1 shows that government spending as a share of GDP increased substantially under Whitlam and in the early years of the Hawke Government, when these governments were taking on major new responsibilities in health, education and income support.

Since then, however, government spending has hovered around 25 percent of GDP. The view that government spending is out of control and increasing rapidly is not supported by the facts. 

The area of government most often cited as out of control is health. Even the Minister for Health has described the health system as ‘unsustainable’. The facts suggest otherwise as shown in Figure 2.

Dennis_Figure_2.jpg

 

Since the early Hawke years health spending at the national level has increased as a share of GDP going from around 4.7 percent to 5.4 percent of GDP but the increase has been gradual and certainly not out of control. While health spending increased by 0.7 percent over three decades, Australia’s per capita living standards increased by 88 percent.

Clearly Australians have chosen to devote some of their higher living standards to improved health care.

The gradual and steady increase in overall health spending is placing some pressure on the budget deficit in an environment of steadily declining revenues, but the problem is not caused by the small growth in health spending – but by the large reductions in revenue. 

As a share of GDP, Commonwealth revenues have fallen from 25.6 to 23.6 percent over the past 10 years.

Rather than address the decline in revenue, delay the planned increase in defence spending or scale back the proposed paid parental leave scheme; the Abbott Government has argued that it has ‘no choice’ but to flick pass its responsibilities for health care to both state governments (in the form of lower payments to the states) and to households (in the form of co-payments for seeing the doctor).

The 2014 Budget introduced a wide range of cruel cuts to services and income support for vulnerable people. But despite targeting the cuts at the most vulnerable citizens, including unemployed youth, the Government managed to reduce overall spending by a relatively modest $7.6 billion in 2016-17.

By contrast the tax cuts introduced by John Howard – tax cuts that went predominantly to high-income earners – cost this year’s budget more than $40 billion. The temporary levy on high income earners partially restores the top marginal rate to where Howard found it, but the threshold at which the top tax rate kicks in has risen from $60,000 to $180,000 in the last decade.

The elephant in the budget room is the tax concessions going to superannuation – another legacy of the Howard Government. Superannuation had always been taxed concessionally but the Howard Government turned it into a tax rort for the rich.

While the highest income earners grab the vast majority of tax concessions, those same high income earners were never going to be eligible for the age pension. The notion that the superannuation tax concessions received by someone earning $500,000 per year will ‘take pressure off the age pension’ is absurd.

As Figure 3 makes clear, the Budget papers project that the cost of tax concessions for super will soon dwarf the entire cost of paying the age pension with the annual cost of taxpayer contributions to superannuation predicted to cost $55 billion in 2017-18.

Dennis_Figure_3.jpg

 

It is not the pension that is out of control but the super tax concessions. A modest tightening of those tax concessions would cover the cost of reversing the cruel changes made by the Abbott Government in its first budget. 

Following the budget we have had Clive Palmer remind us that Australia has one of the lowest tax to GDP ratios among the OECD, which is basically a club for rich countries. Those with lower tax ratios were the US, Chile and Mexico, countries with a welfare and social service system that few people outside the parliamentary Liberal Party want to emulate.

Two years ago Joe Hockey told his conservative colleagues in London that he admired the Hong Kong welfare (non) system but, unfortunately, in the lead up to the 2013 election no-one took him seriously. Mr Hockey clearly believes that friends and family should provide income support for six months to young people who lose their jobs. Such an approach to (non) welfare lies at the heart of the Hong Kong system. 

Addressing the size and distribution of the tax concessions for superannuation and revisiting the tax cuts given to high income earners in the past decade must be at the centre of any effort to provide sustainable and equitable funding for world-class services and dignified levels of income support.

Australia does not have a spending problem. Data from Treasury, the IMF, the World Bank, the OECD and even the Commission of Audit confirms that view. However, those same sources of information make clear that Commonwealth revenue as a percentage of GDP has declined substantially in recent years.

Collecting more revenue does not have to mean increasing the income tax rates paid by average families. The top five percent of income earners get more than one- third of the tax concessions for superannuation. The 50 percent tax discount on income from capital gains flows primarily to the top five percent of income earners. And companies like Google are flouting their obligations to contribute to the education and infrastructure that drew them to this country.

Australia never had a budget crisis, but the society we have built over the past 40 years faces a dire threat from the determination of wealthy individuals and the representatives of foreign companies to undermine the tax base on which our community is built. There is no point campaigning to protect our services if we won’t fight to keep the taxes that fund them. 

RICHARD DENNISS IS THE EXECUTIVE DIRECTOR OF THE AUSTRALIA INSTITUTE. 


Showing 1 reaction

Please check your e-mail for a link to activate your account.
  • commented 2014-07-25 17:18:36 +1000
    Dead right. We should also not be afraid to use debt to fund infrastructure and services, as I point out here lukewhito.wordpress.com/debtperceptioncausesstumbles