The need to cut expenditure and tax

Is a bipartisan policy on overall taxation levels emerging from the major political parties? At his first National Press Club address, Finance Minister Nick Minchin stated that better living standards and greater security for all Australians requires “keeping the lid on the size of government … smaller government is a core belief”. While Labor’s finance committee chair Craig Emerson wrote in an essay that “middle Australia wants genuine tax relief and less government involvement in their lives, and does not want governments deciding for them how to spend their money”.

Indeed, Emerson went further in asserting that those "squawking" (his term) for tax reform, need to indicate “where spending should be cut”. Labor’s finance spokesman, Lindsay Tanner, is moving down a similar path while also pressing for the charter of budget honesty to allow opposition access to the basis on which election promises are costed. And Shadow Treasurer Wayne Swan agrees that marginal rates, including the top rate, are “far too high”.

While a sustainable reduction in the overall burden of taxation requires cuts in spending and or concessions, tax reform itself does not necessarily do so. But it is most encouraging that senior Labor spokesmen advocating tax reform are not ruling out both tax and spending reductions. Although the Opposition Leader has been strangely quiet on his matter, this offers potential for an opposition to compete more actively with the government, at least on budgetary policies.

This is something that is badly needed in Australian politics today. For too long the Labor party has failed to recognise that competitive private enterprise is here to stay and, while it has still not caught up with Tony Blair’s arms distance approach towards unions and industrial relations, its failure to promote the benefits from smaller government has given the coalition far too easy a passage on budget policy.

This is despite the opportunities that have existed and, as illustrated by Minchin’s Press Club address, continue to do so. The Finance Minister then claimed credit, as “an unashamedly conservative government with a core belief in smaller government”, for a fall in federal government spending from 25.5 per cent of GDP in 1996-97 to just 22.1 per cent.

However, the two percentages are totally non-comparable, mainly because the 2005-06 figure does not include the GST revenue paid to the states in lieu of the general revenue grants paid in 1996-97 (and up to the GST’s commencement in 2000-01). A more comparable basis would add the GST revenue being paid to the states in 2005-06, bringing total spending up to 26.1 per cent of GDP and showing that the coalition has increased the size of government.

It is of serious concern that relevant government ministers have not required historically consistent figures of federal government spending (and revenue) - both in aggregate and by function. Labor’s new faces should press for such presentations, and also seek major changes in the papers’ grossly inadequate structure so as to allow public understanding of where federal spending goes and how it is funded.

Such changes would provide the basis for assessing the scope for reducing aggregate taxation without adversely affecting lower income groups.

My May 2005 report to the Australian Chamber of Commerce and Industry on “Commonwealth Spending (And Taxes) Can Be Cut - And Should Be” (pdf file 268KB) points out that a combination of large expenditure and tax cuts is readily achievable because over 30 per cent of government direct and indirect benefits are paid to higher income groups, which means they currently receive back nearly half the taxes they pay. Yet most of this “churning” has no social policy rationale and is a useless product of political parties buying votes.

A combined large reduction in spending and taxes would increase economic activity and employment without increasing inflation. And such an increase in activity would itself produce an increase in taxation revenue - fiscally responsible tax reductions would be partly self-financing.

From a social perspective, welfare dependency would be reduced as an increased proportion of individuals and families would assume more responsibility for their own welfare. To paraphrase Craig Emerson, there would be less government involvement in lives and fewer government decisions on how people should spend their money.