Monster of debt to come

The objections to the responses by the Rudd Government to the financial turmoil and economic slowdown are numerous. The temporary nature of the Rudd cash handouts has been shown to encourage savings and not the splurge in consumption originally anticipated. Adding licks of paint to school buildings and installing pink batts in homes is unlikely to spark Australia's economic recovery.

The descent into fiscal deficits and spiralling public debt means that present and future taxpayers will be forced to endure higher taxes. Deposit guarantees for the financial sector and bailouts for selected industries have distorted the economy, creating a slippery slope for even more ham-fisted government tinkering with markets.

What has been left out of the debate so far is the impact of these policies on the size of government and what that can do to long-term economic performance.

Decades of economic research shows that when government becomes too large, further increases in spending hinder economic growth and productivity. In 2005 American economist Dan Mitchell compiled a large survey of studies all pointing to that conclusion.

There are a number of ways in which more government harms the economy. More spending means more taxes, which distorts incentives for people to work, save and invest to keep the economy growing.

One more dollar of tax raised means one less dollar kept by the productive private sector, with the deadweight efficiency costs and administrative burdens of taxes on top of that.

When governments borrow, particularly when credit markets are tight, they put upward pressure on interest rates and crowd out pro-growth private activities.

Government spending choices in themselves often impede growth and productive activity. Funding bureaucracies that impose excessive regulations can harm investors and consumers alike.

Subsidies to the unemployed and pensioners, or for education, health and housing programs, can distort market choices and destroy private savings as well as, in some cases, incentives to work.

As the global experience of privatisation shows, continued government provision of goods and services is typically less efficient and more costly than private sector alternatives. This also acts as a drag on efficiency and growth in the economy.

The best evidence we have suggests that expanding the size and scope of the state will damage our economic performance in the long term.

Unfortunately, it is evidence that the Government seems determined to ignore.