The rush of new spending proposals by the Gillard government in education and social services has once again raised questions about the long term sustainability of Australian public finances.
Most notably the government has signalled its aspiration to implement a national disability insurance scheme and a new school funding regime, which according to some estimates could cost the commonwealth and states an additional $13 billion per annum.
But just how these programs will be funded, when the budgets of the commonwealth and most states are presently in disrepair and likely to remain so for some time, was one of the central themes of a speech presented recently by federal Treasury Secretary Martin Parkinson.
While acknowledging that competing demands for new and additional government spending should be politically prioritised, Parkinson largely channelled his predecessor Ken Henry to claim that rising public expenditures are next to inevitable.
Accordingly in the Parkinson view of public policy the only way to afford additional spending in the long term is for Australians to yield in their tax opposition and just accept more tax and other revenue increases.
There is no question that the present government has taken such advice to heart, as shown by its preparedness to extend the commonwealth taxing base to mining and carbon dioxide emissions, but the tax‑and‑spend message of the government’s chief economic advisor shouldn’t go unchallenged.
In effectively arguing that Australia’s share of government expenditure to GDP ratio will keep rising in the foreseeable future Parkinson stated ‘while we are getting richer, our expectations for more goods and services delivered by governments are also growing.’
This statement is central to Parkinson’s view on the future of public finances, and is essentially a modern slant on what is known in economics as ‘the law of rising state expenditures’ as laid out by German socialist Adolph Wagner in the late nineteenth century.
Most economists today tend to elevate Wagner’s law to the status of an immutable truth, but numerous empirical studies including for Australia show it is unclear that the law explains why government expanded when it did.
This is because other factors affecting the supply of government, including the imposition of taxes on income and property or the weakening of constitutional constraints such as federalism, have also increased the momentum of public sector growth.
To the extent that demands from voters happen to influence government growth, it is arguably not increasing income that has been central in driving these demands.
It is, rather, the incentives for individuals and special interests to call upon, and vote in favour of, concentrated benefits, such as middle‑class welfare, corporate subsidies and other handouts, which not only spread tax costs over others, but effectively lessen the need to secure incomes from their own personal exertions in competitive markets.
It is not surprising, then, that many public choice studies suggest the relative size and scale of government observed today to be greater than that demanded by the median‑ranked voter across the political preference distribution.
Even if we accept Parkinson’s statement, and Wagner’s law which inspired it, at face value, it is not inevitable that a positive correlation between wealth or economic development and government spending growth will continue to hold.
This is because rising incomes available to most citizens, together with technological developments and the globalisation of service provision, enable people to increasingly choose low cost non‑governmental service providers in fields currently dominated by governments.
In Australia we have seen growing student enrolments in Catholic and independent schools, and the increasing use of private hospitals to provide a wider array of intensive medical treatments.
Growing numbers of people are availing themselves of cheap and effective health care through the burgeoning medical tourism industry, while the emerging online education industry promises to fundamentally change schooling, tertiary and vocational educational services as we know them today.
Combined with the gradual erosion in public sector services reliance is the increasing mobility of capital and labour in a globalised modern world that places significant pressures on the ability of governments to collect tax revenues.
While tax mobility was emphasised by Parkinson in his speech, he omitted the point that the existing tax system, combined with increasingly prescriptive regulations and wasteful government expenditures, diminishes the ability of those who don’t relocate to earn sufficient incomes upon which governments rely for their revenues.
Even the ‘spending strike’ by Australian consumers lacking economic confidence in recent years is limiting the total amount of GST revenue redistributed by the commonwealth to the states.
It is surprising in this context that Parkinson recommended that states increase their payroll taxes to enable them to increase their own‑source spending, even though such measures would raise the costs of hiring labour and so provide disincentives to increase employment.
All in all, one very good reason why tax‑and‑spend proposals should be challenged is that a relatively larger size of government, which tax‑and‑spend inevitably entails, will compromise economic performance sending Australia a few steps closer down the European road of stagnation.
Shouldn’t Australia’s preferred economic and fiscal model be to avoid anything modern Europe has tried, meaning Australia should therefore reduce government spending and tax burdens instead?
There are plenty of proposals on the table to trim government size, so it shouldn’t be beyond the wit of politicians, with the support of their senior bureaucrats, to reform the public sector and avoid the long term fiscal crunch of projected deficits and debt.
That Parkinson failed to outline any convincing counterweight to the tax‑and‑spend inevitability thesis reveals just how far Treasury has fallen concerning the quality of its policy advice over the years.
Suicide is looking better and better !!
AML1618
12 Oct 12 at 7:52 pm
Suicide is looking better and better !!
AML1618
12 Oct 12 at 7:52 pm
The Government has no interest in putting these high spending policies in place. They are resigned to defeat at the next election and are just trying to establish as many points of difference as they can – this will enable them to claim that “under us you would have had X, under Abbot you get less than nothing.”
Similarly, the policy of sliming Abbott is not to win the next election but rather to put Abbott in a position where they can continue to bring his character and credibility into question after the election.
Fortunately there will be so few of the slimeballs left after the next election that their voice will be nothing but a dull whisper.
Sisyphus
12 Oct 12 at 10:05 pm
There’s no inevitability to anything historical, that’s a myth.
Ultimately one would expect that resource constraints would select for efficiency, ie., not tax-and-spend, which has major inherent inefficiencies. So, the truer the ideas of Peak Oil and so on are, the worse off Big Government will be.
wreckage
12 Oct 12 at 11:27 pm
Since the current head of Treasury is the former head of the Department of Climate Change and Green Social Engineering why am I not surprised to hear this?
Treasury is so politicised, as is the whole public service executive, that to believe them is to believe in the tooth fairy. Maybe we can balance the budget by forcibly extracting the teeth of LNP voters to sell them to the Fairy for 50c each. I expect a Treasury report to this effect any day now.
Bruce
13 Oct 12 at 5:51 am
The resources boom that has kept the ship afloat over the past few years may well be another thing that has accelerated the trend toward piling on more and more government expenditure. It’s not as though the mineral and energy resources are going anywhere.
However, almost everything other than land and what is embedded in it can go elsewhere, and we are seeing that. There is a delusion that it is all the higher value of the AUD.
Not only is there the bloated layers of regulation and legislation, but there is the attitude shown by too many people in this country that has resulted in most things being overpriced and underwhelming. It doesn’t matter whether it is painters, doctors, shop assistants, banks or anything else, there is a generalised lack of respect for clients/customers in this country.
You’re right about people choosing to buy overseas what they used to receive from government. I’ve sought out medical treatment overseas because of its better quality and lower cost, and this seems to be spreading amongst people I know. The people I know who have studied overseas have been quite adamant that Australian university are overpriced and second rate.
We’ll end up like a typical resource-rich banana republic, where the resource wealth is spread amongst a do-nothing, know-nothing, achieve-nothing populace that is left behind when those who have some talent and dignity leave for greener pastures.
e-girl
13 Oct 12 at 1:12 pm
The resources boom that has kept the ship afloat over the past few years may well be another thing that has accelerated the trend toward piling on more and more government expenditure. It’s not as though the mineral and energy resources are going anywhere.
However, almost everything other than land and what is embedded in it can go elsewhere, and we are seeing that. There is a delusion that it is all the higher value of the AUD.
Not only is there the bloated layers of regulation and legislation, but there is the attitude shown by too many people in this country that has resulted in most things being overpriced and underwhelming. It doesn’t matter whether it is painters, doctors, shop assistants, banks or anything else, there is a generalised lack of respect for clients/customers in this country.
You’re right about people choosing to buy overseas what they used to receive from government. I’ve sought out medical treatment overseas because of its better quality and lower cost, and this seems to be spreading amongst people I know. The people I know who have studied overseas have been quite adamant that Australian universities are overpriced and second rate.
We’ll end up like a typical resource-rich banana republic, where the resource wealth is spread amongst a do-nothing, know-nothing, achieve-nothing populace that is left behind when those who have some talent and dignity leave for greener pastures.
e-girl
13 Oct 12 at 1:13 pm