Tuesday, June 26, 2012
The International Monetary Fund estimates that, in 2012, Australia's governments, state and federal, will raise a bit over one-third of our GDP, 34.5 per cent, and spend 36.3 per cent. Of the 34 advanced economies, our revenue is the ninth lowest, our spending the seventh lowest.
That might not sound too flash. But the four lowest-spending countries are Hong Kong (19.1 per cent), Singapore (19.4), South Korea (20.4) and Taiwan (20.9), where your welfare is your responsibility.
Among those with whom we compare ourselves, only New Zealand (33.1 per cent) and Switzerland (34.3) have leaner governments.
But isn't revenue the best comparison, which means the US and Japan are smaller governments than ours? No. Both are running huge deficits as a share of GDP, 7.9 per cent in the US, 9.1 in Japan which will have to be paid for by future taxpayers. Spending, not revenue, is the test of the size of government.
Australia and New Zealand aim to run a Western welfare state while spending far less than other Western countries. The gap between us and them is huge: on average, governments spend 42.2 per cent of GDP in advanced economies, 43.1 per cent in the G7, and 48.2 per cent in the European Union. So far, you would have to say, more spending has not brought more success.
On Sunday, Australia will gain two new taxes. The carbon tax initially will raise $4 billion a year: 0.3 per cent of GDP, rising to 0.4 per cent as it settles in. Revenue from the mining tax can't be estimated accurately, but Treasury puts it at just $3 billion, or 0.2 per cent of GDP, while private-sector economists say it won't even raise that.
Neither tax will change the reality: Australia is one of the lowest-taxed countries in the Western world. If Tony Abbott becomes prime minister next year, as seems likely, he will try to repeal both taxes, and will probably succeed. But it will be only a temporary victory. Both taxes will return, probably in different forms. Both taxes will be levied by future Liberal governments.
You can predict that, because in the past the Liberals have rejected so many Labor reforms, only to adopt them later. Medicare, for example, was initiated by the Whitlam government as Medibank, scrapped by the Fraser government, reinstated by the Hawke government, then embraced proudly by John Howard and his health minister, Tony Abbott.
The Liberals initially fought Aboriginal land rights, only to adopt them once in government. We saw similar feigned anger over the Keating government's Native Title Act, only for the Howard government to adopt it with minor changes. Howard's Liberals opposed compulsory superannuation when the Hawke government introduced it. There are many other examples.
A carbon price is the cheapest way of getting companies and people to make choices that slow the growth in greenhouse gas emissions heating the Earth. Give us a price incentive, and we find ways to reduce emissions with little damage to profits or our standards of living.
The market does this better than governments giving taxpayers' money to companies to do things they would do anyway.
A mining tax is justified because minerals belong to the people, and we deserve a fair share of any super profits made from mining them. The Coalition accepts this argument for oil and gas; the Howard government raised billions of dollars from the petroleum resource rent tax. A future Liberal government will agree that it makes sense to apply a similar regime to iron ore and coal. That is why Liberal governments in resource-rich states have raised royalty rates.
In Victoria, alas, Ted Baillieu does not have that option. And since the High Court interprets the constitution to mean that state governments in effect are forbidden to tax income, tax expenditure or tax production despite the intentions of the founding fathers Baillieu is left with a pack of lousy taxes, mostly on transactions, which are volatile when markets turn down, as now.
The sharp fall in housing sales and prices, flat spending on items carrying the GST, flat jobs growth: state revenue has been hit by a perfect storm. And if you don't have the revenue, you can't pay the salaries.
In 11 years, the Bracks and Brumby governments increased the public service from 23,000 to 37,000. Surely it makes sense for Baillieu to cut it back to 33,000 to help ride out the fiscal storm.
His government is in trouble for many reasons, such as its excessive cuts to TAFE, but cutting the public service should not be one of them.
On most issues, this has been a more moderate and sensible government than it has been given credit for. Its weakness is the one Paul Keating pointed to last week in the Gillard government: it lacks a compelling narrative, a credible explanation to us about what it is doing, and why.
Baillieu became Premier because of his self-discipline, good judgment, a progressive streak, careful planning and willingness to take risks.
Now he must add an ability to communicate, to define his government to us in ways we will endorse. The stakes are high.