The Guardian’s Greg Jericho has written a well-reasoned article arguing that the Federal Government should seek to raise taxes in order to balance the Budget:
Since the pre-election economic and fiscal outlook (Pefo) was issued, the expected level of government spending in the future has grown, while the expected level of revenue has fallen. The Pefo projected a balanced budget in 2015-16; now budget deficits are forecast for another 10 years.
…government expenditure is set to jump, because the big increases in expenditure for both the NDIS and education reforms hit the budget books for the first time this year when the 2017-18 financial year is included. The problem is our revenue isn’t jumping with it.
Despite Hockey talking about a “tsunami” of government expenditure about to hit us, we need not get too overwrought. Government spending will actually remain small on a world scale. Combined, Australian governments spend only the equivalent of about 37% of our GDP – less than governments in the US, UK and Japan, let alone the European nations…
A discussion on revenue and expenditure is well due in Australia, but let us not think the revenue well is dry, or that we have suddenly become a huge spending nation. There are revenue measures around, but increasing taxation is never politically easy – either annoying voters or big business. And it is for this reason that when Hockey suggests everyone will have to share the burden, he talks more about reducing expenditure and ignores raising revenue through tax.
One could also argue that the Abbott Government’s commitment to spend tens-of-billions of dollars on new military hardware (armoured vehicles, warships, submarines, and fighter planes), along with $5 billion per year on the Paid Parental Leave (PPL) scheme, are at odds with its cost cutting program.
Regardless, Jericho makes some valid points. To a large extent, the Budget is suffering from a revenue problem, brought about by tax cuts introduced as coffers were flowing from the once-in-a-century commodity boom. And now the boom is over, tax receipts have plummeted (see below charts).
Certainly, a good place to start to restore the revenue side of the Budget are cutting back egregious tax concessions like superannuation and negative gearing, which overwhelming flow to higher income earners and/or serve no social purpose.
That said, it is an inescapable fact that the Budget is facing a demographic time bomb as the baby boomer generation retires and the ratio of workers supporting non-workers declines (see next chart).
Changing demographics means the tax base will shrink over time just as expenditures on age related pensions, medical care, and other items balloons.
In such an environment, it is entirely appropriate for a government to seek to cut expenditure, so that assistance is targeted towards those in genuine need. The key is to ensure that the burden of adjustment is shared across the economy, rather than being concentrated on those with less political representation (e.g. the poor and vulnerable). For example, slashing Newstart from its already rock bottom level, while at the same time allowing wealthy retirees to draw generous benefits via the pension and Commonwealth health card, is the entirely wrong approach.
The entitlement system set-up during the Howard and early Rudd years was never sustainable once the temporary revenue from the once-in-a-century mining boom ended, and in light of Australia’s ageing demographics. Whether we like it or not, Australia will need to tighten its belt, along with finding new revenue streams, either through abolishing egregious tax lurks, as well as increasing (broadening) some taxes, like the GST, and/or implementing new efficient taxes, like broad-based land taxes and taxes on resource rents.
