Weekend Musing: The People’s Budget

It’s the Saturday, which means its time for some CC and a weekend musing.

Last weekend’s musing on the public expenditures of first-world governments produced a lot of interesting debate.  My premise was that current levels of spending on non-capital items – primarily welfare and healthcare – were increasing quicker than GDP.  Politics aside, the math tells us this is an unsustainable situation, especially for those nations who already have large budget deficits.  This is a harsh reality that Greece is already facing and that many other indebted nations will have to face in the not-too-distant future.

As part of the robust debate that ensued, Mav raised the prospect of allowing tax-paying citizens to decide where their tax dollars would be spent.  It is an interesting proposal and one that has been put forward by many libertarians as a way of semi-justifying the forced acquisition of their wealth.  If taxes really are the price of civilisation, then maybe having a choice as to where they are spent makes it a little more acceptable for the Ayn Rand types.

Whether Ayn Rand or Karl Marx, I am still very curious to see what you would choose to have you tax dollars spent on.  I am also interested to hear from the MB community as to what they consider an acceptable taxation rate, and where they’d like to see it applied.

To provide some perspective, the breakdown of Australian federal government expenditure is shown below.  Note – this does NOT include state or local governments, which typically spend more on services such as health and education.

As far as taxation goes, Australia has a 10% GST, a progressive income tax system with a top rate of 45%, a 30% company tax rate and various other levy, duty and royalty systems.

What about Q?

Just to show I am not a fence sitter, here are my answers to the questions above.  I have no experience in treasury or the public sector, so you can take this as a reflection of my philosophical leanings rather than an expert commenting on public budgeting.

  • Government spending (elections, bureaucrats, laws, courts, prisons, etc): 20%
  • Infrastructure spending (natural monopolies only): 20%
  • Education (public schooling to high school, HECS/Help): 20%
  • Welfare (severe disabilities, vet affairs, temporary income assistance): 15%
  • Healthcare (under 18 universal, vet affairs, catastrophic emergency injury): 15%
  • Defence: 10%

Taxation: 15% GST, 20% company, progressive tax with max rate of 20%

Keep in mind my list is not exhaustive of the areas you can spend your stolen hard earned taxes on.

The MB People’s Budget

So where do you want to see your tax dollars spent?  Defence (who doesn’t want nuclear weapons?), welfare (higher student payments?), agriculture subsidies (increase food security?) or maybe the arts (a sequel to Lantana?).  Let us have it!


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Comments

  1. Science is another item where I would agree my tax money to be spent, even though I consider myself a libertarian.

    Gone are the days when a wealthy individual can support a scientist or two. These days the “easy” science is more or less taken car of and now scientists need expensive toys – thin Large Hadron Colliders and similar.

    Hopefully these will help us get to the cold fusion energy.

  2. I would cut General Government services by 50% (I believe in small government), and put that money into infrastructure immediately as I think there is a real problem in our country in that sector. Likewise look at how 30-40% cut from welfare, and put towards science/engineering/education training more trades that are needed in the economy (fast track as appropriate). Cut 10% from Defence and put that into Health. I’m not sure what it costs to have troops in Afghanistan, but get them out, and put that money to infrastructure.

  3. I pretty much agree with your proposed breakdown on the revenue side. As for expenditure, two areas that concern me are:

    1. Welfare – far too onerous on the taxpayer and leading to many perverse incentives and creating a destructive entitlement culture in this country. I’d aim to cut this by 30-40% overall.

    2. Health – Doctors (I’m talking mostly about some specialists here) have done a great job of keeping their wages at astronomical levels by artificially restricting the labour supply. I think this issue requires urgent government attention (I only have anecdotal evidence about this).

    With savings from these two measures, I’d restore our university system to some kind of credibility.

    Also, I would not cut into defence; In fact I’d probably increase funding where necessary to protect against the espionage efforts of our friends to the north.

    • Personally I’d want a defence force which is capable of defending the country, on it’s own, from physical attack by the largest power of the day. In addition, I’d like to see a decent cyber warfare and espionage capability.
      I have no idea what sort of funding this would require or how close we already are to these sorts of abilities. However, I’d wager we’d need to spend more than we do now.

    • There are plenty of young surgeons being trained here. Once they get their meal ticket they have 2 main options: off to St Elsewheres overseas for further training/experience, or straight into private practice here. The fact is that public hospitals are generally not prepared to offer new staff positions to young surgeons because State governments aren’t prepared to fund the positions. If they were, public hospital surgical waiting lists might become a little shorter and public hospitals would most likely offer a better quality of specialist care for really sick patients. But that raises another question; should ageing hips and knees and shoulders be replaced in public hospitals?

      I could go on and on and on about the idiocies besetting our health system….. but I won”t 🙂

    • I like the collective approach to the budget, and would be interested to see what people actually come up with. Considering the average inability to budget at a household level, it may be another experiment to see what a social level holds.

      As for Chris, I agree – welfare and health are areas of concern. We are the welfare state, and our politics of handouts to buy votes has not helped this in any way.

      For health – through an international medical student friend I have witnessed the major issues here first-hand. She is paying (upfront) a very large education bill, only to face possibly no prospects in south-east Qld due to the “allocation” of places to “locals” first, and even state and country wide is always last on the allocation list due to her heritage. Along with many other of our well trained practitioners, she has started applying overseas where the skills will be used, despite the potential here, and the need here…

  4. StroppyTheWonderDog

    If it is unsustainable in Australia, it is way more unsustainable in other countries that have not yet put aside any assets for future promises of income and government services (like our super guarantee and the public sector Future Fund). As UE and others on MB have pointed out repeatedly, the generational timebomb is ticking.

    So how to shift taxing and spending so that it encourages a more sustainable outcome? So that we pass on a more sustainable “system” of government that has a chance. Don’t know. But no question that for many countries, we would not want to pass on the current system plus the future realisation of all our current promises.

    Some thoughts to begin.
    1. Keep pushing back on our expectations for government services.
    Middle class welfare is corrosive in the long term. Have to start promising less for most people.
    There are enough useful universal services for government to be going on with (defence, transport infrastructure, public health/education).
    Should a household on $80,000 gross expect additional help from government? Not sure. But they do.
    2. Better target welfare spending. There are people who need our help, and I want to live in a society that does help them.
    But too much help goes to people who don’t need it. (More coming today with the carbon announcement).
    And some of those who need help aren’t getting it (hint: they are under 65).
    3. Focus education and community spending on early childhood development. Seems to be the area with the most bang for buck.
    Give every kid the opportunity to thrive.
    4. Spend less on universities. Counter intuitive I know, but I suspect we need more productivity.
    How much productive learning and research really gets done at university? Not enough.
    Shift more of this to areas where productivity is valued and rewarded – firms.
    5. And then give firms more incentives to invest for the longer term.
    We want more Xerox’s of the 60’s and 70’s don’t we, rather than another university?
    6. Shift personal tax incentives towards work and tpwards productive uses. (Existing houses don’t add to productivity. Not sure existing shares do either).
    7. Make the political system reform itself so we can input and interact with government more effectively.
    An increase in transparency would help.
    A demand from us for more long term thinking from government would help (one reason why I don’t consume the MSM very much).
    A demand from us that political parties reform so that we are encouraged to join and participate would help.
    As would a rejection by us of the political class. I won’t vote for someone that does not have life experience. A real part of the problem I think.

    • I’d have to agree with most of that, especially welfare for parents. It’s a basic function of life – reproduction. We managed to have kids for eons prior to the baby bonus – why are such programs needed now?

    • Pretty interesting list there.

      I probably don’t run with the emphasis on early childhood learning with the same passion. My son was ‘educated’ in his early years in the Steiner system, precisely because it placed zero emphasis on formal learning before the age of 7, instead encouraging abundant free play, art, tree-climbing – basically being a child and having fun. Found it very nurturing and successful.

      Just think of yourself, family and friends, probably none had any special emphasis at all on early education, yet most manage to develop into reasonably well functioning individuals. The early learning movement is a fashion phase, a feelgood enterprise that needs no special status over other education sectors.

      My own view is that the whole of education will undergo a transformation in the future, given the rise of the internet and online lessons like the Kahn Academy. I suspect it will greatly change secondary education in particular and continue to change university education. It will be resisted by Teachers Unions and vested interests.

  5. Taxation reform is the answer!
    #A flat income tax of 15%
    #Company tax at 15%
    #GST at 30% on everything!
    #Infrastructure wealth fund(bank)that pays investors 2% tax free on savings

    Provide incentive to work and incentive to save and release private capital ie tax reform to invest!

    • Now you’re talking Waz. Although the retort will be this disadvantgaes the poorest as they earned the least and spend the most of basic goods and services. So they’d be killed by the GST whilst not getting much back in tax savings.
      Of course that’s compared to today’s system. I think if you instituted a system much like yours – maybe phasing it in over several years – the economy would adjust, business would pick up (more spending dollars in our pockets) which would then flow back into wages to compensate for the 30% GST. It’d be interesting too see how it pans out.

  6. Reduce general govt expenditure through massive efficiency drives. Federal and State govts are very wasteful and we have to be one of the most over governed countries in the world.

    Welfare is another area of rort and waste.

    Agree with others increase gst to 15% & reduce personal tax.

    Finally look to develop a sense of “community” where the community accepts it’s responsibility to look after it’s own members (the sick & elderly) & it’s assets (parks & communal gardens). Much like the Greek/Italian/French cultures. This can be a project of the healthy retired which is an human asset going to waste

  7. Reduce general govt expenditure through massive efficiency drives. Federal and State govts are very wasteful and we have to be one of the most over governed countries in the world.

    Welfare is another area of rort and waste.

    Agree with others increase gst to 15% & reduce personal tax.

    Finally look to develop a sense of “community” where the community accepts it’s responsibility to look after it’s own members (the sick & elderly) & it’s assets (parks & communal gardens). Much like the Greek/Italian/French cultures. This can be a project of the healthy retired which is an human asset going to waste

  8. “Personally I’d want a defence force which is
    capable of defending the country, on it’s own,
    from physical attack by the largest power of
    the day.”

    Q, firstly, interesting post. I believe it would be a just and wonderful thing for individuals to have greater input into the governance of this country.

    Your thoughts on defence make for an interesting thought experiment. A physical attack from the greatest power of the day would require Australia to be able to defend against a nuclear armed USA. The only real option here would be if Australia had an effective nuclear deterrent of its own. I believe this would expensive.

    Pretty cool idea though.

  9. To get non-scientist to design nuclear reactors is stupid and dangerous : the same can be said of national budgets. Once you start drilling into the details it’s much harder than you think.

    Let us focus on welfare first. Beyond unemployment benefits, there is also family allowance, pension, disability allowance, etc. Those on unemployment benefits are put on a very strict job search program, and being a ‘dole budger’ is actually requires you to work HARDER than most jobs. If they still can’t get a job, it’ll because the job they’re qualified for does not exist. In the US, a job ‘flipping burgers’ at McDonalds get 200+ applicants!! Lowering the minimum wage will not help, because the number of people that can be hired at McDonald is limited. McDonald can only hire more if it opens another restaurant, which requires a huge increase in demand. So what would you do with people with no jobs? The reality is that welfare is much, much cheaper than putting them in prison.

    Now for family benefits, which is sometimes described as ‘Middle Class Welfare’. Another uncomfortable reality emerges : it is in the national interest for those with jobs to have children. It would be a national disaster if the only families with children are those with an unemployed single mother of five. However this goes against the ‘fairness’ argument.

    In the end, ou’ll find there is not much scope for pure ‘saving’. Any substantial budget cut can only be implemented through trade-offs which involves political pain and unintended consequences.

    I will make one except for Defense. It’s not how much is allocated, but what it’s spent on. Right now, we have a radar system which can’t pick up boats, submarines which make as much sound as a rock concert, ships too small to transport what they’re suppose to transport, and our next generation air craft is still ‘vaporware’. We’re better off just giving 20 billion dollars to the US and tell them to look after us!!

  10. I would only suggest changes that are in the realm of possible consensus between the political parties:

    1. Cut welfare payments by 50% – I believe there are people who have never worked for a single day and are on dole throughout their adult life.

    2. Allocate the money from welfare into infrastructure projects – Put the dole-bludgers and unemployed on a WPA style program to build the nation’s infrastructure.

    As for tax & bureaucracy – stop wasting taxpayer’s money on various feasibility studies/reviews like Henry tax review, when the government is not going to implement them anyway. Make the outcome of any study binding on the parliament. That should get rid of the bulk of bureaucratic waste and kicking the can down the road.

    Getting rid of FHOG, Negative gearing, Baby bonus etc would also be nice, but I doubt taxpayers will ever rise to the occasion and stop gorging on the pork.

    • At 42% of the average wage, Australia has one of the lowest unemployment benefit in the Western world. Reducing it further may cost less, but it will not solve the problem.

      David Brook in the New York times wrote a good article about behavioural research in regard to the unemployed. (reg. required).

      http://www.nytimes.com/2011/07/08/opinion/08brooks.html?_r=1&ref=davidbrooks

      The finding of the research is significant. It seems that the human mind does not deal well with stress, leading to a drop in IQ and irrational decisions.

      You can find some example on websites such as WSWS.org

      http://www.wsws.org/articles/2011/jul2011/welf-j01.shtml

      and

      http://www.wsws.org/articles/2011/mar2011/bank-m21.shtml

      When you read up on the situation of the people being mentioned, you have to wonder : WHAT ARE THEY THINKING??? One of them suffers from Type 2 diabetes and wants to become a SINGLE MOTHER?? And then there are all those unemployed people studying political science at TAFE @[email protected] Why is the TAFE offering a course with almost ZERO chance of employment? Why is the government paying for this?

      On the flip side, you have the grandmother gallantly raising her 4 grandchildren after the death of her daughter, but she gets no help from the government because she is employed as a truck driver.

      We need welfare reform to target the money better, and stop the insanity of paying people to study in useless courses like political science.

  11. If the amount allocated to any gov’t department, Fed, State or local, was only allowed to rise at half CPI we’d have a built in stabiliaer to gov’t waste.

    This was done in the Qld electricity industry years ago and I can tell you that no pain was felt, just a bit more resrtraint on the expenditure side.

  12. If the amount allocated to any gov’t department, Fed, State or local, was only allowed to rise at half CPI we’d have a built in stabiliser to gov’t waste.

    This was done in the Qld electricity industry years ago and I can tell you that no pain was felt, just a bit more resrtraint on the expenditure side.

  13. +1 to everyone

    Ronin I do PRAY that, wrt defence, you exaggerate just a little.

    It looks like we all favour taxing consumption rather than income.
    In regard to savings, it looks to me to be total stupidity in a nation plagued by spending more than we earn and foreign Debts that the after-tax real rate of return on savings is negative. Let me throw in a spanner!
    Savings after-tax interest rate should be
    1. What should be a reasonable return for postponing spending. i nominate 5%
    2. Infaltion I nomintate the real inflation rate as about 6% (10 id based on Real Estate) so now nominal interest rate is 11%. Now we divide that by the nominated tax rate which I believe should maximum 20% and FLAT. So we get an interest rate on savings of about 13.5%.

    GST should be calculated to make up whatever shortfall there is on income tax at 20%. I don’t care what the rate is.
    However i’d make incomes up to say $30,000 tax free to account for the fact that lower income earners get it in the neck with high GST on everything.. Then say 10% and then 20% at higher numbers?
    Cut welfare!
    However…you cannot cut welfare etc without attcking the privileged monolpolistic sectors such as Lawyers, wharfies, many government employees etc etc
    Searches for wine and a mat…this is too exhausting!

  14. It’s always interesting to ignore the theory (and there’s lots of it on this) and just get back to what’s reasonable. For mine an effective tax rate (ie total tax / income after expenses) starts getting a bit on the nose after 25% percent and by 35% feels really ordinary.

    Consider that for an ETR of 35% a person is working the first 4 months of the year (past April) for the government, and at 25% its the first 3 months. At levels in excess of 25% it really starts to feel like you working just to keep the politicians in Italian suits.

    One other issue that Australia never want to think about is the difference a person’s existing capital makes to the value of income. A person earning 60K that only has a capital base of 100K is in a very different position to a person earning 60K that has a few mil in assets. In particular the capacity to shelter income behind expenses or allow sheltered asset growth is significantly increased as the capital base grows – this issue becomes more pronounced as ETR’s rise up above 20%.

  15. Ronin, if you are referring to my post, my variable was for income tax for the lower wage earner not GST.
    I was a wholesaler during the time of the old Sales Tax which was just a GST applied at one level with varying rates. What a piece of utter stupidity it was!

    • Ah, I misread your intention. Although a variable income tax rate is still challenging because it’s PAYG, and most people won’t know exactly what their income tax will be until the end of the financial year.

      I always believed the wholesale sales tax was so messed up that the accountants just use random numbers and hope for the best 😛

  16. I think Ronin’s post is a clear demonstration that our problems are somewhat deeper than a mere rearrangement of the tax and economic system.

    • Exactly Flawse.

      The State is the great fiction by which everybody tries to live at someone elses expense. Bastiat.

      “It is a socialist idea that making profits is a vice. I consider that the real vice is making losses.” Winston Churchill

  17. All government budgets to be balanced. Federal,State and Local.

    Any deficits to be payed out of government and politicians wages and salaries or layoffs.

    No inflation via credit or monetary machinations. No get out of jail free mechanisms.

    Flat taxation. 10% GST consumption tax. Nothing else. No dipping into OPM-other peoples money. No welfare state, no warfare state. If you want money produce or trade.

    No free lunches for anyone other than those that are not genuinly capable of producing or trading for their needs. No wants catered for anywhere, anytime.

    The social contract for civilisation is that the benefits should outweigh the costs.

    Taxation is a social contract. It basically states that the government knows better than you on what to spend YOUR money on.

    “History does not provide any example of capital accumulation brought about by a government. As far as governments invested in the construction of roads, railroads, and other useful public works, the capital needed was provided by the savings of individual citizens and borrowed by the government.” Ludwig von Mises.

    “The institution of taxation is not a civilized but a barbaric method to fund anything…it amounts to…a gross violation of human liberty.” Tibor Machan

    “The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny…The wise and correct course to follow in taxation is not to destroy those who have already secured success, but to create conditions under which everyone will have a better chance to be successful.” Calvin Coolidge

    Bread and water for the robber classes till the cows come home.

  18. I’m interested in what exactly two of those blocks in the current budget pie chart mean, “General Government Services” and “Community Services and Culture”?

    If $100billion is the federal governments cost of doing business then I think we’re in trouble. That seems like a massive amount of money to be spending on ads, stationary and public sector wages.

    As for Community services and culture, I’m guessing this includes the ABC and SBS, which I actually think are pretty good, but still $8 billion seems a bit high here as well, what else is being folded under this banner I wonder?

    For my own budget, I think Q has done a pretty good job. Lifting education from the current ~8% to 20% might be a bit much but education would definitely be one of my priorities as I think a well educated populace allows people to make more informed decisions (although it might keep politicians more on their toes). Whether an additional 5% of funding to defence will actually give an addition 5% performance in defence is questionable too. However, stopping foreign deployment to participate in other people’s wars would definitely get recruitment numbers up.

  19. Much more education, less general government, less community Services and Cultural, more health and less social welfare. The more educated people need less social welfare. With today’s technology we should be able to introduce direct democracy and direct voting for any of the big pieces of the public pie.

  20. Those who suggest a flat tax structure must hate their accountants – I am sure the accountants lobby group will come out with an ad if government tries to simplyfy the tax structure 🙂