During the Federal Election campaign, Labor’s shadow treasurer, Chris Bowen, confirmed that the overall tax burden would hit 24.8% GDP by 2026-27 under Labor, up from 23.5% in 2019-20:
Mr Bowen told The Australian Financial Review that his number was lower than the 25.7 per cent of GDP that Treasurer Scott Morrison claimed Labor would deliver, but higher than the Coalition’s ceiling of 23.9 per cent.
Mr Bowen said the alternative would be spending cuts to essential services.
“Let me be clear: tax-to-GDP will be higher over the medium term under both the Coalition and Labor government. Either that, or the Coalition will continue to deliver more savage cuts to Medicare and education,” he said.
The admission was immediately seized upon by Treasurer Scott Morrison, who claimed that a higher tax burden would damage the Australian economy’s growth:
“Labor might want to think you can have a tax-to-GDP ratio approaching 26 per cent and that will have no impact on the Australian economy. They are kidding themselves”…
The Coalition’s 23.9% of GDP ceiling on tax is based on the National Commission of Audit’s recommendation that taxation revenue as a share of GDP should be capped at 24%.
The assumption that higher tax equals less economic growth is a popular one among conservatives, not just in Australia.
However, four American academics have published an important new book, entitled “How Big Should our Government Be?”, which examines in detail the vexed issue of government size and growth.
According to the Washington Post, which provides a good summary of the book, there is actually a positive correlation between the size of government and economic growth per capita:
Using data on 12 advanced economies from 1870, the authors of the book conclude with the following:
“In the century and a half since then, government expenditures as a share of GDP have risen sharply in these countries. Yet they didn’t experience a slowdown in their longrun economic growth rates. The fact that economic growth has been so stable over this lengthy period, despite huge increases in the size of government, suggests that government size probably has had little or no impact on growth.”
The authors also note that “A national instinct that small government is always better than large government is grounded not in facts but rather in ideology and politics,” and that the evidence “shows that more government can lead to greater security, enhanced opportunity and a fairer sharing of national wealth.”
In particularly, the authors call for more investment in infrastructure, education, as well as proper safety nets for the unemployed and those that get sick.
The Turnbull Government should take note as it considers taking an axe to Australia’s public services.