Sorry Coalition, “big Government” doesn’t kill growth

By Leith van Onselen

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:

ScreenHunter_14443 Aug. 10 08.40

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.

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Comments

  1. Rising debt to GDP ratios would suggest that the huge increase in government has had a material impact on – how should we put it – the “quality” or perhaps “efficiency” of growth……..in the sense that it now takes a lot more debt to generate additional output……just measuring the growth rate itself is meaningless………also interesting that we are now living in an era of massive government (as a share of total output), yet we also have huge inequality…….if government was effective at making things “fairer” – one really does wonder how that has happened

    • Yes [email protected]: Modern neo-classical economics and political mis-thinking create something of a dogs’ breakfast in Australia and most of the western world. H&H once wrote: “Public investment is the only hope of getting anywhere near offsetting the vast mining gap.”

      And H&H was right!

      Public investment is the way out of the quagmire that is holding back economies worldwide. Major economies like the USA and China are likely to actually go into recession for some years during 2016/17.

      We need massive government spending on R&D in potentially deflationary industries including clean alternative energy supplies, nano technology research and development, and medical research (including the effect of lifestyle and diet on diseases such as cardiovascular, diabetes and cancer). A subsequent deflationary effect that will occur in all of these industries and parts of the economy affected and will bring for example lower power prices and medical costs.

      This deflationary effect will pay for the government expansion and will provide employment in a transformed high tech Australia.

      This a a form of QE for the people instead of for the finance and banking industry at a time when new debt cannot be used as a stimulant because private debt is too high.

      Coupling such an approach with a reduced level of immigration (except for experts who are essential to fill job roles in the areas of expansion) and the end of negative gearing and the end of superannuation advantages for the rich will provide government with additional tax cash to beneficially use to further the expansion. Further, the cost of business and other premises for use in the expansion will fall, as will the cost of homes in which to live, and the expansion will be further fired-up with many more opportunities for entrepreneurism.

      • Jumping jack flash

        Indeed!!
        We need to realise, at the highest level, that Thatcherism is only for the good times, and in hard and risky times such as these it requires a return to nationalism.

        Because the private sector are only in it for the buck.

        In hard and risky times, innovation doesn’t get a look in, its all about self-preservation. Risk is reduced and profit maximised by monopolies being formed, and the commencement of gouging. After all, its a sure thing.

        And it is no surprise that this is what we see happening.

  2. Wouldn’t there necessarily be a positive correlation between a rise in government tax revenue and a real increase in GDP?
    If the economy is growing wouldn’t there be a greater tax take?
    The premise of the article may be true but that graph is not convincing.

  3. A form of big government is the ban on luxury showers/toilets instead of having a big tax on them.

    Some people make their own luxury showers at home anyway or buy them like in the Seinfeld episode.

    May as well have a luxury shower and dunny tax instead of the ban.

  4. ceteris paribus

    Yes indeed. The discussion of the link between growth and tax is all based on hot air and bullshit rather than evidence.
    Funny way to run a post-Enlightenment economy..

  5. The BS in this article is astonishing – starting with using GDP as the measurement of growth.

    Just looking at that distribution the GDP growth looks pretty much correlated with debt growth with a couple of outliers. Again lumping a whole lot of countries together that are so different in natural resources, social and political systems, and degree of reserve currency is just plain BS!