ABC Fact Check has released a report confirming that the Howard Coalition Government of 1996 to 2007 was Australia’s highest taxing of modern day governments:
…the Howard government delivered 12 budgets, the first being the 1996-97 budget (delivered in August 1996), the last being the 2007-08 budget (delivered in May 2007)…
When the Howard government took office during the 1995-96 financial year, the tax to GDP ratio was 21.9 per cent.
As can be seen from the graph, the tax to GDP ratio was not below the current 21.6 per cent in any of the 12 years for which Mr Howard delivered a budget, starting in 1996-97…
The tax to GDP ratio was at a low of 22.3 per cent in 1997-98 and 1998-99, and reached a high of 24.3 per cent in 2004-05 and 2005-06.
…the average level of taxation during the Howard era (1996-97 to 2007-2008) was 23.6 per cent, above the 21.6 per cent last financial year and the 22.5 per cent estimated for the current financial year.
“From Howard’s second term to the end of his government (2000-01 to 2007-08) the tax to GDP ratio was 23.9 per cent. This was boosted by high income and company tax revenues during the mining boom.”
To be fair, when it comes to the Budget, much of it is beyond the control of the incumbent government.
Labor had to contend with the GFC, which at the time was considered the biggest global shock since the Great Depression. On Treasury’s advice, it ran hard with fiscal stimulus. While much of this spending turned-out to be wasteful (e.g. pink batts), it did at least help to ensure that Australia avoided a technical recession. Labor had to contend with falling revenues as well.
Ditto the Abbott and now Turnbull Governments, which have had to contend with falling commodity prices (terms-of-trade), which crunched national income, nominal GDP, and tax revenue. No one can credibly blame them for the deteriorating Budget position.
However, no such excuses can be made for the Howard Government. It presided over near perfect macroeconomic conditions both locally and abroad, but managed to piss the proceeds away and lock Australia into permanent spending commitments that we are now paying for.
First, the Howard Government experienced a literal explosion of household debt:
This extra demand (spending) by the household sector meant that the Federal Government was able to run bigger surpluses, without adversely affecting overall demand in the economy:
The Howard Government was also fortunate to preside over the most lucrative part of the resources boom when commodity prices and the terms-of-trade exploded, providing the key impetus for the rising disposable incomes and Budget surpluses:
In turn, nominal GDP, which is the dollar value of what’s produced and earned across the economy and is also the measure that drives federal taxation revenue, surged as the Howard Government reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed:
So it’s fair to say that on the revenue side, the Howard Government enjoyed unbelievable luck in the form of relatively benign global economic conditions, record growth in household debt and asset markets, and the best part of the commodity (terms-of-trade) boom.
Unfortunately, its time in Government was also littered with a raft of short-sighted and damaging spending/taxation decisions, which Australia is paying for today. These include:
Halving the rate of capital gains taxes in 1999, which pushed up house prices, overwhelming benefiting the rich, and now costs the Budget some $4 billion in revenue foregone;
Freezing fuel excise indexation in 2001 (now reversed), which still costs the Budget more than $5 billion annually today;
Greatly loosening the assets test to qualify for the part Aged Pension and the Commonwealth Health Card (now reversed by the current Government);
Implementing tax free superannuation for those aged over-60, a move dubbed by Saul Eslake as “one of the worst taxation policy decisions of the past 20 years”;
Implementing generous “transition-to-retirement” superannuation rules, assisting those approaching retirement to avoid paying tax;
Allowing the conversion of franking credits into cash refunds for shareholders in 2000, which costs the Budget around $6 billion today; and
The overall expansion of middle-class welfare.
Sure, the Howard Government did also do some good things like implementing the GST. But on balance, the policies it implemented were only ever affordable under highly favourable global and domestic macroeconomic conditions, not the conditions that exist today.
Now it is up to the current crop of political leaders to fix the problems they have inherited via a broad-based agenda of tax reform, which broadens the tax base and shifts it away from inefficient sources, along with closure of Australia’s world-beating tax concessions, which are destroying the tax base, reducing the progressiveness of the tax system, and heightening inequities.
Sadly, the current crop of politicians do not appear capable of doing what needs to be done.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
