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A disturbing letter

April 16th, 2004

The issue of whether the Howard government is, as the Labor party has claimed, the highest-taxing government in Australian history[1] is not only politically contentious, but statistically complicated. A couple of weeks ago, David Bassanese had a piece in the Fin using Australian Bureau Statistics data to argue in support of this claim.

I was disturbed today, to see a letter from Rob Edwards of the ABS, responding to Bassanese and supporting the government line. In particular, the letter accused Bassanese of unspecified errors and argued in favor of relying on cash measures of the deficit (Bassanese used accruals for recent years and “cash converted to accruals” estimates for earlier years). While the ABS has occasionally responded to direct criticism of its figures (for example, my own criticisms of its multifactor productivity estimates), I don’t recall a previous instance where it’s been involved in partisan controversy of this kind.

As readers of this blog will know, the issue is far too complex for simple answers like those put forward by Bassanese and Edwards to be regarded as definitive. But Bassanese is a journalist writing what’s clearly intended as commentary rather than news. He’s entitled to put forward his own views. Edwards is supposed to be a neutral public servant.

It’s been a long time since I took on trust anything coming out of policy departments like Treasury and the Productivity Commission. Under the present government, we’ve already learned we can’t trust statements from the armed forces, the Defence Department or the Electoral Commission. But until now, I’ve never seen any serious evidence of political interference with ABS. This letter suggests that the process has begun.

(The Edwards letter follows).

I refer to David Bassanese’s “Howard writes tax history” (April 2), which used data provided by the Australian Bureau of Statistics.

The data provided to Bassanese for some periods was incorrect, and was a mixture of accruals and cash-based data. Accrual data are available only from 1998-99, whereas cash data are available for all periods. For analysis of government finance statistics covering long periods we recommend that cash data only be used, to maximise the consistency of the data.

Using cash data for all periods, and with corrections to the data in error, commonwealth tax revenue, as a proportion of GDP, in the period before the introduction of the GST was highest in 1986-87, at 24.4 per cent, and not in 1999-2000 as stated in the article. Using the revised data, the proportion for 1999-2000 is 24.1 per cent.

Rob Edwards,

Australian Bureau of Statistics,

Belconnen, ACT.

fn1. My own view, which I’ve stated a few times is, “if it isn’t, it should be”.

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  1. Robert McDougall
    April 16th, 2004 at 15:59 | #1

    . . . the letter accused Bassanese of unspecified errors . . .

    No, the letter confessed to ABS error: ” The data provided [by the ABS] to Bassanese for some periods was incorrect . . .”

  2. John Quiggin
    April 16th, 2004 at 16:06 | #2

    You’re right on this – I missed the link between the first and second sentences.

    I’m not sure whether this makes things better or worse. It gives a sound reason for writing a letter. On the other hand, an occasion for correcting an error of your own is usually not a good justification for disputing choices made by someone you’ve misled.

  3. April 16th, 2004 at 16:07 | #3

    I disagree with everyone (again). First to Q – who attempts to tar the PC with the same brush that should rightly be used on government departments (including my old Dept – Treasury). The PC has often run anti-government lines on many issues – and I think it deserves its reputation for consistently providing high quality analysis.

    Second to Bassanese, who destroys his argument by attempting to use accrual data when cash is the only data series with appropriate time series information. He goes on to compound his mistake by (it seems) declaring 1999-2000 to be the highest taxing year… when the highest taxing year actually occurs after the introduction of the GST.

    Finally, to Edwards from the ABS – who is allowed to mislead his audience because of the failings of the Bassanese article. While 1999-2000 was indeed a lower taxing year that a previous year, Edwards doesn’t do us the favour of working out the equivelant measure for the post-GST years. Very few people get this methodology right – but it shows that (I can’t recall exactly) either 2000-01 or 2001-02 was the highest taxing year in Australian history.

  4. John Quiggin
    April 16th, 2004 at 16:17 | #4

    I agree that unlike the other instances I referred to, the PC hasn’t acted to assist the government in a party-political way. I didn’t mean to imply this, but I can see its an obvious reading of what I wrote.

    But the PC is a partisan for a particular viewpoint., and its findings can’t be taken on trust – there is as much advocacy as analysis.

  5. April 16th, 2004 at 17:02 | #5

    There actually is quite a lot of circumstantial evidence of political interference with the ABS in terms of old collections being terminated (including, for example, overtime collections) and new collections not being started (most glaringly, globalisation related collections). Of course, this doesn’t directly reflect on the ABS officers themselves, and the government has the cover of ‘funding’ considerations. Still, I’d like to see a systematic accounting of the ABS’s deletion patterns over the Howard years.

  6. Louis Hissink
    April 16th, 2004 at 17:44 | #6

    Cash?

    On the collapse of any government, cash still exists, since it is a physical object. The rest are imaginary constructs.

    Even when society collapses, cash remains, but the rest not, except in the memories of those who thought that GDP and other nebulous concepts were real physical things.

    Hence cash, read “metallic money”, durable commdodity, remains a haven.

    Gold was, is and will remain money.

    Except one cannot take it with you to heaven, though if one believes in heaven on earth, this must surely be possible.

  7. David Bassanese
    April 16th, 2004 at 18:20 | #7

    Hi everyone. As the guy who started this, let me clear a few things. It was the ABS’s mistake, not mine. I asked them for the best most consistent historical tax data avialable and I used what they gave me. I profess I am no tax expert, but I understood they adjusted historic cash data to an accurals basis to make it consistent with the change to an accurals method. Nope, it turns out it was a mish mash with errors in their system.
    It now turns out they can derive consistent cash based data. Great.

    With that data, the Govt. did not break the record in 1999-2000, but they did break it later if we included the GST as international conventions say we should – and the ABS does. A huge chunck of the GST effectively funds the govt’s previous FAG grants to the states and the first home owners scheme – equal to almost 4% of GST.

    There are maybe valid reasons why the tax take is now high. It’s not necessarily a criticism. Just a fact. And the fact needs to be known for proper debate.

    Keep reading the AFR as a follow up story will appear soon.

  8. Louis Hissink
    April 16th, 2004 at 19:06 | #8

    David,

    Perhaps also submit it to Henry. Who knows, he may ,,,,,,,,

  9. Dave Ricardo
    April 16th, 2004 at 21:21 | #9

    Edwards might or might not be running interference for the Howard regime, but he has one redeeming feature: he uses data as it should be used, which is as the plural of datum.

  10. john ryan
    April 17th, 2004 at 16:19 | #10

    of course someones lying Telestra put up line rentals its gone up 300% in a few years and inflations under control and prices are stable balls

  11. April 18th, 2004 at 16:36 | #11

    It is not appropriate to simply add GST to the commonwealth tax take if you want to find the impact of the Coalition government on tax and spending – because some of the GST was to replace state taxes. You need to also deduct the difference between FAGS (financial assistance grants – the previous flow of money to the states) and the BBA (budget balance assistance – the new flow of money to the states).

    If you do this, then you find that the increase in tax and spending by the Coalition government isn’t as high as the ABS data suggests – but they have still been the highest taxing, highest spending government in history.

    No need to thank me folks… just doing my job. :)

  12. stephen
    April 20th, 2004 at 11:01 | #12

    dear all

    there is a time series on a consistent basis that the Finance department developed based on adjusting the previous cash numbers, but it was not entirely reliable either. the adjustments that need to be made are complex, and rely on assumptions about categories of spending that have changed dramatically anyway. for analysis of government finances, both cash data and accruals are useful: the latter allow for much more in depth assessment of the government’s stewardship of resources, because the estimates show changes in assets and liabilities. cash just shows what goes in and out each year.

    on either basis, when the GST is included as it properly should be, it is absolutely clear that this is the highest taxing Federal government in Australia’s history.

  13. April 21st, 2004 at 11:19 | #13

    No stephen, as I said – it is not enough to simply include GST. You also need to adjust for FAGS-BBA. The government has not released these adjusted numbers.

    Accruals does not have sufficient time series data as it only started in 1999. The difference between cash and accruals is that accruals adjusts for receivables and payables. The difference is minor because the government uses TLM accruals, not ETM. I’m not going into this debate now – these sorts of boring topics were one of the reasons I left Tsy in the first place! :)

  14. stephen
    April 21st, 2004 at 15:47 | #14

    Dear John

    actually you shouldn’t make adjustments for FAGS and BBS – because these are on the expense rather than revenue side. They don’t affect the claim that this is the highest ever taxing government. But if anyone wants to they can see exactly what has been spent on BBA, it’s in the budget papers; and FAGS numbers can be calculated pretty simply from the forward estimates as they were in 1997-98 adjusted for published parameter changes since. However, you don’t need to. The only adjustment to the revenue numbers I’d accept as arguable is to deduct the amount of revenue foregone through the reduction in State taxes that accompanied the introduction of the GST. You could argue that some State taxes were dropped only because the Commonwealth introduced the GST, so what changed was the level of government at which taxation was collected (I don’t necessarily accept this argument – or at least not in whole – but it can be made).

    The differences between cash and accruals are more than just the adjustments on the operating statement that you mention, more numerous in fact than a brief post allows. The TLM and ETM methods of calculating tax revenues are an abstruse debate I agree, but only affect the revenue figures. (for those interested, these are different estimating methods: in brief, by liability or by estimated collections). The ELM/TLM debate is of course irrelevant to the spending side, where accrual measurement has a greater impact on the estimates.

    Incidentally, I think there is less of a case that this is the highest spending government: you can mount a case that government expenses (previously outlays) as a proportion of GDP have been higher in the past.

  15. April 21st, 2004 at 16:34 | #15

    I agree that the FAGS/BBA adjustment can be done, though I’m not as confident that estimating FAGS correctly is easy given the calculations that were used to determine FAGS. All the same, it would be good if the government did release the adjusted numbers, and save us all the trouble.

    As for tax or spending – the FAGS/BBA adjustment can be used to work out both, as the BBA was to ensure that states were not made worse off due to tax reform.

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