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Grattan on the revenue-expenditure gap

April 23rd, 2013

There’s an important new report out from the Grattan Institute, which has received a fair bit of press (some of it rather off-point) for its prediction that, under current policies, Australian governments will need to find an additional 4 per cent of GDP (about $60 billion a year) over the next decade if they are going to meet new expenditure needs for health and education services and maintain a prudent fiscal surplus.

The options aren’t explored in much detail, but it seems clear that expenditure cuts (particularly the usual suspects like duplication and waste, “middle class welfare” and so on) won’t be enough, so more tax effort will be needed. The top priorities ought to be tightening up the income tax system and increasing income tax rates at the top. If that’s not enough, the next option (tough, but maybe necessary) is an increase in the rate of GST.

I’ll try to post in more detail soon, but I think Grattan gets the story right on most points, and their analysis will certainly help anyone who wants to take a serious look at Australain fiscal policy

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  1. wilful
    April 23rd, 2013 at 16:25 | #1

    I think that this article by Tim Colebatch is another useful contribution in the same vein: http://www.smh.com.au/opinion/politics/farewell-to-good-times-somethings-gotta-give-20130422-2iad7.html

    I agree with him, tax rises could be found easily (in a sense of I know which ones I would go after, and they would be economically efficient), but with Australia’s current level of debate, dominated as it is by vested interests, we know that under an Abbott government, tax rises will happen on the poorer half of Austalia first, and services that promote egalitarian outcomes will be the first cut..

  2. Jordan
    April 23rd, 2013 at 16:31 | #2

    Would not the best and only solution to fill the gap be to increase employment? That will increase the income that funding comes from.

    From formula Spending = Income, it implies that reducing expenditure of state will reduce income that future funding comes from.

    Taxing top incomes at higher rates will also reduce income that funding comes from, so it is a wash but that will improve fiscal transfers so that in much further future the total income will improve.
    Higher top tax will reduce savings which goes into finacial instruments, not so much into productive investments. Since deficit have to cover desired savings to prevent unemployment rise, higher top tax will reduce deficits which can be used to employ unemployed into productive invstments. This is how fiscal transfers should gradually increase future incomes that funding comes from. Fiscal transfers switch funds from unproductive investments into financial assets toward productive ones.

    From Spending = Income (when i spend $100, that is someone’s income) only conclusion is that funding gap should be solved only by increased employment.

  3. Jordan
    April 23rd, 2013 at 16:36 | #3

    Maybe a simpler solution is to realize that deficit of a currency issuer in a time of unemployment (available capacity) do not matter.

  4. wilful
    April 23rd, 2013 at 16:43 | #4

    Something that is ALWAYS worth repeating, even here, is that Australia is a very low taxing country with a generally very well targeted welfare system. A moderate increase in the tax take would do absolutely nothing at all to affect Australia’s international competitiveness. Well-targeted tax reform to gather more taxes (c.f. the Henry review) would in fact boost Australia’s productivity and investment attractiveness.

    But, to repeat myself, we are currently ruled by the worst set of rentiers and their acolytes, so a sensible debate cannot be had.

  5. rog
    April 23rd, 2013 at 16:46 | #5

    I expect the conservative reaction will be along IPA/CIS lines ie smaller govt and cuts to welfare, education and health.

  6. Jordan
    April 23rd, 2013 at 16:48 | #6

    Or to realize that growing investment in unproductive use is going to produce more deficit or higher unemployment. Investments are not taxed, only its returns. It is time to start taxing unproductive investments to encourage productive investments. That will reduce deficits and unemployment.

  7. rog
    April 23rd, 2013 at 16:48 | #7

    And I believe that this will be the ALP wedge for the next election; already BOF has signed NSW onto Gonski.

  8. Newtownian
    April 23rd, 2013 at 16:56 | #8

    Dear Dr Quiggin

    Thank you for breathing oxygen into another excellent think tank product that would otherwise have sunk without trace after a short time in the sun.

    Given your clearly positive attitude to progress I would like to offer details of the three options we are currently drafting as a follow-up in order to realise rational and balanced medical/health service provision.

    1. Keep the budget the same but relabel the 4 percent as ‘efficiency dividends’. Problem solved.

    2a. Fix the medical budget at a set % of GDP say 20%. For new spending measure the net benefits in terms of Disability Adjusted Life Years (DALYs) added (UN standard approach currently), further adjusted for the net worth of likely beneficiaries. For existing spending, measure their total DALY contribution to life expectancy. Slash and burn those areas with a poor DALY yield and priority fund those which show a high DALY or are part of charity cocktail party circuit. Require medical researchers to do DALY calculations of their ideas so that administrators can rationally sort out and selectively promote genuinely productive research without understanding what they are doing or secondary impacts.

    [ These changes would ensure moneys are appropriately directed toward ensuring the health of young people (worker units) and reducing the waste from spending money on most irredeemably old and infirm who are about to die or aren't significantly contributing to wealth creation.

    Similarly this system would ensure highly productive older citizens to be subsidised in proportion to their contribution to society as measured by their net wealth. Likely large resources might need to be allocated to gerontology research so that wealthy people could live for hundreds of years, if not forever, and be appropriately rewarded for the high taxes they pay. This way we would no longer lose Kerry Packers and Rupert Murdochs but maintain them in a high productive wealth creation state for hundreds and thousands of years and continue to manage the rest of us.]

    2b. Develop a similar metric to keep school education system on track, the UPAWY, or Useful Potential Adjusted Working Years metric, measured based on likely gross working life income based on the school a person comes from and their family’s wealth.

    [This would ensure that government resources are redistributed toward those schools which generate high net worth individuals optimizing the Pareto efficiency of society while preventing excessive spending where there will be on average little net benefit .]

    3. Just forget all this redistribution nonsense and move straight to Brave New World, Soma parties, an average age of 62.4 years, and maximising the Gross National Happiness Index through a mixture of operant conditioning and genetic engineering so that all people in all classes of society will finally be satisfied with their lot whether they are alpha, beta, gamma, delta or epsilon as appropriate.

    Sincerely
    Mustapha Mond
    c/- Grattan Institute Melbourne

  9. gerard
  10. Ikonoclast
    April 23rd, 2013 at 20:24 | #10

    There is an enormous amount of revenue foregone (perhaps at least $14 billion per annum) via corporate welfare, fossil fuel subsidies, negative gearing and salary sacrificing. These enormous bloated sacred cows should all be slaughtered. But guess what? They never will be. Thus endeth any chance of fixing Australia.

    In addition, the phrase “prudent fiscal surplus” is meaningless in isolation. A surplus may be prudent or imprudent depending on the state of the economy. For an economy mired in deep recession or even an economy with unemployment well over the frictional level, a fiscal surplus will almost always be imprudent.

  11. April 23rd, 2013 at 20:30 | #11

    Here, on cue, is the CIS contribution to The Drum.

    It offers some basic data on Australia’s taxing and spending regime. Interestingly though, it pushes a cognitive dissonance line with a ‘magic pudding’ theme. Not a bad idea in some ways.

    Problem is that it neglects to acknowledge the benefits what we actually get for our money… It’s a more sophisticated version of taxes bad, government spending bad.

  12. Martink
    April 23rd, 2013 at 20:33 | #12

    Can someone set me straight on this, I though GST revenues where very small, under 0.1% GDP.

  13. Fran Barlow
    April 23rd, 2013 at 23:00 | #13

    @Martink

    IIRC G&ST is about 4-5% …

  14. Fran Barlow
    April 23rd, 2013 at 23:50 | #14

    One thing they might consider would be widening the G&ST’s scope to health and education. This would mean that those sending their kids to private schools would pay G&ST and you could hypothecate the funds raised to fund schools on a needs basis.

    One could use the funds raised by G&ST on health to actually fund health services on a means-tested basis. This could partially cover NDIS or dental or mental health. A G&ST on food could be accompanied by substantial improvements in provision for quality low cost means-tested public housing, food-coops and so forth.

    You could probably push the G&ST to 12.5% without too much trouble, provided you compensated people in the bottom three income deciles with income support and/or more generous allowances to earn for those on welfare and gave the next two deciles up more tax relief.

  15. April 24th, 2013 at 00:47 | #15

    @gerard

    What would happen if the Murdoch Press reported the weather accurately?

    http://www.youtube.com/watch?v=JwCJ1GhYXwo

    Apparently Rupert wouldn’t be pleased.

    Maybe that’s why they’ve privatised the weather!

  16. rog
    April 24th, 2013 at 04:46 | #16

    @David Jago Healthcare and education should be seen as an investment, not a “magic pudding”. In a way Tony Abbott sorta agrees; regarding the extra company tax to fund his his maternity leave policy

    “This is not just a family policy, this is an economic policy, this is a productivity policy, this is a participation policy,’’ he said.

  17. Troy Prideaux
    April 24th, 2013 at 09:18 | #17

    Well, these could be interesting times. The Hawke/Keating trade policies of the 80s to kill manufacturing & to slowly strangle manufacturing productivity growth could finally catch up with us. The theory is our weakening dollar should account for wage & productivity discrepancies by those lovely market forces. Problem is, I bet nobody accounted for such rampant quantitative easing and state controlled currency manipulation when they devised these lovely utopian theoretical models and polices [grimace]

  18. TerjeP
    April 24th, 2013 at 13:37 | #18

    I’m shocked to hear that a government funded think tank suggests the government should have more funds from taxpayers. Will wonders never cease. :-(

  19. may
    April 24th, 2013 at 13:54 | #19

    @TerjeP
    well corporate funded thunkers consistently push for more hidden subsidies from the public purse at the same time as pushing for the complete elimination of the public purse so the bleat goes on.

  20. Jordan
    April 24th, 2013 at 14:27 | #20

    Fran
    Please do not recomend any tax increase that is regressive. GST is regressive tax and even doing relief on the bottom will still damage economy in the midle that is already the most weighted down by tax.
    Only tax increase that would not hurt economy is taxing unproductive investments like savings of the rich that go into financial assets.

    Property tax is tax that goes against land property, but there is no tax on financial assets property. Majority of people pay land property tax where they put their savings, rich do not pay property tax where they put large part of their savings; stocks and bonds.
    91% top tax worked nicely to reduce unproductive investments and drive it into productive investments.

  21. Donald Oats
    April 24th, 2013 at 14:46 | #21

    As further amusement, in today’s Australian, Janet ALbrechtsen laments how today’s unborn children are the forgotten ones, to be burdened by today’s alleged overspending mistakes.

    Funny how she doesn’t take the same perspective when considering the future costs imposed by today’s ever growing fossil fuel use. Funny, but unsurprising.

  22. wilful
    April 24th, 2013 at 15:22 | #22

    The Henry Review has already done all the work for us on what the nearer and longer term changes to the current tax mix should be. I would far rather a bipartisan commitment to implementing that than I would yet another debate where vested interests push their barrows for personal advantage – because I know where power lies in this society!

  23. wilful
    April 24th, 2013 at 15:29 | #23

    Of course the Henry Review didn’t touch the GST for political reasons. I’m in favour of including health, education and fresh food in it. Yes there would be some redistributive impacts that would have to be adjusted for, but we can’t talk about tax mix changes that only affect one sector, we can’t rule out something solely because it disproportionately affects poor people. If it’s inefficient it should be fixed, wherever it falls, and let other mechanisms pick up the pieces.

  24. April 24th, 2013 at 17:08 | #24

    I have had a geek at part of the report. It says we should be in surplus because we are close to trend growth.WRONG.

    You look at NOMINAL GDP not REAL GDP when examining a budget and Nominal GDP has been below trend for a while.

    On present NOMINAL GDP levels no-one could get the budget into the black.

    The more you tried by cutting spending and/pr raising taxes the greater effect on NOMINAL GDP ie it would get weaker.

    you would end up with a European solution. The more you cut/tax the larger the budget deficit.

  25. TerjeP
    April 29th, 2013 at 20:48 | #25

    well corporate funded thunkers consistently push for more hidden subsidies from the public purse

    If it’s consistent then you should be able to rattle off several recent examples. Care to try?

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