Crikey asked me to write 1000 words or so on my ideal budget. I didn’t respond exactly in those terms, looking instead at the strategy for the medium term. Crikey ran it today, and I’m doing the same (over the page).
The first point to make about the Budget is that our fiscal position is, rightly, the envy of the world. This is primarily the result of an unprecedented period of economic expansion which began in 1990, when the economy was at the low point of the ‘recession we had to have’. Primary credit for this outcome must go to the Reserve Bank, which made a series of good calls in the 1990s and the early 2000s, and to the Rudd government for the rapid shift from ‘fiscal conservatism’ to Keynesian stimulus after the 2008 financial crisis. This was made easier by the strong growth in minerals demand from China, and the fact that China also implemented a massive stimulus in early 2009.
The Howard-Costello government deserves at least muted praise for not making a mess of this. Howard and Costello kept the budget in balance or just enough above to report a string of small surpluses, and they did not interfere with the Reserve Bank. In their final years of the pre-crisis boom, However, they made a string of decisions that ensured the budget would be in structural deficit once more normal conditions returned.
The 2009-10 budget, along with the emergency measures taken earlier, protected Australia from the impact of the global crisis. By contrast, New Zealand, now being praised by everyone on the political right for returning rapidly to surplus, experienced a recession, pushing it yet further behind Australia in income per person.
At the time of the 2009-10 Budget, the government projected a return to surplus by 2015-16. On the basis of some good news that turned out to be illusory, the target was later moved forward to this year, and turned into an ironclad commitment, which was only abandoned a few months ago. It now appears likely that the deficit will be around $12 billion or 1 per cent of GDP, which is about where it should be.
It follows that there’s no need, in terms of fiscal policy, for any radical change in strategy. If the economy slows further, the automatic stabilizers inherent in the tax welfare system will produce a somewhat larger deficit. If strong growth returns, the original surplus target should be reached.
The big question for this year’s budget is that of the long term levels of public expenditure and taxation. With the announcement, and apparent bipartisan acceptance, of a 0.5 per cent levy to provide partial funding for the National Disability Insurance Scheme, we have finally broken the longstanding taboo on increasing taxation. We can therefore address the central question of fiscal policy: should we pay more tax, and get improved services in areas like health and education, or should we pay less and get less?
The case for paying more and getting more is based on the fact that technological change has reduced the cost of most physical goods relative to ‘human services’ which require skilled labour for their delivery. At the same time, increasing longevity and the disappearance of unskilled jobs have increased the importance of health and education.
Over the next decade or so, addressing unmet needs in human services is likely to require an additional 3 to 5 per cent of GDP*, or around $40 billion to $65 billion a year. It’s worth considering a few options.
Thanks to the dominance of tax-cutting dogma over recent decades, there’s no shortage of options to raise significant additional revenue. The first would be to scale back the tax cuts for high-income earners originally proposed by Howard in 2007 and adopted, in large measure by Rudd. Increasing the top marginal rate of tax to 50 per cent, and applying it to income over $150 000 would recapture only a small part of the increased share of income that has gone to those in the top 1 or 2 per cent of the income distribution. Nevertheless, it would be sufficient to raise close to 1 per cent of GDP per year over the next few years.
Then, there’s a laundry list of concessions and tax expenditures such as the the Seniors Tax Offset and the abolition of income tax on super fund earnings paid to people over 60. Together with the earlier decisions to halve the rate of capital gains tax and end the indexation of petrol tax excise, Saul Eslake lists these as ‘the dumbest tax decisions of the last 20 years’. Again, it would not be hard to find 1 per cent of GDP here.
Given the continued pressure on the States to contribute to the financing of Commonwealth initiatives, and the fact that so much of their own-source revenue depends on inefficient, distorting and regressive taxes like stamp duties and gambling tax, State revenue also needs attention. While the states could do better than they have with payroll and land tax, the only serious option is under the control of the Commonwealth – an increase in the rate of GST, say to 12.5 per cent, which would raise an additional 1 per cent of GDP.
Even in my dream budget, I would not introduce these measures all at once. For the moment, the macroeconomic situation does not require further tightening of fiscal policy. But in the long run, these are the kinds of measures that will be needed.
* GDP is the wrong number to use here. The best estimated of the base for taxation available to the Australian government is NDI (Net Domestic Income). But the habit of referring exclusively to GDP is so ingrained that correcting it seems pointless.
John Quiggin 
@TerjeP
Terje, hoping for a response to my #40 that explains how you hold on to your worldview, when 78% of people support the NDIS knowing it means higher taxes.
@TerjeP
Michael Chaney (April 30th) on Lateline discussed the size of government and stated:
“For example, it’s grown from 25 per cent of GDP to 35 per cent since the 1970s and if it keeps going it will be at an unsustainable level, maybe 50 per cent, according to some estimates.”
kevin1 – I’m not sure what you think my worldview is. Or why you think it should depend on the general publics opinion of the NDIS? Feel free to elaborate.
@TerjeP
First you quoted the Essential Vision poll, and said the majority of people want govt to spend less (actually, at 55% barely a majority). In fact, given your concern that the govt not ignore the people’s will, you should be applauding the govt’s fiscal response as consistent with the results of your preferred poll. It is now raising taxes (13% of respondents supported this), and cutting spending (55% of respondents supported this.) The remaining 32% gave no practical help, being “neither” or “don’t know”.
My point was such a general sentiment is ultimately meaningless and no guide to action, absent people nominating govt’s appropriate objectives ie. what to cut. (Obviously no-one, including me, would like it to spend more than is necessary.) So your strong conclusions here are also meaningless.
The striking contradiction to your conclusions are the overwhelming endorsement of the NDIS (post a widespread awareness of 1. the levy and 2. the unfunded status of part of its liabilities). People do not see govt as intrinsically evil and unable to be influenced towards a positive role, which I take as the libertarian position.
Kevin1 – let me offer you a small challenge. Go back over the discussion that has been had here and find the comment in which I articulated these “strong conclusions” that you refer to. Copy the “strong conclusions” that I stated and then quote it back to me. Because having read back over this discussion I really have no clue what you are on about.
@TerjeP
“The following poll suggests that the majority of the public thinks government should spend less. On this occasion I’ll go with the herd. …So should we ignore them when they call for spending cuts and tax constraint or should we ignore them when they call for more services?”
Yes and yes. You make much of these results, but we should interpret such generalities as meaningless in isolation, because in the same breath people endorse a new program requiring many billions of new spending, plus a new tax. The most likely conclusion which squares the circle is that people want the govt to be efficient and effective – a mantra accepted by all parties – not that small government is desirable. You’ll never be with the herd, because your political project has no traction in a civilised society.
@kevin1
“Everyone is always in favor of general economy and particular expenditure.” – Sir Anthony Eden.
On the same topic, I remember an article many years ago in the broadsheet Courier-Mail where the journalist was one of those typical old conservative curmudgeons*. He managed to complain in the one article and just a few short paragraphs apart about (a) high government taxes and (b) the fact that Social Security wasn’t helping his old mother enough.
* No, it actually wasn’t Lawrie Kavanagh but the name escapes me now.
Nowhere did I state that this poll indicates people want smaller government. You must have imagined that conclusion. I didn’t state it or even think it.
You have no clue what you are on about. But carry on.
@rog
I do not disagree with your comment. As a matter of discussion I’m not even sure why you’d think that I’m suggesting the RBA is not acting their role by considerings the issues in my previous comment.
No where in section 10(2) of the RBA Act 1959 mentioned anything about inflation, however since the RBA perceive inflation may affect (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and; (c) the economic prosperity and welfare of the people of Australia which leads to them targetting inflation. The same can be said about my previous comments of the issues which I speculate the RBA MAY be concerned about e.g. IF they perceive the foreign investment is necessary to achieve full employment and economic prosperity and welfare of the people of Australia; the level of foreign investment was a result of relative high interest rate and stable Australia Dollar (even if it may be overvalued); and the benefits of maintaining or increasing the level of foreign investment outweights the cost of high Australian Dollar and relative high interest rate.
@TerjeP
Care to explain?
And no attempt to reconcile the contradiction between first statement and the NDIS poll, so I guess you concede the vacuousness of your preferred poll.
Kevin1 – the budget is going to be in deficit. Tax revenue has risen around 7% but spending has risen faster. If you want a surplus you need to either raise even more tax revenue (presumable through more taxes or higher tax rates) or else spend less than you planned on spending. However spending less than you planned when spending was planned to grow is not the same as shrinking government. To shrink government you need to do more than spend less than revenue or less than what has been budgeted. To get smaller government you need to spend less than you are currently spending.
Terje, stop spinning Catallaxy garbage.
The budget will cut about 3/4 of a % point of Annual growth.
with nominal growth likely to be LESS than 3% any further contraction on the part of fiscal policy could have bad consequences.
If spending was the problem then interest rates would not have been cut!
@nottrampis which particular sentence at @TerjeP are you objecting to?