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.