Opinion & Commentary
Politicians addicted to big spending
Tax revenue and government spending have grown even faster than the booming economy since the last major attempt at tax reform in 2000. That is a key message of figures recently released by the Australian Bureau of Statistics that consolidate the final outcomes of all budgets – Commonwealth, state and local – for 2005-06.
This ABS overview of the public sector allows the carve-up of the government finance pie between the Commonwealth and the states to be set aside as a separate issue, although it is one that must be addressed in assigning responsibility for the outcomes described below.
From 1999-2000 (the last year before the GST tax reform) to 2005-06 total government expenditure – current and capital - edged up from 35.4 per cent of GDP to 35.6 per cent. Total revenue was unchanged at 37.6 per cent, but tax revenue rose from 30.5 per cent to 30.8 per cent of GDP. These figures cover the general government sector (basically budget-dependent departments and authorities) but exclude public trading enterprises.
The changes since 1999-2000 may appear to be small. Before dismissing them as ‘status quo’ outcomes, however, readers should consider the following.
First, the shares of GDP mask rapidly expanding totals of government spending and tax revenue. With both aggregates in dollar terms growing at just over 7 per cent annually since 1999-2000, they have risen by 50 per cent in six years. Tax revenue collected by all governments reached $300 billion in 2005-06, or $14,550 per capita, up from $10,340 before tax reform. In real terms tax and spending have risen 24 per cent, or in real per capita terms 16 per cent.
If we exclude interest expense, which is not a service delivery item, the growth of expenditure has been even greater at 8 per cent annually, or 60 per cent in six years. Health expenditure is up 65 per cent, social security and welfare and education both 53 per cent, defence 49 per cent and public order and safety a whopping 74 per cent.
These facts place a heavy burden of proof on people calling for new government spending initiatives in the coming round of budgets. They may validly question the composition of expenditure, or its efficiency and effectiveness, but it strains credulity to argue that total spending and taxing should be expanding even faster, or even continue to expand as fast as they have.
Second, the 1999-2000 pre-tax reform snapshot did not represent an abnormal low point for the size of the public sector. In fact, although exact historical comparisons are muddied by the switch from cash to accrual accounting, it is clear enough that from a long-term perspective 1999-2000 was a high water mark.
Third, the share of government spending in GDP has historically shown a cyclical pattern, rising at times of recession and shrinking at times of expansion. But it has failed to shrink in the current long expansion. This guarantees that if current trends continue government spending will ratchet up to a record high share of GDP come the next recession. And the tax burden will follow.
Today is a better day than most to highlight these facts because it is Tax Freedom Day – the point in the calendar at which the economy has been working full time since 1 January to generate just enough income to pay the national tax bill for the whole year. The tax burden and government spending go hand in hand. If spending had grown just one percentage point per year less since 1999-2000 – by 6 per cent instead of 7 per cent – then by 2005-06 $20 billion per year would have been freed up for the private sector. Tax could have been lower by almost $1,000 per capita and Tax Freedom Day would have been eight days earlier.
Which level of government should be held responsible for excessive expenditure growth? The best way to answer that question is to look at the own-purpose expenditures (that is, excluding grants to other levels of government) of each level of government. These show that there has been very little difference between the growth rates of Commonwealth and aggregate state expenditure since 1999-2000.
As governments at all levels finalise their 2007-08 budgets this month and next, the rapid growth of expenditure and taxation is the elephant in every Cabinet room in the country. Whether governments continue to ignore it will be a test of their fiscal discipline
Robert Carling, a former commonwealth and state treasury official, is a visiting fellow of the Centre for Independent Studies.
