Opinion & Commentary
Support for spending spree won't last forever
AT budget time, newspaper commentators puzzled over why, with polls showing voters preferred more health and education spending, the Howard Government was offering tax cuts instead and the ALP was going along with them.The economics correspondent of one newspaper suggested that politicians did not understand that the ground had shifted under their feet.
But how far has the ground shifted? While more spending on health and education came out ahead in all polls conducted during 2003 and 2004 mentioning both taxing and spending, support varied from 57 per cent to 88 per cent. Answers were highly sensitive to the question asked.
One important difference evident in the polls was between spending money out of the surplus and increasing tax. Though rejecting a tax cut of $10 financed from a projected surplus has the same effect on household finances as agreeing to a $10 tax increase, psychologically the two are different. When a surplus was mentioned or assumed, support for more spending was about 20 percentage points higher than a question that stated it would be financed from higher tax.
This suggests that electors are rather like politicians -- not so keen on new taxes but unable to resist spending cash the old tax rates deliver to Treasury. But it also suggests that support for spending is heavily contingent on budget surpluses. These, in turn, depend heavily on economic growth. A modest downturn would wipe out the surplus and take about one-quarter of the pro-spending constituency with it.
My research suggests that the link between prosperity and support for spending is deeper than just voters who think spending a surplus is pain-free. We have polls on the relative preference of voters for less tax or more spending on social services going back to 1967. In the late 1960s, there was majority support for more spending on social services over less tax. During the past couple of years this majority has returned.
What do these two polls have in common? On both occasions, real wages were growing strongly and people were positive about their finances. In 1969, 43per cent of voters thought they were better off than three or four years before, compared with only 14 per cent who said they were worse off. In the past two years Roy Morgan's consumer confidence index has reached record levels. When Australians feel prosperous they want to spend more, including on services such as health and education where government is the main supplier.
By contrast, when real wage growth is slow and consumer confidence is low, support for more spending on social services falls, as it did especially in the 1980s. When the household budget is tight, paying existing bills is the top priority and voters resist any more money being taken in taxation. This result is paradoxical. When people are most likely to need government services, in financially tight times, they are least likely to want to spend more through tax.
When people are best able to afford private alternatives, when they are prosperous, they are most likely to want to spend more on government services.
One reason for this is that voters are in a tax trap. They cannot switch to private-sector health and education except by paying twice, once through their taxes, and again through private health and school fees. Though they may prefer to go private, a modest tax increase seems a cheaper way of improving services when they cannot get their tax back.
Governments face a trap of their own. Despite Australia's remarkable run of economic growth, only a very brave politician would assume that the good times will last forever.
Yet if new spending is introduced in response to present public opinion, it will be very hard to cut back. In more than 30 years only three budgets have reduced spending in real terms, all in response to a succession of large budget deficits. Government spending is a little like marriage -- a permanent commitment based on passion that may well turn out to be temporary.
The political attraction of cutting taxation is that it is more like flirting than marriage. Unlike spending programs, which cause the commonwealth's fiscal position to worsen over time, tax cuts woo voters but then correct themselves.
Inflation and economic growth puts more people into the higher tax brackets every year, pushing up revenue without any politically difficult decisions being made. The tax cuts announced in the May budget will only slow the growth in tax revenue, not reduce it.
The situation isn't just that the ground has shifted under the politicians' feet. It is that they know that the ground could easily shift again. And unlike commentators whose predictions are quickly forgotten, the fiscal consequences of more spending now would haunt governments for years to come.
Andrew Norton is a research fellow at the Centre for Independent Studies. His full report, Will You Still Vote for Me in the Morning? Why Australia's Politicians Aren't Rushing to Increase Taxes, is at:
www.cis.org.au
