Ideas@TheCentre
Fiscal fixes
Everyone now agrees the nation’s public finances are in need of repair, but not on why or how. Is the problem too little revenue or too much spending?
The Gillard government wants us to believe the problem is one of unprecedented revenue shortfalls leading to unexpected deficits. But this begs the question, ‘shortfalls relative to what?’ This year’s budget was based on an estimated 11.8% surge in revenue, which was probably never realistic to start with.
The day after the prime minister’s declaration of war on the deficit using taxpayers as cannon fodder, the Australian Bureau of Statistics (ABS) released new data that help shed light on the nature of the underlying problem. Yes, revenue has been weak for the last few years, but expenditure has been strong.
All levels of government combined (Commonwealth, state and local) spent the equivalent of 35.4% of gross domestic product (GDP) in 2011/12. This was the second-highest figure on record, exceeded only when the Rudd government’s stimulus spending was at its peak in 2009/10. (The 10-year average before the financial crisis was 34.1% of GDP.) Spending was far too slow to recede after the stimulus. It actually went up as a share of GDP between 2010/11 and 2011/12. Even before the stimulus spending, the size of government was excessive, leading not to deficits at that time but to an excessive tax burden.
We don’t yet have comparable figures for 2012/13, but every indication is that the fundamental fiscal problem is a size-of-government problem rather than a revenue shortfall (which is not to deny that depressed revenue is also contributing to the deficits).
In March, The Centre for Independent Studies launched its TARGET30 campaign aimed at reducing the size of government to 30% of GDP or less over 10 years. If achieved, this would not only solve the deficit problem but also create room for much-needed shrinkage of the tax burden through tax cuts, restructuring, and in some cases, outright abolition. At that time, the ABS figures were available only up to 2010/11 and revealed that the size of government was just below 35% of GDP. The 2011/12 figures show that the task has not become any easier, but remains readily achievable through a combination of spending restraint and economic growth.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
