Ideas@TheCentre

Tax rises are not savings

As we made clear in our TARGET30 foundation report, government spending has increased rapidly over the last 40 years and governments have shown little inclination to address the budget sustainability issues that have arisen from that trend.

Even before this budget, it was obvious that Treasurer Wayne Swan was not serious about addressing sustainability issues by cutting wasteful spending. His demonisation of even the rational cuts of TARGET30 as ‘mindless austerity’ in a recent essay for the Chifley Centre made that clear.

Therefore, it was hardly surprising that those so-called ‘difficult saving decisions’ the Treasurer mentioned in his budget speech would be tax rises.

What is disappointing is that we have yet again seen the Treasurer describing tax increases, deferment of future spending, and tightening tax laws as savings, as if they are the same as spending cuts.

They’re not.

Tax rises are inefficient, have a negative effect on GDP and increase the size of government. Deferring future spending promises has no effect on the long term budget balance, it is simply a political ploy to make the forward estimates look better.

Deferring spending also increases the dangerous disconnect between the gain of making new spending promises and the pain of having to pay for them.

This budget announces $43 billion in savings across the forward estimates. Leaving aside the minor measures ($10 billion which are marked ‘other’), less than $5 billion of the remaining $33 billion are actual cuts to programs. This is mostly due to cutting the wasteful Baby Bonus (the removal of which is a credit to the Gillard government).

There is nearly $15 billion in tax rises (mostly increases to the Medicare levy to fund DisabilityCare) and $7.5 billion in deferred spending (which you could uncharitably call ‘broken promises’ revenue).

The absence of real spending cuts in this budget is why government spending as a percentage of GDP increases in this supposed year of ‘difficult decisions.’ Unfortunately from a TARGET30 perspective, spending won’t return to the level at the end of the Howard government over the forward estimates.

This budget is further evidence that governments remain addicted to spending. The effects of this are spelt out: The budget remains in deficit for years and debt is increasing all the time. This budget is further evidence of why Australia needs TARGET30.

Simon Cowan is a Research Fellow at The Centre for Independent Studies.