Keeping Taxes Low

Amongst the most important statements in the Ralph Report was this: "more generally, the benefits of a more robust and durable tax system should also be returned to taxpayers via lower tax rates."

It is very appealing to be giving consideration to what to do with an endless and growing surplus. Limited increases in the level of public spending balanced against increasingly rapid taxation receipts – whether such an outcome is mere wishful thinking only time will tell.

But whatever its likelihood for realisation, such an outcome should be seen as highly desirable. There ought to be no doubting that if we could arrange our affairs in such a way that the natural flow of events led to a continuously higher surplus, the effect on the economy and our national standard of living would be highly positive.

That this is a possibility is only the case because there is now firm restraint on public spending. There is something like an assumption that the Government will not indulge itself in further increases and rather than growing expenditures, the aim is to keep downward pressure on outlays.

The quite extraordinary aspect of this is that there is still almost no appreciation of the role that expenditure restraint played in putting the Australian economy onto its current growth path. It is as if the government reduced its level of spending and then, independently, the Australian economy, in the midst of an economic crisis in Asia involving every one of our major regional trading partners, took off.

Let it therefore be understood that there was a cause and effect relationship between the reduction in spending and the resilience of the Australian economy. The cuts to spending were the foundation for the extraordinary and unexpectedly robust rates of growth we have experienced. These were not independent events, but the very essence of the reason why economic conditions have been as good as they have been.

Compare Australia today with the last occasion in which the budget went into surplus. In the late 1980s, Australia for the first time in years ran a consistent surplus for a number of years. The consequence was an economic revival of the most intrepid sort.

So good was the rate of economic growth at the time that the problem was suddenly seen to be an overheated economy. Not only was Australia growing, it was supposedly growing too rapidly for its own good. Whatever one might say about the solution to this non-problem, the very fact that the economy was doing as well as it was should have provided some kind of indication about the kinds of policies which actually do good in the real world.

The other comparison worth making is with Japan. Since the early 1990s the Japanese have been attempting to use public sector expenditure to revive a moribund economy. It has poured trillions of yen into various publicly funded capital projects. With each failure of the previous stimulus package another is designed and put into play.

And the result is that Japan remains prostrate, where a change in the Tankan Index from –33 to –27 is seen as a sign of growing business confidence.

The returns are in. Using public sector spending to raise rates of growth and to lower unemployment does not work. Cutting spending does. So whatever justification there may be for higher levels of spending, it ought not be to stimulate growth and increase the number of jobs.

If there is a justification for higher spending it is only that there are various outcomes that the government can achieve that cannot be left to private initiative. And even then, it must assume that the government’s priorities takes precedence over the priorities of the taxpayers who fund such government activity.

The government pays for nothing. Because it does not create the value that it distributes, all of its expenditures are transfers from the general public. Purchasing power is taken from private individuals who are less well off as a result. This income is then used in ways which the government has itself determined.

There are without question many activities which governments rightly undertake and there is an important role for transfer payments to supplement the incomes of the disadvantaged. National defence is the obvious example of the first kind and the social safety net is an example of the second.

But each has its limits. The privatisation programmes of the past few years have been part of a process in which activities which can be undertaken by the private sector are returned to private ownership. It is well understood that the pressures of the market do a far better job to ensure that resources are used more efficiently. So long as competition is maintained, the market will provide a better service than can be expected from publicly owned enterprises.

And then there are the problems with poverty traps. One of the important lessons of the thirty year experiment with a rapidly expanding welfare state has been that up to a point it provides a necessary benefit but beyond some point it actually makes conditions worse.

Where that point is and in which circumstances a withdrawal of social support is advisable are issues about which there are different opinions. But it is no longer controversial that some of the expenditure on the safety net does those who receive it no favour but creates problems for them which are difficult to undo.

It is a nice thought that we may be heading for a period of perpetual budget surplus. If so, the first priority ought to be lower taxation. There are certain circumstances in which it is well understood that governments have a role but if we are seriously interested in strongly growing economies and a self-reliant population, the aim should be to keep public spending to a minimum.

A lower level of taxation relative to total national income is an ideal towards which we should now be heading.