Historic flip on spending risks big tax increases

The Australian government has a serious spending problem.

In recent years the federal government’s spending level has surged to now sit at an estimated 26.9 per cent of GDP, with little sign of slowing down.

The spending surge has put pressure on inflation, which has pushed interest rates up, and is compounding the cost-of-living pain from fuel prices.

The seriousness of the problem points to the urgent need to bring the budget back under control. In addressing the issue, it is worth noting a change in the pattern of spending which is contributing to the overspend problem.

Historically, one of the notable aspects of Australian government budgeting compared to other countries has been its efficient targeting of spending.

Spending programs in Australia have tended to be limited to those in the community that need assistance, rather than extending through to those with higher incomes. This targeting of assistance has made Australia the means-testing capital of the world.

The tighter targeting of spending has an important positive consequence: it reduces the need for tax. It is no coincidence that among developed countries Australia has long had one of the lowest overall tax burdens.

This relatively low overall tax burden, notwithstanding significant tax system design flaws, has been a significant contributor to Australian competitiveness.

A notable new development in Australia is the number of policy changes that opt for universal rather than targeted coverage, meaning that government benefits are extended right up the income chain.

• The First Home Deposit Scheme delivers financial benefits not just for lower income people but to already prosperous families.
• Energy rebates have not been restricted to people of limited means but have been given to middle and high earners also.
• The government’s student debt relief measure shifts the financial burden of providing those education services away from higher lifetime earners towards lower lifetime earners.
• Bulk billing incentives that target pensioners and health card holders have been extended to everyone. The cheaper medicines measure focused on reducing the general co-payment rather than the co-payment paid by lower earners.
• The new home battery scheme is not targeted to people less well-off but extends through to high-wealth families. 
• The government’s childcare changes to date have extended significant benefits to families higher up the income chain, and it is currently looking to extend the benefits right through to the very highest earning families in Australia.

These changes are part of the broader growth of less targeted programs compared to more targeted programs. Recent research from the e61 think tank shows for the first time in forty years, expenditure on in-kind services provided by the government, such as health, aged care, NDIS and childcare, has overtaken cash transfers such as pensions and unemployment benefits.

The structural spending increases that come with extending benefits to higher earning families has a high cost, and it is important to understand where the structural increase in revenue is expected to come from.