There's plenty to downsize

What are public goods? Commonly perceived they are services needing government supply because markets are either unable to offer them (defence and police) or will offer insufficient to ensure community access to spin-off benefits (education, social welfare and environmental protection).

But wide differences in government spending between countries, and changes over time in such spending, suggest their appropriate extent is far from settled.

With government spending around 35-37 per cent of gross domestic product, Australia and the United States are identified as small government countries, while European countries have big governments whose spending averages about a third larger.

But major changes are occurring. Since 1995 a quarter of Organisation for Economic Cooperation and Development countries have reduced outlays by five or more percentage points of GDP, with massive reductions by Nordic “big spenders”, such as Sweden (11 points), and by Canada (9), where government outlays are now only five percentage points above Australia’s compared with 14 in 1990.

Regrettably, there is no sign of any similar movement in Canberra. This is not because the coalition claims Australian government is already small enough. To the contrary, senior ministers assert they have effected a major reduction in government size since 1996. Using data published in the budget, Treasurer Peter Costello wrote on March 27, 2006 that “from 1995-96 through to 2005-06 the Australian Government’s spending has declined from 26.3 per cent of GDP to 21.6 per cent”. And Prime Minister John Howard told the Menzies Research Centre on April 18, 2006 that “the Australian Government’s overall tax share has fallen as a proportion of GDP from 23.1 per cent in 1996-97 to an estimated 21.0 per cent in 2005-06”.

But pre and post 2000-01 data published in the budget on spending and taxes are not comparable. The pre 2000-01 figures include large general revenue grants to the states and the taxes to pay for them while those for recent years exclude from expenditure the GST payments now made in lieu of those grants and exclude from taxes the revenue from the GST itself.

By failing to use historically consistent data, ministers have seriously misled the public and should correct their distorted picture of federal fiscal performance. They have broken the Charter of Budget Honesty, whose purpose includes “facilitating public scrutiny of fiscal policy and performance”.

What is the correct picture? Historically consistent Australian Bureau of Statistics web site data shows that between 1995-96 and 2004-05 federal taxation (including the GST) increased by three percentage points of GDP and spending declined only about one point. But discretionary spending (i.e. excluding interest) has actually increased nearly one percentage point of GDP and, even allowing for the 2006-07 budget tax reductions, the Coalition is clearly the heaviest taxing government ever in Canberra. A return to the Whitlam Government tax take would in today’s terms allow a tax cut of over $70 billion.

Although little recognised, Australia’s larger private sector reduces the adverse effects of taxation on productive effort and, importantly, also means more efficient and higher quality services. Australia is already a world leader in the substitution of private for government services and usage of private sector education and health services. But, as indicated by recent apparent bipartisan support for increased usage of private hospitals, our private sector can provide an even large proportion of what have hitherto been regarded as public goods.

Political leadership to support changes in that direction might include:

• requesting from Treasury/Finance that, as the budget’s macro objectives are now more agreed upon economically and politically, much greater analysis is needed in budget papers of the economic-welfare implications for both particular groups and the economy of expenditure allocations and revenue sources;
• amending the Charter of Budget Honesty to require the publication of spending and revenue data on a consistent accounting and historical basis;
• requesting Treasury/Productivity Commission to publish papers analyzing the changing role of the public and private sectors; and
• requesting Treasury/Productivity Commission to publish an analysis of the reduction in outlays by OECD countries in Europe. 

After ten years of a Coalition Government supposedly believing in smaller government and in giving greater responsibility to individuals, let us hope its policies for the next election will go one better than the Opposition’s pledge not to increase the tax to GDP ratio.

Such policies might adopt the conclusion of French economist, Jean-Baptiste Say: the very best of all plans of finance is to spend little, and the best of all taxes is that which is the least amount.