Taxes are no substitute for savings

Australian Financial Review 29th April, 2014

The government is kite flying a one-off income tax surcharge for the budget, perhaps to be deceptively called a deficit levy, to side-step the "no new taxes" pledge.

Commonwealth expenditure has blown out as a result of long-term commitments made under Rudd and Gillard. As a share of GDP, it grew from 23 per cent in 2007/8 to 26 per cent this year with that level set to increase gradually over the next decade.

The blowout began in 2008 with windfall payments to lower-income people that fuelled a splurge on flat screen televisions and poker machine gambling.

It progressed to school hall programs, "Building the Education Revolution", "pink batts" home insulation spending, and compensating lower-income taxpayers for the carbon tax.

All those spending decisions were in pursuit of kick-starting the economy by funding consumer spending increases that would, so the Treasury and others said, lead to a new burst of investment and higher incomes. This would enable the debt from the spending to be paid back effortlessly. That didn't work in Australia or anywhere else it was tried. Instead, the spending cannibalised savings and detracted from underlying income growth.

The spending momentum will be maintained by Gonski-recommended educational outlay measures and the program for vastly increased funding for people with disabilities. In these and other cases, including Bill Shorten's decision to increase payments to the largely government-funded care workers, the payment load is encased in a framework of income-redistribution and higher levels of debt. The income redistribution involves soaking the better-off, the side effects of which are to adversely impact on savings, investment and work effort.


One-off taxes can only be effective if they carry with them a strong perception that they will not indeed be repeated. Once a tax is factored into perceptions, it brings adverse consequences in distorting spending, as firms and individuals start rearranging their activities to minimise the impact. The tax will almost always bring diminished levels of income, though some may cite as exceptions one-off taxes by Jeff Kennett (part of the Victorian electricity market reforms) and a 1981 special UK bank tax Margaret Thatcher implemented.

Whatever the credibility of these two examples, they have no relevance as responses to correct current fiscal imbalances faced by the Commonwealth. The present dilemma is a budget deficit that goes on forever, created by a spending splurge. A one-off tax is no solution.

Nor is a more permanent increase in taxation. The Rudd-Gillard governments ratcheted spending up to new levels and the response must involve spending cuts. Unfortunately, though the Abbott government has said it will rein in spending, it has also indicated areas of increase, including on carbon emissions, paid parental leave and the (very necessary) increases in defence spending.

IPA has previously identified $22 billion in annual ongoing savings. These have ranged from eliminating all but emergency foreign aid, through to privatising the ABC and SBS, and to making massive savings in environmental expenditures and industry handouts. In addition to these are one-off savings from the negative value-added that is the $10 billion Clean Energy Finance Corporation. Eliminating the waste of these programs takes us half way towards the required contraction in spending.

For the rest, some bounds to aggregate spending - rather like the tithe of old - must be found.

There is no limit to needy causes that justify government spending but each dollar outlayed on these creates an increase in the demand.

Each program inevitably expands to meet marginal cases beyond its original reach and some recipients opt to place themselves in the supported categories.

In addition, the tax load required to fund the programs reduces incentives to work on the part of those paying the taxes.

There may be areas where tax policies can be tightened - including increasing the age at which aged pensions cut-in and the $800 million a year that education expert Andrew Norton reckons is available from better administering student loan repayments. But more is required and this means focusing saving measures on the 60 per cent of Commonwealth spending allocated to health, education and welfare.