The biggest question, the real one about our shared identity as a nation and our vision for fairness and prosperity, is also hidden in the background to this budget. That is, what size of government do we want and what should it do?
I’ve noticed a troubling discourse that suggests federal tax revenues are too high, or should be capped at some arbitrary level. Australia’s “tax level”, sometimes called the “tax burden”, the ratio of total taxes collected to GDP, is about 31%. Our federal tax level has been approximately 24% of GDP since the 1980s. The rest is state taxes. This percentage indicates what proportion of Australian economic wealth goes to shared expenditures and responsibilities, and balancing the budget calls for capping government spending at this level too.
The Commission of Audit said that a fiscal rule that should be introduced to cap federal tax revenues at this level. The Commissioners think government is too big and imply that this cap is needed for prosperity – but this is false. Nowhere is there some “rule” of tax policy, or good government, that sets 24% of GDP as an ideal size of government.
In fact, Australia’s tax level is low. Its much lower than all comparable rich countries around the world. We are about level with the US, but they borrow more to fund their government than we do.
As the level of development of a country increases, its tax level tends to increase. Among rich countries, the tax level varies from the US and Australia at the bottom, about 30% to Norway, at 57%. Germany is doing just fine on a tax level about 45% of GDP, which enables it to fund childcare and infrastructure. Norway’s free education for all – yes, its a small rich country but then (except in geography) aren’t we? – has set them up for 3% economic growth and one of the most flexible and open economies in the world.
The federal government spends 35% of its budget on social security and welfare compared to 7% on education and 16% on health. Hockey made much of this apparently large share in his speech, but this is exactly the role of the federal government should be doing, paying out social security to ensure a fair opportunity for all across the country. Australians care about this – we even voted for a referendum to amend the Constitution in 1946 – so that the federal government would have authority to redistribute taxes to fund social security and medical payments where needed.
The implication in Hockey’s freeze on future education spending, and his comment that funding is up to the states, seems to be that any extra taxes should be levied by them. But our most effective revenue-raising taxes are probably best administered centrally – the income tax and the GST. This is a national issue.
Australians need to think hard about whether we are holding ourselves back as a country, if we don’t start raising tax levels to be just a little closer to those of other rich countries, so that we can spend on education, infrastructure, welfare, health and the environment – not mentioned in Hockey’s budget at all. And that means we need to examine overall tax reform for the future.
Miranda Stewart is a Professor and Director of Australian Tax Transfer Policy Institute, Crawford School of Public Policy at the Australian National University.
This article was originally published at The Conversation. Read the original article
