Bowen said Labor was committed to bigger budget surpluses than the Coalition and paying down the $352 billion in net debt.
A forthcoming paper to be published in the Economic Analysis and Policy journal estimates that the economically optimal size of combined federal, state and local government payments in Australia is 31 per cent of GDP – well below the historically high 37 per cent of today.
‘They never wind it back’
“There comes a point where inefficiencies occur due to the size of government and the bigger the government, the less your economic growth rate,” says the report’s co-author, Griffith University economics professor Anthony Makin.
“But the spending trend, especially at the federal level, just ratchets up and they never wind it back.”
Makin and his co-authors, Julian Pearce and Shyama Ratnasiri, acknowledge that developing economies require higher spending growth to develop infrastructure, public institutions, police and the rule of law so a market economy functions.
Advanced economies may hit a tipping point where too much spending – and consequentially higher taxes – crowds out private sector investment and reduces incentives to work.
Despite the Coalition showering voters with $144 billion in legislated tax cuts over the next seven years and the MYEFO allocating $9.2 billion in extra tax cuts, personal taxpayers are shouldering a big burden for larger government.
The average tax rate paid by workers will hit a two-decade high of 20 per cent by 2021-22 – the second-highest personal tax slug in the economy’s history according to analysis by Deloitte Access Economics.
Bracket creep, whereby workers pay more tax due to wage inflation, is quietly sucking more money out of people’s pockets.
The Coalition governments of Tony Abbott, Malcolm Turnbull and Scott Morrison have done a decent job restraining new spending and attacking unsustainable health, education and social programs the Rudd-Gillard-Rudd governments loaded in the budget.
One senior Liberal strategist said it was clever politics by Labor before the 2013 election to set up spending booby traps because it made the Coalition look like nasty budget cutters. It has allowed Opposition Leader Bill Shorten to claim the Coalition cut $80 billion from hospitals and schools, when in reality Labor never properly budgeted for the medium-term spending.
Politically clever, but fiscally reckless.
Finance Minister Mathias Cormann says policy decisions taken by the Coalition since 2013, including reversing and slowing the growth in Labor programs like foreign aid, will save the budget $400 billion over the next decade.
Yet the Coalition’s spending restraint has been more about nips and tucks than wholesale spending reform since the public backlash against Abbott’s and Joe Hockey’s inaugural 2014 budget that cut welfare payments, reduced university funding and pushed a $7 co-payment for doctor visits.
Since the 1960s, the size of commonwealth spending has ballooned from 18 per cent of GDP, to 22 per cent in the 1970s, to around 25 per cent in the 1980s – edging up and down around that level since.
Former Treasury budget official Stephen Anthony says for most of the past 50 years both nominal and real spending outstripped the growth of the economy.
With medium-term cost pressures coming from the NDIS, new submarines, an ageing population, climate change and, more immediately, the election campaign, Anthony says it is time to better consider the right amount of government expenditure, especially given tax revenue is at risk from China slowing, commodity prices falling or a sharp housing market correction.
“Our long-term fiscal challenges mean a higher revenue share or we reprioritise spending,” says Anthony, chief economist at Industry Super Australia.
“My view would be we reprioritise spending.”
“There needs to be a clear commitment from both sides of politics to a stable size of government and improving the efficiency of expenditure and revenue measures.”
That could involve less wasteful recurrent spending and more productive investment, such as on infrastructure or pro-growth tax policies.
The last government to implement sustained real spending cuts was Bob Hawke’s Labor, due to treasurer Paul Keating and finance minister Peter Walsh cutting real spending for three straight years in the mid-1980s.
“The star performer was Keating and Walsh, so it’s not strictly a partisan history,” Makin says.
Since John Howard and Peter Costello achieved fiscal restraint early in their government, there has been a general drift toward more spending and higher taxes over the past 15 years.
Howard loaded in family payments, baby bonuses and homebuyers’ grants, plus other goodies for older voters.
The Rudd-Gillard-Rudd governments failed to arrest spending after their 2008-09 fiscal stimulus during the financial crisis. Pensions were made more generous, the National Disability Insurance Scheme set up and health and education spending significantly increased beyond the four-year budget estimates.
Internationally, total government spending in Australia of 37 per cent of GDP is in the lower-to-middle band of comparable countries. It is well below France’s 57 per cent and around 50 per cent for other European welfare states, but well above Singapore at 19 per cent.