Tax and spend gets us nowhere

 

Does Australia need more tax revenue to provide social welfare, health, education and public goods? Too many people have an instinctive answer that likely bears little relationship to how much the country currently spends in those areas.

If you lean Left, odds are your answer is yes; and even if we doubled spending in those areas for most of the Left it would probably still be yes. In fact, we can be sure that it is — because we actually doubled spending on schools in real terms between 1987-88 and 2011-12, yet in 2012 the government’s response to the Gonski report was another large, back ended, increase in school funding.

Despite poor returns from these funding increases, boosting school funding remains one of the centrepieces of Labor’s election pitch.

Another prominent example is childcare, where taxpayer funded subsidies effectively doubled in real terms between the 2010-11 budget and the 2017-18 budget, at which point the government ‘reformed’ the system with annual spending now set to exceed $10 billion by 2020-21.

Despite this, out of pocket expenses for parents increased by almost 50% in real terms between 2011 and 2017 — and are likely to continue to rise.

Moreover, a key driver of this massive increase in costs has been the imposition of a new early childhood education framework, much of which is not backed by robust evidence and some of which we know actually doesn’t work.

Notwithstanding the shakiness of the supporting evidence, Labor is proposing billions more to expand early childhood education through multiple years of universal pre-school.

Of course the catch-cry of the activist is ‘more government and more spending right now’. If you listen to their stories, you might come to believe Australia chronically underfunds every aspect of its public goods and services.

The Commonwealth spends more than $450 billion a year, including transfers to the states — the majority of it in welfare, health and education. The total figure across all tiers of government is well north of $600 billion. Each year.

Raw figures can only tell so much of the story, but are we really to believe it’s impossible to run a country of just 24 million people for less than $650 billion a year? Or that every dollar currently spent is crucial to the health and wellbeing of the nation?

The pro-revenue camp claims it’s so hard to raise revenue they recently held special summit. What nonsense. Other than a dip in revenue due to the Global Financial Crisis, revenue continues to increase in real terms year on year.

The problem is that spending has kept growing too.

Investigating the efficiency of large scale government spending, like schools funding or childcare, shows numerous examples of waste or programs lacking an evidence base. Yet every big pocket of government money spawns advocacy groups and vested interests with a laser like focus on protecting every dollar of that spending and lobbying for more.

Collectively, these groups unite to oppose any cuts and support all spending increases.

It is these vested interest groups that will scupper calls — like the ones we saw recently from ACOSS — to reignite the idea of a grand bargain on tax reform. Such a bargain was actually struck back in 2015; although given the spectacular lack of success of that endeavour you could be forgiven for forgetting it.

In the current climate any grand bargain is bound to devolve into a mess of contradictory initiatives.

It may be that Labor wins the next election with enough of a majority that they can simply impose their ‘tax and spend’ policies on the electorate at will. The odds on that aren’t great, though — the more likely outcome if they do win is that they will have to manage fractious minor parties in the Senate.

Moreover, reforms that endure longer term tend to have at least some support from the other side (even if true bi-partisanship is a bridge too far).

So instead of holding summits on how to squeeze more out of the taxpayer, or trying to solve all our problems in one go, what should the good and great of the Left do about tax reform?

Here’s a radical thought: instead of starting with a demand for ever-escalating spending, commit to identifying specific dud programs and vocally supporting their removal — the trade-off being that government uses the savings on new initiatives.

The ironic thing is that a Coalition government would probably happily agree to this, especially as the Left actually has the credibility to stand up to these activist groups and get an outcome.

For example, Indigenous activists call for more spending on new programs, yet at the same time complain about outside service providers soaking up funds intended to combat Indigenous disadvantage.

What government wouldn’t jump at using the funds freed up by fixing the second problem to support the first? And isn’t that the kind of influence over priorities that Indigenous activists really want?

The days of grand bargains are over, but Left and Right can still come together in specific areas to improve the system. Instead of trading company tax cuts for another $10 billion for hospital funding, it might be be funding new drugs on the PBS by cutting funding for certain unnecessary scans.

If the Left wants more reform maybe it starts with admitting that bigger government isn’t actually the solution to every problem.

Simon Cowan is Research Director at the Centre for Independent Studies.