Labor’s path to joining the worst welfare states

Next month’s economic reform roundtable will doubtless be animated by talk of tax reform, but one of the elephants in the room will be expenditure reform.  

Unless governments (federal and state) curb the rapid growth of their spending, tax reform will mean increasing the overall level of tax as well as restructuring the system — if not in the short-term, then over time. 

The starting point is a level of general government expenditure at all levels equal to 38–39 per cent of GDP. Apart from the surge above 40 per cent in the pandemic spendathon, this is the highest for many years and possibly since the Second World War.  

It represents an increase from the 34–35 per cent that was typical before the pandemic and more so before the global financial crisis of 2008. 

Although projections show expenditure edging down relative to GDP, don’t count on it actually happening; particularly given the Albanese government’s known spending ambitions.  

It is not fanciful to think we are on track for Australia’s public sector to go back above 40 per cent of GDP in the years ahead and this time stay there, which would put us in the company of the big welfare states of the world.  

The only thing making us look better is private superannuation — which the government is doing its best to undermine through greatly increased tax on larger balances, including the pernicious taxation of unrealised gains.  

The large and growing public sector is a problem because it is driving up the tax burden, creating entrenched deficits and rising debt, and weighing on productivity growth as resources are diverted from more productive uses in the private sector.  

In recent years it has helped fuel inflation and may do so again.   

All of this surely makes it a topic for the economic reform roundtable. Tax reform needs to improve incentives above all else if it is to help lead us to the promised land of productivity growth. 

But it is difficult to devise that kind of tax reform if the tax system is being called upon to build on an already record tax take to finance record and rising levels of expenditure. 

The federal government accounts for the bulk of the increase in spending, although some of that has gone to funding state programs such as public schools, hospitals and transport infrastructure.  

We should not let state governments off the hook — particularly Victoria — but that is a topic for another day.  

Focusing on the federal government, the increase has been from 24–25 per cent of GDP to 27–28 per cent.  

Much of this has happened in recent years but is a result of forces set in train more than a decade earlier as a previous Labor government established new social spending programs. 

Since 2012-13, federal spending in real per capita terms has grown at an average rate of 1.8 per cent a year, well ahead of labour productivity at 0.5 per cent and GDP at 0.8 per cent.  

The excessive growth of spending was established before the pandemic but has been more prominent since 2018-19. 

Comparing the growth of federal spending with pre-pandemic trends, there is a current excess of at least $50 billion a year, which more than accounts for the prospective budget deficit. This is more evidence that the deficit reflects too much spending, not too little revenue. 

The key to understanding the sources of this excess is a list of a dozen expenditure categories that in aggregate have average growth of 9 per cent a year since 2012-13 compared with 4 per cent for all other Commonwealth budget expenses.  

In 12 years this ‘dirty dozen’ has gone from around 35 per cent of Commonwealth own-purpose expenses (excluding the pass-through of GST revenue to the states) to almost 50 per cent and is set to increase further. 

The dirty dozen includes defence — coming off a very low base in 2012-13 — road and rail infrastructure (mainly grants to the states), the cost of the GST top-up for Western Australia, and debt interest.  

But it is dominated by social and entitlement spending on disability care (NDIS), aged care, schools (‘Gonski’ scheme funding), public hospitals, medical benefits, pharmaceutical benefits and child care. Together these are estimated to cost $150 billion more in 2024-25 than in 2012-13. 

Some of this is unavoidable due to demographic change, but it also includes a lot of waste and ineffective spending.  

The essential task of curbing overall spending growth must mean taking a fresh look at social and entitlement programs as well as keeping a tight rein on administrative expenses. 

Any tax hike ideas coming out of the roundtable should be shelved pending a serious go at expenditure reform. 

This will mean confronting the entitlement mentality that has taken hold in Australia — a mentality that successive governments have themselves fostered by their actions. 

Robert Carling is a senior fellow at the Centre for Independent Studies and the author of Leviathan on the Rampage: Government spending growth a threat to Australia’s economic future  

Photo by Jimmy Chan