Does Albanese lead a reformist
government? Or not?
He can leave taxes alone, or he can change Australia. Not both.
There are two possible views of the reform credentials of
the present Labor government. One is Bill Kelty’s: that it is “mired in
mediocrity”.
Another is that Anthony Albanese and his colleagues are
playing a long game, embedding their place in government, gaining the trust of
electors by acting responsibly. We cannot yet know which of these paths will be
taken by a re-elected Labor government.
All national Labor governments have aspired to change
Australia: to make it fairer, to improve the quality of ordinary people’s lives
and to use the powers of the Commonwealth to fund essential services that the
states cannot manage alone.
The Curtin and Chifley governments had to change the
constitution to allow the federal government to put money into health, child
support and unemployment benefits. They created the Pharmaceutical Benefits
Scheme, the social security system, post-war immigration and the CSIRO.
“A conservative government survives essentially by dampening
expectations and subduing hopes,” said Gough
Whitlam, ten years after the dismissal.
“We, by contrast, exist to raise hope and expectations – to
lift the horizons of the people. We cannot be satisfied by merely establishing
a reputation as good economic managers, important as that is. And in the longer
term, if that is all we are seen to stand for, we will forfeit a large part of
our public support.”
After Hawke and Keating, the wheels fell off. The
Rudd-Gillard government was most notable for its failures to deliver meaningful
health reform, and for caving in to mining interests on tax. So far, the
Albanese government has restricted its reform program to measures that don’t
cost much and which are therefore of limited consequence.
Serious
reforms cost serious money
Together, the four biggest areas of government expenditure –
welfare, health, education and defence – account for two-thirds of the budget.
All four are in pressing need of reform and increased spending. Making any
significant difference, particularly in welfare and health, would add many
billions to each year’s budget.
Welfare
Australia as a whole spends much less on social welfare and
health programs, as a proportion of GDP, than most other developed countries. The
sudden jump in 2019-20 was in response to the pandemic recession and has since
been withdrawn. Over the decade to 2019, Australia spent 2.4% of GDP less on welfare
programs than the OECD average. Eliminating that shortfall would cost $61.6
billion a year.
Much of the sudden increase in Australia’s welfare spending
in 2019-20 was the result of unemployment benefits being temporarily increased
to the poverty line. That increase, now withdrawn, still left this country’s
welfare spending significantly below that of other developed nations.
Using a Parliamentary Budget Office data tool shows that
increasing Jobseeker to the Henderson poverty line and then indexing it to CPI
would cost $8 billion in the 2024-25 fiscal year, rising to $10 billion by
2029-30.
The addition of 0.28% of GDP to the budget bottom line would
still leave Australia far behind most other similar countries. But without an
unexpected increase in revenue, it would add 1.29% to net debt though,
according to PBO estimates, this would fall to 1.22% by 2028-29.
By itself, adding this amount to debt would not be
crippling. But this is far from the only budgetary increase that will be needed
to fund a genuinely transformative welfare reform program. It will not be
cheap. Adding just 15% to the cost of six key programs would add $129 billion
to the budget – and to debt – over the forward estimates.
Health
Australian governments spend less on health, as a proportion
of GDP, than most other high-income countries. Bringing that level up to that
of New Zealand or Britain would add $46 billion to the annual budget.
Healthcare costs fall on the Commonwealth, the states and
individuals, with the national government providing 44%, the states 29% and
non-government sources 27%. But, because the states have such restricted means
of raising revenue, meeting those costs has stretched state budgets much more than
the Commonwealth’s.
The introduction of a new hospital funding scheme by the
Rudd-Gillard government in 2011 brought a substantial increase in the
Commonwealth’s health spending, compared to tax revenue. Since then, the trend
has been downward. Health costs have risen more slowly than revenue.
For the states, the reverse has been the case. Health
spending now takes up a significantly greater proportion of tax revenue. This
is a major reason why the states and territories (with the exception of Western
Australia) now run substantial and growing budget deficits.
The Commonwealth has the power to increase its tax revenue;
the states, broadly, do not. If this growing vertical fiscal imbalance is to be
brought under control, the federal government will have to take on a much
greater responsibility for funding state-run hospitals.
When the new National Health Reform Agreement was signed in
2011, the Commonwealth undertook to fund the recurrent costs of public
hospitals at the rate of 45% of the national efficient price (NEP), a
calculation of what treatments should cost in aggregate, increasing to 50% in
2017.
That increase has never happened. Implementing that original
promise now would cost $437 million in 2025-26, rising to $2.4 billion in
2028-29.
But costs have increased so substantially that an increase
to 50% will not be enough. Bringing the level to 60% would add materially to
the federal budget: $1.3 billion in 2025-26 and $5.4 billion by the end of the
decade.
But even that won’t fix much. The states have not invested
nearly enough in hospital infrastructure because they don’t have the money. As
a result, per-patient costs are soaring because hospital staff cannot work
efficiently when resources are so inadequate. Only the Commonwealth can raise
the cash to make public hospitals fit for purpose once again.
Then there are private hospitals, many of which are facing
existential threat. They comprise one bed in three in this country, so we can’t
do without them. Putting them onto a sustainable, efficient path will involve
sidelining private insurers, but to be properly effective, that would cost
around $9 billion annually.
Medicare needs much more money as well as serious redesign.
Something must be done about access to dentistry.
It adds up. Increasing health funding (as a proportion of
GDP) to the level of New Zealand or Britain would cost $47 billion a year now,
and $51 billion by the end of the forward estimates.
Very little of substance can be achieved unless tax revenue goes
up. We can’t do this with borrowed money.
Education
Two graphs show how even Australia’s inadequate education
funding puts a disproportionate strain on the federal budget. Again, it’s a
story of inadequate taxation.
Among countries with which we compare ourselves, Australia
is towards the bottom of the list in our public spending on education. As a
nation, we could afford to spend a good deal more: Australia’s 5.3% of GDP (by
all levels of government) compares poorly with most others, even the USA but
particularly Britain and the Nordic nations.
Bringing education spending by Australian governments up to
the level of New Zealand would cost $5.6 billion a year, to Britain’s level
would take $14.6 billion and to Sweden’s would cost $57.5 billion.
Despite this relatively modest amount – 5.3% of GDP – education
takes a greater share of total government spending than any of the nine
countries shown here. Again, here is proof that we need to raise taxes if any
serious reform is to occur.
Australia badly lags most other high-income countries in
funding of its tertiary education sector. Much more than most, universities,
TAFEs and other institutes have to rely on overseas students and substantial
student fees.
Of 13 high-income countries, only two spend less than
Australia.
Bringing government funding of this sector up to the OECD
level would involve an increase in funding of 84%. Over four years of the
forward estimates, that would cost the budget $113.5 billion.
Defence
Military spending takes up a greater share of the Australian
government’s budget than is the case in almost any of the developed nations
within our broad alliance group. Only the United States spends significantly
more.
Looking at defence spending as a proportion of GDP also shows Australia’s performance is well in line with other advanced economies. Since these figures were compiled, this country's defence expenditure has risen from 1.9% of GDP to just over 2%.
On these figures, there is no case for increasing defence
spending further, given that the capacity to spend on other programs would be
impacted, or debt would increase sharply, or both. However, the government has
already committed to increase spending.
“We’re taking defence spending from about 2% of our economy
to more than 2.3% in the course of the
next decade or so,” the Treasurer, Jim Chalmers, said
recently. The Coalition has
flagged an increase to 2.5% and the Trump administration has called
for 3%.
Taking defence spending from 2.02% of GDP to 2.33% (the
government’s target) would involve extra spending of $48 billion over five
years. An increase to 2.5% would cost $79 billion and to 3% would cost $159
billion.
Debts and deficits
There is nothing inherently evil about government debt. It is
entirely reasonable – and indeed important – for governments, like companies,
to use debt to build infrastructure and other productive capacity. But running
up large amounts of debt to fund recurrent expenditure leaves us, eventually,
with a large bill and no ongoing benefit. This is what the Treasurer, Jim
Chalmers, meant when he complained about the former government racking up “a
trillion dollars of debt and nothing to show for it".
But according to Treasury figures, the “trillion dollars”
ascribed to the Morrison government in 2021-22 was actually $895 billion in
gross debt and $516 billion in net debt. The trillion-dollar mark will be
reached in the coming financial year, on Mr Chalmers’s watch.
The budget estimates have gross debt increasing by an
average of 6.8% over the next four years, even without any major reform
expenditure. If that trend continues, gross debt would reach $1.5 trillion by
2031-32 and $2 trillion by 2036-37.
There is no need for sudden panic. Compared with most other
advanced countries, Australian government debt is relatively benign: around
half the OECD average.
But that is a poor benchmark. Many countries have been
spending far more than they raise, continuing to increase deficits and the
consequent interest payments. The standout example is the United States where,
over many years, successive administrations have cut taxes and increased
spending. Official
figures show that in the most recent fiscal year, the government spent
$US1.3 trillion ($A1.95 trillion) more than it collected, bringing the national
debt to $US36 trillion ($A54 trillion). It has risen from 33% of annual GDP in
1980 to 123% now.
On that total debt, the US government is paying an average
3.32% interest. That’s $US1.2 trillion ($A1.8 trillion) a year, or $US5,194
($A7,900) for every US resident. That, of course, adds to the debt.
Australia is in no such immediate danger. But the same
principles apply: you cannot go on forever cutting taxes and increasing
spending.
But the federal government (as well as all state and
territory governments except Western Australia, because of its GST special
deal) are already in long-term structural deficit. During the final term of the
Howard government, a temporary budget windfall from the mining boom was given
away in permanent tax cuts. The windfall disappeared but taxes have never been
put back up.
But the Howard-Costello cuts are only part of the picture.
Since then, there have been further cuts to personal income taxes. While some
of these cuts are defensible in terms of restoring money lost to taxpayers by
bracket creep, they have undoubtedly worsened the overall budgetary position.
And government spending has continued to increase. Since a brief period of
surpluses as a result of ultra-high commodity prices, the budget is back in the
red.
History shows that as the role of the Commonwealth in
Australian economy and society expanded, the share of GDP going to federal
taxation revenue steadily increased. But, three decades ago, that trend halted
– and, with it, the capacity of the government to take economic leadership and
to provide services has stalled.
The affordability of servicing the nation’s debt varies with
the government’s revenue but the latest budget estimates that within three
years from now, interest payments will take up around 4.6% of everything the
government earns.
Whether or not a full-blown recession is imminent, Trump-induced
global economic chaos means that public spending will increase and revenue will
decline: more people will need income support, the economy will need
large-scale stimulus, and less tax will be paid.
That, in turn, means more borrowing. Interest costs will
rise, with less money left over to fund any reform program.
So where’s the money coming from?
To eliminate the structural deficit in the federal budget
will require at least another $20 billion a year to be raised. A
transformational reform program, such as that outlined earlier, will demand
another $122 billion.
When we put that into the context of total government
expenditure, it looks a little less scary. Budget repair costs of $20 billion
would add 2.6% to current government expenses and the reform program would add
16%, making a total of 18.6%.
Although this represents nothing more than catching up with
other advanced economies, it cannot be achieved without significant increases
in tax revenue.
Looking at the federal government’s tax mix gives the
impression that Australia relies unduly heavily on personal income taxes, which
is by far the biggest category and which provides more than a third of total
tax revenue.
The notion that income tax must be reduced is almost
universal in Australia, but the idea falls apart when we look at what’s
happening in other countries. Income taxes appear high because Australia (and
New Zealand) do not impose separate social security taxes. Instead, Australia’s
social safety net is funded by the entire economy, not only individuals. When
this is taken into account, this country’s personal taxes amount to 12% of GDP,
compared to 17% for the OECD average.
The disproportionate weight of income tax in the revenue mix
reveal not that individuals are paying too much but that other contributions
are too low. The recent cuts may have been justified in political terms but
they have no justifiable economic
rationale.
Nevertheless, increasing taxes on capital, while leaving
taxes on labour as they are, is
justified in terms of social and economic equity. Since the demise of the
Whitlam government in 1975, income inequality has risen sharply. A minor
downturn in the share of national income going to the richest 10% of the
population does not signify a meaningful improvement in equality: that money
went to the people in the 50th to 90th percentile; the
share going to the bottom half continued to decline. The trend was unaffected
by changes of government.
Since the early 1970s, the share of the economic pie going
to employers has risen, at the cost of wage-earners and the self-employed. In
1959, at the start of this series, the combined share of wage-earners and the
self-employed was 77%; now it is 61%. Over the same period, the owners of
capital have increased their share from 24% to 39%.
There is a strong case for the long-term balance to be
restored.
Which taxes?
Increasing tax revenue by $140 billion a year is a massive,
complex and politically fraught task. But it can be done.
There are three main areas in which change can occur:
reducing tax exemptions, attacking tax avoidance, and levying new taxes.
Dozens of tax breaks have crept into the Australian system
over the years. Many of these are socially and economically justified, but a
lot of the big ones are not. Abandoning the 50% discount on capital gains tax
would raise $23.3 billion in the 2025-26 financial year; getting rid of
negative gearing on investments would yield another $7.7 billion. There are
excellent reasons for reducing the very generous superannuation tax concessions
for higher-income earners, and for levying the sort of tax on billionaires
proposed by Warren Buffett.
Current proposals on corporate tax avoidance ($0.5 billion
in 2025-26) do not go nearly far enough. The nominal rate of company tax is
30%, but relatively few pay that. The effective rate – that is, what
they pay after all the deductions and exemptions – is lower in Australia than
in almost any advanced economy. According to the US Congressional Budget
Office, the gap between the two is 13%. Reducing that to the rich-nation
average would add another $7.7 billion to revenue.
Another very large potential source of tax revenue is the
amount avoided by individuals and companies who are not complying with the law.
The Australian Tax Office estimates
that around $44.5 billion, or 7.5% of total tax liabilities, are unpaid.
Individual taxpayers accounted for about a quarter of this.
There was far greater avoidance by companies, across a range of categories.
It is fantasy to believe that all of this can be collected,
but the level of clawback achieved by the ATO needs to improve markedly. These
figures show what could, in theory, be added to government revenue if the law
was being complied with. But even reducing the tax gap by 50% would add $22
billion to revenue.
But … the
politics
Tax cuts are almost universally popular. Tax increases are
not.
The electorate likes to think that better government
services and lower taxes can go together. They can’t.
At the heart of the problem is that those who have to pay a
new tax will complain loud and long; those who benefit will regard it as their
right and be quiet. Vested corporate interests are very well-organised and
lavishly funded: history shows that they run far better campaigns against
reform than the government’s campaigns in favour. An example was the defeat of
the Resource Super Profit Tax in 2010.
The Labor campaign for the 2019 election focused on three
revenue-raising measures: removing negative gearing from most property
transactions; halving the capital gains tax discount from 50% to 25%; and
abolishing franking credits for share investors whose taxable income was zero.
These were eminently sensible and moderate proposals. The
mistake was to announce them before an election, rather than enacting them once
the election was won. That mistake will not be repeated by Anthony Albanese.
If the government has a strategy of reducing inequality by
transferring some of the tax burden from labour to capital, the recent tax cuts
make sense. But that money will have to be more than recouped if the budget is
to be brought back into surplus, and if any serious reform is to take place.
There is no chance of Albanese taking the
crash-through-or-crash approach to reform that characterised the short-lived
Whitlam government. If reform happens, it will be slowly, carefully and over
several parliamentary terms. If anything is to be achieved by any party, it has
not only to attain office but to keep it for quite a long time.
But power for its own sake is not enough for any party
claiming to have, as its central purpose of existence, a commitment to the kind
of reform that makes people’s lives better. No government lasts forever and
most last no longer than about a decade. Albanese has no more time to waste. If
there is no sign of fundamental reform during his second term in office, it’s
probably not going to happen.
“I always believed in burning up the government's political
capital, not being Mr Safe Guy, you know?” he said.
“I think you have to be born with an instinct for power. I’m
not sure you can learn about the exercise of power. I think you’ve got to be
born with it, grabbing the naked flame and hanging on, surviving the
experience, drawing the inclinations of the community into a concentrate, one
you can use to effect change.
“That’s the kind of power I’m talking about, and not being
afraid to use it to the best of your ability, and not wasting its power to change.”