The SIze of Government in Australia

 

Reproduced from the Australian FInancial Review:

That’s the “big” myth blown 

The conventional wisdom on the side of politics that is big spending and big taxing has been dramatically turned on its head with the 2012-13 budget.

The facts in the budget papers show undeniably that the Labor side of politics is able to deliver smaller government through low spending and taxing as a share of the economy. The Coalition parties, conversely, err on the side of higher spending with the budget surplus objectives inevitably met by high tax receipts.

The facts show that the fifth Labor budget in this political cycle has in place a quite massive 4.3 per cent cut in real government spending in 2012-13, the largest single-year cut yet recorded.

In nominal terms, government spending falls in 2012-13 for the first time. Adding context to this extraordinary spending restraint indicates that in the three years since 2009-10 there has been a cumulative total of zero growth in real government spending, restraint only exceeded in the three Labor budgets from 1986-87.

Not once did the Howard or Fraser governments in about 20 years in office achieve a single year where government spending was cut in real terms, while Labor governments have been able to cut real spending in five years since the mid-1980s. Viewed another way, the 2012-13 budget will see the ratio of government spending to gross domestic product fall to 23.5 per cent. This is 0.7 per cent of GDP lower that the average of the 12 Howard government budgets. In today’s dollars, that is around $10 billion less spending. What is equally striking, in the four years to 2015-16, this ratio will remain at or below 23.7 per cent, a four-year run of low spending not seen in more than three decades.

In terms of taxation receipts, the return to trend economic growth will see the tax-to-GDP ratio rise to 22.1 per cent in 2012-13. In the prior three years, the tax-to-GDP ratio averaged 20.4 per cent to be at levels last seen during a Labor government in the early 1990s and not delivered by a Coalition government since Billy McMahon was prime minister in the early 1970s. Not once did the Howard government have the tax-to-GDP ratio below 22.2 per cent and its average tax take was 23.4 per cent.

For the current Labor government, the tax-to-GDP ratio will, in each of the eight years out to and including the forward estimates, be below the average tax take of the previous Coalition government. If the 2012-13 tax take was equal to the average of the Howard government, Labor would be collecting around $20 billion in extra revenue and delivering a budget surplus close to 1.5 per cent of GDP.

Rounding out the myth-busting fiscal performance of the Labor government is the turnaround in the budget bottom line of 3.1 per cent of GDP in 2012-13. This is more than double the next-biggest single-year contraction in fiscal settings and reflects both cuts in spending and some pick-up in revenue as the economy returns to trend growth. It is beyond argument Labor governments function with a lower tax take than Coalition governments and at the same time have a propensity to rein in spending when the economy is growing.

None of the above facts deals with the philosophical issue of whether “big” government is more desirable than “small” government. That is for others to debate and most times it depends on the state of the business cycle.

Suffice to say, the updated facts on government spending and taxing in the budget papers confirm that Labor delivers smaller government than the Coalition. This is important to recognise because it repudiates the mantra from various opposition spokespeople about this government being “addicted to tax” or not delivering “genuine savings” in terms of cuts in government spending. Nothing could be further from the truth.