The better economic manager
This article first appeared on the ABC web site on 14 December 2012
The Federal election is now less than a year away. The budget surplus, government spending, tax and debt are likely to feature prominently in each side’s efforts to convince voters that they are the better economic manager.
The Liberal Party and many conservative commentators suggest that the size of government in Australia under the current Labor Government is too big.
Opposition Leader Tony Abbott has said the current government “is addicted to taxes” and that it “is spending like a drunken sailor… mortgaging our future“. In a similar vein, shadow treasurer Joe Hockey says “Labor has shown it is incapable of cutting spending“.
Either these comments are deliberate mis-truths or reflect the lack of understanding of budget policy from people who, within a year, could well be prime minister and treasurer.
The facts of the budget show that the current government’s budgetary footprint on the economy is small, running at the lowest level in 35 years. The current small government is made up of both low tax receipts and record cuts in government spending.
The tax to GDP ratio has averaged 21.1 per cent of GDP in the five years of the current Labor Government. The highest tax to GDP ratio in those years is for 2012-13 where it will reach 22.2 per cent. Under the Liberal Party-lead Coalition, the Howard government tax to GDP ratio averaged 23.4 per cent over its 12 years in office and never once did it fall below 22.2 per cent. In other words, the tax to GDP ratio under the current government is at a level last seen during the Keating government in the early 1990s and before that, we have to go back to the 1970s to see such a low-taxing government.
The difference between the average tax level of the previous Coalition government and the current Labor Government is 2.3 per cent of GDP. In today’s dollar terms, that is around $35 billion per annum in less tax collected by the Labor Government compared with the previous Coalition government. That $35 billion lower tax take is equivalent to around $4,000 per year for every household in Australia.
The budget papers also show that the Howard government was the highest taxing government in Australia’s history. In 2004-05 and 2005-06, the tax to GDP ratio reached a record high 24.2 per cent. In addition, there have been only seven occasions where the tax to GDP ratio has been in excess of 23.5 per cent of GDP and all seven were under the Howard government.
In a similar vein, in the last 30 years, there have been 10 occasions when the tax to GDP ratio has been below 22.0 per cent of GDP and all 10 were under a Labor Government. To put simply, the Howard government was a high taxer, while the current Labor Government is a lower taxer.
In terms of government spending, there have been only five years in the four decades leading up to 2012-13 when real government spending was cut in real terms. None of those cuts were delivered by a Coalition government. All five times that there has been a cut in real government spending have been when a Labor government has framed and delivered the budget. There were three years during the Hawke government in the late 1980s where government spending was cut in real terms and there have been two occasions in the current Labor administration where such cuts have occurred.
In what should be an embarrassing fact for Mr Hockey, 2012-13 will see real government spending fall 4.4 per cent, the biggest cut ever recorded. This cut will see the government spending to GDP ratio fall to 23.8 per cent, having previously been ramped up to successfully counter the shock from the global financial crisis. This level of spending is 0.4 per cent of GDP below the average government spending level of the Howard government. In today’s dollar terms, the 0.4 per cent of GDP amounts to around $6 billion.
All of this suggests that the current government and the Labor Party more generally are low taxing and the only side of politics willing to cut spending when required.