Entitlements, budget deficits and facts – Mr Hockey’s challenge

I am having difficulty in uploading at present, at least from some sites. That’s annoying!

One of the current issues is the ending of the Australian age of entitlements, something that Treasurer Hockey is very keen on. A second subtext is the burden of taxation. It helps, I think, to get some facts to do with the discussion.

Today, the Australian Parliamentary Budget Office released its analysis of Trends in Australian Government Receipts over the last thirty years. This was the document that I wanted to reload for analysis. At the same time, Greg Jericho had an interesting piece on The Drum, The land where entitlement runs riot? Hardly. I wanted to join those two. Since I cannot reload the PBO piece, I will have to rely on memory and on you to correct me if I am wrong.

The PBO analysis shows that Commonwealth tax revenue as a percentage of GDP has fluctuated considerably over the last thirty years above and below the thirty year average. At present, tax collections at 24.3% of GDP are below the thirty year average. This compares with the Howard period when mining drove them well above. In addition to Federal taxes, we have state and local government taxes. State taxes are, I think, now about 4 per cent of GDP, local government about one per cent, making total Australian tax collections a bit less than 30 per cent of GDP.

The difference between Commonwealth tax collections at 24.3 per cent of GDP and combined state and local government taxes at 5 per cent is a measure of the fiscal imbalance in the current Australian system. The total percentage, however, does not suggest that Australia is grossly overtaxed in aggregate terms

There have been significant compositional changes within the tax mix, This was the area that I really wanted to look at again, so just a few take-home messages.

The really big growth area has been company tax collections. It’s not that company tax has gone up, it hasn't. Rather, profits as a share of GDP have risen significantly, increasing the company tax take.

This should be a good thing, business has more money to invest, and it probably did help during the mining boom by reducing our need to attract international capital. However, it is not clear that higher profit shares outside mining have encouraged investment to this point. Business has been more concerned to fix balance sheets, reduce debt, build reserves. It is this process that was one element in my positive assessment of the economic outlook last year.  Business had plenty of capacity to invest, so investment was likely to increase as re-balancing came to an end. Assuming, of course, that business saw expansion opportunities. That’s actually not clear, given that there has been something of a capital strike.

Within the remaining tax streams, the relative importance of personal tax collections and GST collections have declined. The decline in the relative importance of personal tax collections is understandable. Lower tax rates plus the increase in the profit share (by implication, the relative importance of income tax declines) have been more than sufficient to offset the continuing impact of fiscal drag. Fiscal drag refers to the way that money wage increases pushes people into higher tax brackets.

The relative decline in GST collections is more interesting, for this was meant to be the state growth tax. I haven’t looked at consumption as a share of GDP, but if the profit share goes up, the wages share down, consumption growth is likely to slow, more so if (as happened) the savings rate goes up. In addition, the growth in consumption spending appears to be concentrated in areas where GST exemptions apply or, alternatively, cannot be collected.

An example of the first is expenditure on private school fees, the second international travel and tourism spend. While I haven’t analysed the numbers, I suspect that international travel is more important than, for example, GST retail leakage.

On the surface, there would appear to be a real case for widening the GST net and perhaps increasing the rate. This would also have the advantage of increasing state revenue and hence decision freedom relative to the Commonwealth.

Turning now to the Jericho piece, this is interesting because he presents evidence suggesting that by global standards Australia simply isn’t an entitlement society. We actually do things efficiently and relatively cheaply as compared to, say, the US or indeed many other countries.

This isn’t to say that there isn’t an entitlement culture in certain areas, I could give you examples here including private education and paid parental leave, as well as a range of specific examples coming from the welfare sector. However, overall, Australia does not appear to be an entitlement society by global standards.

Where, then, does the debate actually rest? It appears to rest not on now what we spend now, but on what we might spend in the future given decisions already taken by Governments. It is in this area that we need to focus. Here we need to scope the real problem, not what government tells us.

My Hockey is focused on a tough budget now to solve future risks and problems. That may be right. However, I would be more comfortable if he gave me more information about his perception of the longer term. I don’t actually buy the entitlement debate as presently phrased. I don’t buy his prescription of the problem. I need to be convinced. That’s my challenge to you, Mr Hockey!