How Chalmers can square the budget circle despite stagnant productivity

As if Treasurer Jim Chalmers didn’t have a big enough problem trying to improve the economy’s productivity, we now know Treasury has privately reminded him he’ll need to find additional tax revenue and reduce government spending to keep the budget “sustainable” – that is, to stop the government’s debt getting a lot higher.

Some of the measures he’d like to take to get the economy’s productivity improving could involve reducing certain taxes but, with the budget already overextended, he can’t afford them. He’s had to stipulate that all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.

Treasurer Jim Chalmers has said all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.Credit: AAP

This suggests productivity improvement and budget repair will need to be kept in two separate buckets. If so, Chalmers will probably end up avoiding tax changes and sticking to reforming the regulation of certain industries, which would have little cost to the budget.

But some measures to improve productivity may lead to increased tax collections. If so, it may be better to put together a big package of interlocking measures that together would help improve both problems.

The successful reforms of the 1980s involved big packages, with their size actually helping to reduce opposition to them. When you propose reforms one at a time, those who lose from the measure can make such a fuss that the government decides it’s not worth insisting.

Independent economist Saul Eslake.Credit: Alex Ellinghausen

But you can put together a package so big that most industries and individual taxpayers would gain something as well lose something. So if I oppose the package because of my loss, I put my gain at risk. And not only that; I get a lot more pushback from the many groups and individuals who see themselves as net winners from the package.

Even so, if I were Chalmers and cuts in government spending were needed, I’d tread carefully. The independent economist Saul Eslake sees government spending likely to be about 2 percentage points of gross domestic product higher in coming years than it averaged over the 40 years before COVID.

In contrast, the former top econocrat Dr Mike Keating thinks that to balance the budget while making adequate provision of government services will leave a gap to be filled of about 4 per cent of GDP.

We know from the voters’ frighteningly hostile reaction to the big spending cuts proposed by Tony Abbott in the 2014 budget that proposals to slash government spending are delusional. Voters want more services not fewer.

But smaller, more carefully considered spending cuts ought to be possible. Years of performance audits by the federal auditor-general have revealed how common it is for particular spending programs to be failing to achieve their stated objectives.

Trouble is, it’s just as common for such programs to roll on with only superficial efforts to fix their ineffectiveness. That’s partly because even programs that aren’t working still put money in the hands of their recipients, who will fight hard to keep their money coming.

What’s more, the people who earn their living delivering ineffective programs – the public servants and private-sector providers – have little interest in changing the status quo. The truth is, the auditor-general’s performance audits reveal a public service that doesn’t put enough effort into ensuring taxpayers are getting value for money.

This may be because, under previous governments, public service numbers were run down, and more money spent on expensive private sector consultants, none of whom had any great interest in ensuring government spending delivered the expected benefits.

Another part of the problem was the many failings of the grand experiment of attempting to increase “efficiency” by transferring the provision of public services to private businesses. Too often, the private businesses did what came naturally and sought to maximise their profits at the expense of a government driven by ideology – “public bad/private good” – rather than common sense.

The governments’ neoliberal delusions stopped them remembering to make sure the remaining public servants managed all the private businesses to stop them overcharging and underdelivering to a customer they regarded as an easy cop. Meanwhile, the remaining public servants went into a sulk, watching the private providers rip off the government, but not bothering to tip the pollies off.

The point is, while it’s idle to imagine governments can simply slash spending on public services, there’s solid evidence that much money is being misspent. So there is scope for reducing spending on particular programs without great loss to voters.

Just stop spending on programs that aren’t achieving their stated objectives. Governments should try a lot harder to reduce waste, and the public service should be made to see that alerting their political masters to instances of waste is a big part of their job.

Reducing wasteful spending matters also because voters’ misperception that most of their taxes are wasted is a big part of their justification for opposing increases in tax. It strengthens the argument so many pollies are afraid to make: “Guess what? If you want more and better government services, you’ll have to pay for them.”

But if I were Jim Chalmers, I wouldn’t consider simply increasing the rate of taxes such as the goods and services tax before I’d tackled the “waste” in the existing tax system. The people – usually the well-off – and industries that should be paying more under the present arrangements but aren’t, thanks to deliberate exemptions or inadvertent loopholes. Picking off the undeserving should cost fewer votes than just whacking up the tax on the unfavoured majority.

As Treasury told Chalmers, the first place to look for higher revenue is the superannuation tax concessions, which offer the well-off (including me) huge scope to minimise the tax they pay. The well-off get a much higher proportion of their income from sources other than wages, sources that are taxed far more lightly.

So, as Saul Eslake says, much extra revenue could be raised by reducing the 50 per cent tax discount on capital gains, curbing negative gearing, taxing trusts as though they were companies, and taxing payouts from super. And that’s before you get to the hugely undertaxed mining industry.

Balancing the budget wasn’t meant to be easy, but less politically risky solutions are there if you hunt them out.

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