Put away national credit card and boost productivity

It is no surprise that government spending increased as a percentage of GDP during the response to the pandemic. The Morrison government’s JobKeeper and other stimulus measures kept the economy afloat. Nor is it surprising that total government spending, including the states and territories as well as the commonwealth, ballooned to its highest share of the economy in history. What should be concerning to those who understand the value of lower taxes and smaller government is there is no sign of spending reducing after the pandemic. After years of fluctuating between 23 and 24 per cent, it now sits at about 28 per cent of real national output, with more, not less, spending on the way. As Labor prepares its first budget next month, which is expected to include expensive promises on childcare, taxpayers are bearing an increasingly heavy burden. While popular as centrepieces of election campaigns, big-spending promises to fund services such as the NDIS, better aged care as recommended by the royal commission into the sector, health and childcare come at a cost. It is PAYE taxpayers, business taxpayers or the budget bottom lines that suffer as governments borrow to fund their spending habits. In view of Australia’s deteriorating strategic circumstances, defence spending is also likely to increase in coming years as governments, of necessity, improve the nation’s defences.

A Commonwealth Bank analysis of national account figures, reported on Monday, reveals that a 16 per cent lift in ongoing spending since the pandemic has outpaced economic growth. Real GDP is just 5.5 per cent above its pre-Covid level. As a result, the CBA’s head of Australian economics, Gareth Aird, says “government spending as a share of the economy has risen significantly”. That trend is counter to the nation’s long-term interests. Market economists believe larger government sectors reduce growth, diverting resources from productive investment to social spending. Repairing the budget is also vital if the nation is to weather another major international health or financial crisis.

Both sides of politics, in response to community wants and needs, contributed to the situation. The Coalition’s 2021 budget, in May last year, provided major increases in federal spending on aged care ($18bn over the forward estimates), an extra $13bn for the National Disability Insurance Scheme and $2.3bn more for mental health. From July next year, Labor’s childcare package, at a $5.4bn cost, will lift the maximum childcare subsidy rate to 90 per cent for the first child in care for families earning up to $530,000. The Albanese government recently announced an extra $1.4bn to extend Covid response measures.

After the rigours of the pandemic, austerity measures would be counter-productive but as Reserve Bank governor Philip Lowe said last week, higher taxes, reduced spending or economic reform would be required to close the gap between spending and revenue. Dr Lowe was not concerned that current spending would add to inflation but the current and future governments could not keep using the “national credit card”, he said.

Legislated stage three tax cuts, to correct years of bracket creep and help taxpayers who carry a disproportionate share of the tax burden retain more of their earnings, should proceed. As E61 senior research manager Adam Triggs says, Australia has relied on a wave of commodity booms to hide a growing structural deficit for more than a decade. The economy will not always be lucky. Yet high inflation and rising rates on the nation’s debt made it urgent to boost productivity to boost wages, corporate profits and government revenue. Tax reform and changes to competition rules would help. The CBA figures are a wake-up call. They need to spark a realistic discussion about productivity.