We urgently need a sensible debate about role of government
One of things we teach our children is that there is difference between wants and needs. Too many politicians have forgotten this lesson and are happy to spend other people’s money.
There is little doubt that our Prime Minister is a believer in big government. According to his thinking, “This a time when government has to step up. Not every challenge can be solved by government stepping back.”
If big is beautiful, bigger is even better.
But here’s the conundrum: as real incomes have grown in advanced economies, so has the size of government. Surely higher living standards should enable more people to self-provide. And given the often-deficient services provided by government agencies, surely, they would want to self-provide.
With high average per-capita incomes, people should be covering household expenses, buying a home, caring for children, saving for retirement – all without government support. There should be a substantial majority of the population accepting their individual responsibility for their own wellbeing and that of their families, with the government’s role limited to defence, law and order, and, to a degree, health and education.
To be sure, there is also a role for government to provide a safety net for those who, for a variety of reasons, are unable to pay for the necessities of life. But the reality is that the actions of all governments of advanced economies have expanded well beyond these core functions.
We only need look at the figures to see how the role of government has expanded dramatically across the past 50 years in Australia, a period during which living standards have more than doubled. Before the election of the Whitlam government in 1972, federal government payments were 18.5 per cent of GDP.
Even after Gough Whitlam’s wildly expansionary terms in government, payments had risen to 24.3 per cent of GDP. In the coming financial year, federal government spending is estimated to be 27 per cent of GDP. In the three years of Labor’s last term in office, government spending rose by more than $100bn.
Some commentators see no problem with this trend, concluding that the public now expects more government involvement and more subsidies in a range of areas.
Grattan Institute director Aruna Sathanapally merely states: “Australians expect high-quality healthcare, aged care and disability care, among many other things. Like other rich nations, government spending has grown as a share of the economy, particularly in recent decades.” A similar point has been made by the outgoing chief political correspondent for the ABC’s 7.30 program, Laura Tingle. In fact, Tingle wrote a whole Quarterly Essay on the topic entitled Great Expectations: Government, Entitlement and an Angry Nation. She does make the point that “politicians set expectations. They are also the conduit through which people’s expectations about the state flow. But expectations also build up insidiously over time.”
This phenomenon has been on speed dial in recent years, although a more cynical interpretation is that self-serving politicians have increasingly taken the view that buying votes by offering more “free stuff” is a route to electoral success.
There was a noticeable ramp-up in government spending at the time of the global financial crisis. And during the Covid period, government spending rose dramatically to compensate individuals and businesses for the pandemic-related restrictions as well as direct expenses. Government spending hit 31.4 per cent of GDP in 2020-21. While temporary programs were wound up, it seems unlikely that government spending will return to a pre-Covid proportion of around 24 to 25 per cent of GDP any time soon.
It is worth quoting some examples of the inexorable rise in the size of government. In the case of childcare, for instance, at the beginning of the century, the federal government spent less than $500m on fee relief. It is now up to $16bn and rising.
Households with combined incomes up to $533,000 are eligible for assistance. Were the government to implement a universal version of childcare assistance, annual spending would be $26bn.
Another example is the National Disability Insurance Scheme, which is costing nearly $50bn annually, with an anticipated growth of 8 per cent a year that is likely to prove optimistic. The Productivity Commission had expected just more than 400,000 individuals to qualify for the program; it is currently more than 700,000.
Aged care is another area in which government spending has grown like Topsy. While there have been efforts made for comfortably-off older people to contribute to the cost of their care, this has been largely unsuccessful. In the case of Home Care Packages, for instance, less than 10 per cent of the recipients make any contribution at all.
One of the messages is that where the government steps into fund what should be largely private spending, those receiving the fully paid or highly subsidised services will quickly adjust their personal budgets. In turn, they will form a strong expectation that the government should continue the funding lest they form a dim political view of the government making the call to cut or discontinue it. Similar political pressures apply to the opposition.
The role of providers is also an important factor in the expansion of the public sector. These providers quickly become sources of political power – think here the Australian Education Union, the Australian Medical Association – arguing for ongoing generous funding of their areas. The fact oftentimes the spending in health and education, to give just two examples, is not effective is quickly dismissed.
It is not surprising therefore that the current Treasurer, Jim Chalmers, would be talking about the need to make the budget sustainable by raising more revenue.
What he can’t escape is the broader economic impact of expanding government spending so quickly, particularly spending directed to the care economy.
According to the Australian Bureau of Statistics, annual growth in federal government funding on social spending was 15.5 per cent in 2023-24. This was nearly five times GDP growth. Social spending covers the NDIS, childcare, Medicare, the Pharmaceutical Benefits Scheme, aged care and electricity concessions.
Such rapid growth in social spending has been associated with inflexible supply arrangements and rising costs. It is also funding that is directed at low-productivity segments of the economy.
The net effect has been to see overall productivity go backwards even though it is estimated that productivity has been growing in the market sector of the economy. That GDP per capita has fallen in eight out of the past nine quarters is a direct corollary of this misdirection of resources.
One of things we teach our children early in their lives is that there is difference between wants and needs. Too many politicians have forgotten this lesson and are happy to spend other people’s money to court political popularity.
Across time there is an inevitable need to extract more of other people’s money by way of higher taxation to feed the beast. In turn, higher taxes, particularly when they are badly designed, will dampen economic growth as the incentives to work hard and invest are adversely affected.
We need to have a sensible debate about the role of government sooner rather than later.
More Coverage
Ex-PM fires potshots in the battle of ideas
Paul Keating’s views on security are heard widely. But it’s only reasonable to expect he will be challenged on them.
While the downsides are real, freer trade is still a powerful tool for shared prosperity
When the world’s poorest countries are better off, the whole world is a stronger, more stable place. Reform, not protectionism is the path forward.