Yes, Virginia, we can reduce Commonwealth expenditure

There are good reasons for Australia to adopt smaller government and reduce public sector spending, argues RICHARD WOOD

WHEN I recently published detailed proposals to reduce Commonwealth expenduture by $15.6 billion over two years, instead of increasing taxes, the reception was largely hostile.

One leading economic commentator suggested the proposals were "politically impracticable";  another, though a consistent critic of the welfare State, rejected as undesirable the limiting of benefits for the unemployed or for single mothers, along the lines adopted in overseas countries.

And the Opposition leader (who has supported spending cuts and smaller government and who is now promising tax cuts in the first term of a Coalition Government) described the proposals as "way over the top".

It may help to start with a few relevant facts if my proposals had been fully implemented in 1994-95:

1. Commonwealth outlays on programs (that is, excluding public debt interest and the effect of asset sales) would be about 11 per cent lower, which would still leave them at $102 billion or around 8 per cent higher in real terms than in 1990-91;
2. By contrast, there was a 3 per cent real reduction in such outlays between 1985-86 and 1989-90 following the mid-1980s debt crisis.
3. While that reduction partly reflected cyclical influences, my proposals still seem relatively moderate overall -- though they focus much more on own purpose outlays than Commonwealth payments to the States;
4. Excluding asset sales, Commonwealth own purpose outlays would be 17.1 per cent of GDP in 1994-95, a little lower than the 18 per cent of GDP in the last Fraser Budget of 1982-83, but about the same as in 1981-82.
5. As then Treasurer Paul Keating heavily criticised the 1982-83 Budget, he could scarcely now complain about own purpose spending levels slightly lower than then.

As to "political practicality", much depends on circumstances and political environment.  With Keating's soft pedalling of serious economic reform since he became Prime Minister, and the Coalition's evident difficulties in deciding what it stands for, the environment has hitherto scarcely been conducive to expenditure cutting.

But renewed reform from Keating, or a coherent and serious Opposition program of smaller government, would merely be consistent with current action to reduce spending by governments in the United States, Britain, Sweden and New Zealand.  In New Zealand, former Labour Finance Minister, Sir Roger Douglas, has successfully formed a new political party on a platform of reducing government spending by 30 per cent over 10 years.

The present New Zealand Government is budgeting for government spending to fall by 1996-97 to 31 per cent of GDP from 40 per cent in 1992-93.  With economic growth strengthening while the NZ Budget surplus for the current financial year looks like reaching 3 per cent of GDP, a fairly quick move to a substantial Budget surplus in Australia should provide the basis for a sustained period of private sector growth here.

Of course, some say that Australia already has "small government" and we should not reduce it further.  This argument is without substance.  For one thing, while in most OECD countries total government spending is a higher proportion of GDP than in Australia, this does not mean that our education, health and other services are suffering.

Higher government spending in other OECD countries usually simply reflects the fact that less of a particular function is provided through the private sector in those countries than in Australia.  In fact, Australian spending (that is, both government and private) on such services is broadly in line with total spending in other countries with comparable income levels.

Australia benefits from having a greater proportion of services provided by the private sector because that reduces the adverse effects of high taxation on productive effort, and on saving and investment.  Moreover, the private sector generally provides a more efficient and higher quality service.

OECD economies with large government sectors have not performed well in recent years, particular in regard to employment growth, due importantly to the adverse effects on incentives to work and to save from higher transfer payments and from the concomitant rise in the burden of taxation.

Given our place in the world and the pressing need to render Australia a more competitive player in Asia, a more appropriate model might come from Asian countries, whose economic growth has recently been so much better than that of most OECD countries.  Those countries have significantly smaller government sectors than Australia -- generally below 30 per cent of GDP compared with ours at around 40 per cent.

There is also much to be said on social grounds for concentrating government social security and assistance on those most in need.  Middle and higher income groups should generally be expected to take care of themselves, and we are likely to have a better society if they do so.

Does more than a quarter of the population really need to rely on personal benefits from the Government for the main source of their incomes -- nearly double what it was 25 years ago -- when the average standard of living has risen considerably since then?  Increasing welfare dependency suggests the need for a complete rethink of the wider economic and social implications of existing government levels of expenditure.

There is thus the potential for an Opposition to mount a strong case for smaller government.  But the Coalition has to be able to enunciate the case, at least in terms of general principle and general direction.  It is simply not credible for Alexander Downer to imply that really large savings could be made by reducing duplication between the Commonwealth and the States.  While reducing such duplication is very desirable, the prospective savings are relatively minuscule.

If he is serious in his small government policy -- and particularly about tax cuts in his first term -- Mr Downer will not be able to avoid tackling the sort of proposals included in my package of $15.6 billion.  Small government is a politically practicable policy provided the case for lower government expenditure is made much more explicitly.

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