Jeff's $2b is Taxing Issue

The Kennett Government faces it biggest challenge yet, which is to pursue and sell the benefits of a low-tax environment.

Over the last seven years the Government has brought the Victorian public sector from the brink of a financial abyss to a sound sustainable financial position.

The question is:  now that it has reached its fiscal goals, what next?

The no-change position -- which is what was essentially adopted in the 1999 Budget released this week -- is not sustainable for much longer.  Eliminating all state debt -- which is what will happen under current policies -- is hard even for us scrooges to sustain.  Stuffing cash into hollow logs is also only a short-term measure -- as the termites will eventually get to them and leave nothing but dust.

The fact is that the Government has the wherewithal over the next few years, with the proceeds from privatisation already in train, to provide a substantial tax-cut, or boost in spending, in the order of $2 billion.  It can achieve this "reform bonus" whilst maintaining a balanced budget, reducing debt, and providing enough slack to cope with fall-out from Asia.

The fundamental question is:  how should this "reform bonus" be provided -- through lower taxes or higher spending?

The priority should be tax cuts and sooner rather than later.  Victoria remains -- even after the minor tax cuts doled out over the last few years -- a high-tax state.  Its tax-take will still be $220 million above the average of all states at the end of next year.  Moreover, unless the Queensland Government goes on a taxing spree in this year's Budget, which is unlikely in an election year, the Victoria Government will still be extracting $2 billion more in tax than its Queensland counterpart.

True, taxes in Victoria are now below the level incurred in NSW -- which has assumed the dubious honour of being the nation's big-taxing state.  However, Victoria does not have the euphoria of the Olympics or the natural draw of Sydney to desensitise business to taxes.  Nor does it have the resource base and fast population growth of WA and Qld.

The Victorian economy will confront a difficult period over the next few years as it struggles to re-engineer or replace its erstwhile protected industry base.  To do so Victoria needs to create a competitive advantage and the best one would be to have a low-taxing, efficient public sector.

Although higher spending may be appropriate in some areas such as public hospitals, contrary to received wisdom, public spending has not been slashed over the last seven years.  As Ed Shann has discussed in previous columns, public sector spending, in overall terms and in most essential areas in Victoria, remains above the level of other states.  Moreover, the Kennett Government has greatly improved the efficiency of service delivery so that consumers are getting greater bang for the still large amount of bucks being pumped into the system.

The problem for the Government is that the political calculus is skewed in favour more spending -- even if wasteful -- and against tax cuts.  To most people state spending is virtually a free good.  Most services are provided free of charge and the nexus between taxing and spending has been all but broken.  Most state taxes are levied on business and are, therefore, invisible to people and over half of state funds are laundered through the Commonwealth.

The task is a tough one -- politically much more difficult than balancing the books -- but the pay-off will be great, and the alternative, worrying.

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