Almost any discussion of public policy nowadays seems to begin and end with the same idea: the state is in retreat.
The idea is gaining a particularly strong foothold in the tax debate and with support from unlikely sources such as the Business Council of Australia.
The idea, however, is based on myth.
The tax system has many failings, but growth is not one. Despite a number of much-heralded tax cuts, the total tax receipts are now higher than ever and are expected to remain thus for the foreseeable future. Total tax receipts reached 31.8 % of GDP in 1997: the highest level in history and some 4.6 per cent of GDP (equivalent to around $24 billion) above the level which prevailed in the early 1980s.
Tax revenue did fall off during the early 1990s, but this was neither unexpected nor the start of a long term trend. Tax receipts declined because we went through the worst recession in 50 years and because the Commonwealth trimmed tax rates in an effort to stimulate the economy. Since 1993/94 the tax-take has, because of tax-hikes and economic growth, grown rapidly and, according to government forward estimates, is expected to remain buoyant.
The idea that government spending on social services is in steep decline is also a myth.
Despite significant savings achieved in some areas, overall government spending has continued to trend upward over most of the 1990s. In 1997 Government spending stood at 36.1 per cent of GDP which was about 1 percentage point above the level of spending which took place in 1987 -- the comparable year in the previous cycle.
The composition of spending has changed significantly over the last decade. State spending has declined to the lowest level since 1975. Administrative costs have been cut in all governments along with staffing levels and subsidies to government business enterprises. Interest payments are down, as is spending on defence.
But these cuts have been more than neutralised by increased Commonwealth spending on health, education, and welfare.
Own-purpose Commonwealth outlays reached a post war high of 20.8 of GDP in 1996 which was over 4% of GDP larger than 1980. Likewise, spending on social services (health, education, welfare, police and public housing) has reached an all time high of 23% of GDP -- which is some 4% of GDP higher than the 1evel achieved in 1987.
The Howard Government has put in place policies which are expected, with the help of solid economic growth, to reduce government spending over the next four years. But even if this forecast is achieved -- which history indicates is doubtful -- overall spending will remain above the level achieved during the previous cycle of the 1980s.
But isn't globalisation undermining the current tax base and government ability to spend? The honest answer is: not yet.
The fact is that governments currently have considerable discretion to raise and lower the tax-take as they choose and have record levels of resources at their discretion.
As such governments do not need major tax reform to change the tax-take and tax cuts, not more spending, is what is needed.
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