Cuts small, spending smaller still

What if an election was held and all that was offered was tax cuts?  During this election campaign both parties have promised to increase government spending.  Meanwhile, as all of these promises to spend more have been gradually accumulating, the various state, territory and federal governments have actually spent more than $1 billion on each day of the campaign.  No matter who wins Saturday's election, this $1 billion-plus per day habit is set to continue into the foreseeable future.

It is not easy to determine the actual dollar amounts of election campaign spending promises.  Political parties have an incentive to fudge the numbers either up or down, depending on who is listening.  Politicians want to look like big spenders when they visit a marginal seat, but on national television they want to appear as spend-thrifts.

But tax cuts are not equivalent to spending.  Spending occurs when the Government raises revenue usually by taxation and then spends the money.  Spending in this context involves the Government purchasing an asset, paying wages and salaries to its employees, or giving the money to recipients of benefits.  Tax cuts, on the other hand, involve the Government never raising the money in the first place.

To argue that a tax cut is the same as spending we should consider the following simple example:  The schoolyard bully takes your lunch money every day and buys himself a pie at the school tuckshop.  One day, the schoolyard bully announces that he will not steal your money any more.  You buy a pie for yourself at the tuckshop.  To be sure you now have pie you never before had but it is not the case that the schoolyard bully bought you a pie.

Tax deductions, rebates, and other so-called tax expenditures are not classed as spending either.  In the federal budget papers they appear as reductions in revenue, not as increases in spending.  Tax expenditure can be thought of as being a targeted tax cut.  If you undertake activity X, the Government allows you to deduct part of the expenditure from your tax bill.  To take our schoolyard bully example, imagine the bully takes your lunch money, buys himself a pie and then lets you have a bite of the pie if you let him copy your homework.

Despite the media frenzy that accompanies campaign spending announcements, additional spending and tax cuts promised during election campaigns are simply not that economically important, relative to the massive spending programs that will not be touched at all during this campaign and which will continue to grow no matter who is in power.

Election spending promises are far less important than the amounts of money that will actually be spent in total during the next government's term of office.  The political significance of campaign spending announcements exceeds their economic significance and both parties (and the media, we suspect) would like to keep it that way.

This election we have seen both parties announcing tax cuts early in the campaign and then announcing increased spending.  Relative to the amount that government already spends, the tax cuts were quite small and the increased spending smaller still.

ADVERTISEMENT