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April 22nd 2013 print

Peter Smith

A fork in our road to Greece

While an Abbott victory would be most welcome, come September 14, that date will mark a challenge much greater than the replacement of an incompetent leader with a steadier one. Simply put, government spending as a percentage of GDP must be brought to heel


The Heritage Foundation in co-operation with The Wall Street Journal measures and tracks ten benchmarks to compile an index of economic freedom for 185 countries. Hong Kong won the number one spot overall in 2013. Australia came in at number three, gratifyingly ahead of New Zealand at four and behind Singapore at two.


So things are not bad here. Of course we know that. But it’s also important to note that doing well in this league year in and year out is not like an Olympic footrace. Times are not getting faster. Take one of the benchmarks: government outlays (including transfer payments) as a proportion of GDP.

Wherever one looks, the deadweight of government involvement in economic affairs is rising; seemingly inexorably. Australia is doing its bit. In 1972, before Whitlam got going, government expenditure (federal, state and local) measured around 24% of GDP. Now it measures around 35%. And who can doubt the ability of Australian politicians, at ease with electoral bribery and in pursuit of votes, to reach the 40% to 50% levels common in Europe. And they’re doing so well on it over there!

Certainly our PM and the world’s best treasurer are particularly adept at spending and, moreover, with a relaxed southern European approach to raising revenue. Spending commitments on Gonski, the NDIS, the off-budget NBN, and welfare handouts are all proceeding at a brisk pace. All are unfunded or based on imaginary tax revenue from mining profits and/or carbon dioxide emissions. The Greek model is proving to be alluring. The latest Grattan Institute analysis of growing deficits and debt across the federal and state governments indicates just how alluring it is becoming.

Some of us remember when the Swedish model was in vogue among those on the left. There is a similarity between the models. Government expenditure in both Sweden and Greece accounts for around half of GDP. The difference is that Sweden raises taxes to pay for most of it; Greece doesn’t. Now the Swedish model is tenable, provided there is community acceptance of much higher taxation. The Greek model is untenable. The only tenable choice facing Australia is between Sweden’s model and something a little close to Hong Kong’s. Maybe we can call it the CIS model.

The Centre for Independent Studies (CIS) has an admirable and well-targeted campaign underway to set a goal of reducing total government outlays to 30% of GDP. Its research report, Target 30 – Reducing the burden for future generations, principally authored by Simon Cowan, is well worth a read. Cyclical movements complicate yearly comparisons but a return to 30% of GDP would mean gradually unwinding the last twenty years of government inroads into the economy. Were things so bad circa 1992?

The difficulty is that so many people now worship at the shrine of government. I caught Tony Abbott at his recent town hall meeting being quizzed on his policy of rescinding the recent measure to effectively eliminate superannuation contributions tax for those on low incomes. This was to be paid for by some of that imaginary revenue from the mining tax. However laudable is the measure, there is now no money to pay for it. But for some that appears to be irrelevant.

We need statesmen not politicians. Abbott needs to become a statesman and throw these questions back. Do you agree, he should say, that government has eventually to match its expenditure with revenue and, if so, please identify concessions or benefits that you personally receive which should be reduced or removed and/or by how much your taxes should be increased?

Of course it is not only individuals who are besotted by the largesse of government. For example, at the recent Global Food Forum, Visy Chairman Anthony Pratt set out six proposals to assist food manufacturing in Australia. The first four all involved special pleading for government assistance. Curiously, one asked for the implementation of American-style anti-dumping measures. This in a world which, though said to be running out of food, will be prepared, apparently, to feed Australians at bargain basement prices. Go figure! Adam Smith comes to mind. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

This coming election will be more important than most. In the Eighties the failed Eastern European communist experiment provided an instructive backdrop to the emergence of Thatcher and Reagan. We now have another failed experiment — a failed fiscal experiment — this time in Western Europe and in America. The conditions are right for the emergence of statesmen who are prepared to tell the truth that we can’t have what we don’t earn.

I think there is an opportunity for Tony Abbott, but it won’t be grasped by the me-tooism of matching Gillard’s and Swan’s extravagant and unaffordable spending promises. Enough of the electorate might be of a mind to hear the truth. If they are not we are on the ruinous road to Greece, whoever is in power.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics