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April 16th 2015 print

Dominic Perrottet

When Other People’s Money Runs Out

There is no doubt that citizens should be paying for the provision of necessary services. Yet, as the talk is once more of raising taxes, we are confronted by a twofold problem: governments do a lot of things they shouldn’t be doing, and what they should be doing, they do very inefficiently

money down drainBelow is the edited text of a recent address to the Sydney Institute by NSW Finance Minister Dominic Perrottet. Given his observations about the GST and a system of revenue-sharing that insulates Australia’s mendicant states from the consequences of their profligacy and follies, it should be read by all — Joe Hockey perhaps more than most.

As we gather in this room tonight, the eyes of the world remain fixed on Greece, where a radical left wing party has taken power with promises to reverse austerity, re-hire public servants and increase pensions. Some say they hold the fate of the entire Eurozone in their hands. There is little doubt that in a globalised economy, whatever decisions are made, the aftershocks will be felt even here.

Greece has had a tough time recently, hit by a catastrophic cocktail of spiralling debt, savage spending cuts and widespread public unrest. But for me, the most telling statistic is that in Greece, youth unemployment currently sits at  49.8%.[1] Just think about that. Nearly half of all young people in Greece under 25 cannot get a job. Incredibly, Greece is not the worst case. Youth unemployment is even higher in Spain, at 53.8%. Croatia is at 45.5%, Italy at 43.9% and Portugal at 34.5%. You could say France is doing relatively well with only a quarter of its young people out of work. Across the EU over 5 million young people are unemployed and 7.5 million are neither working nor in any form of education or training.

As Finance Minister, I live in a world of numbers and statistics, but the problem with numbers is that they try to capture in one dimension issues that are not really numerical but are, rather, political, social, and often deeply personal. What metric can adequately capture the feelings of a young person who has studied hard for years in expectation of a career, but now has limited prospects for finding paid work? What equation can compute the toll on the human dignity of young people who continually apply for hundreds of jobs with no response? How do we quantify the impact on individuals who have no hope, parents who cannot retire and entire communities in despair? That is the true cost of youth unemployment. And it can never be communicated by just a number.

That’s why I’d direct you to a very powerful video I watched recently on the Huffington Post website[2] that interviews young Europeans struggling to find a job. “We can’t find our way in life,” says one. “Our parents are our personal welfare system,” says another. “We really are a whole generation of the unemployed,” says a third. The 20th century was meant to be a time of unheralded prosperity, brought about by benevolent big government. Instead, what we are creating is a lost generation. So what went wrong?

Over the past 60 years, we were sold the notion that Big Government would be our saviour. We were told that that governments would end poverty — in fact, one of the things I remember most clearly growing up was Bob Hawke’s promise that, by 1990, no Australian child would live in poverty. We were told that governments would provide free healthcare, free education and jobs for all – with long holidays and fully funded retirements to follow, what sociologist Daniel Bell has termed “the revolution of rising entitlements.”[3]

But despite the good intentions behind many of these policies, a very different result has emerged. If you look carefully at what is happening in the Eurozone — not just in Greece, but in France, Italy and Spain — you will start to see some common factors: big governments and large public sector unions leading to a toxic combination of unsustainable welfare programs, low birth rates, heavy labour market regulation and high taxes. This is a poison pill for economic growth, for innovation and, ultimately, for employment. The pattern is always the same and so, too, is the result. Far from being our saviours, Big Government is causing citizens, especially our youth, big problems. And that’s why I come here tonight with a warning: these same things can happen here, in our nation and in our state.

I come before you tonight not just as a Finance Minister, but as a member of that younger generation just over 30 years of age, as a father of three who is increasingly concerned about the future that I — and those younger than me — will soon inherit. Edmund Burke famously said that “society is a partnership between those who are living, those who are dead and those who are yet to be born”. I say to you that countries around the world are failing in that partnership.

It is one of the enduring laws of nature that no one has ever run up a tab they didn’t have to pay. The current political class is running up a huge debt. And it is the next generation, those who are to yet come, that will have to pay the price. For example, it’s estimated now that more than 50% of federal benefits in the United States flow to just 13% of the population aged over 65[4] – and this proportion will only increase. Even here in Australia the number of people aged 65 and over is projected to double by 2040[5]. Action is needed and, as Malcolm Turnbull said in his maiden speech in 2004[6], “the demographic storm is coming. How hard it blows and how well our children weather it will depend in large measure on the decisions we take today.”

Let me relate a story. A few years ago, a Greek journalist, Despina Antypa, decided to invest in a new career, as she was concerned about her job prospects. So after working a full day, she would attend baking classes until 10pm and practise her pastry-making skills at nights and on weekends. After she and her husband both lost their jobs and went on benefits, Despina spent her days trying to master the perfect French macaron. After more than 3,000 trials, she says she finally did. She poured the rest of her savings into starting a new business – investing in a website, building a brand and a establishing new premises. Things were going to get better.

But the bureaucrats had other ideas. Writing in the New York Times[7], Despina relates the nightmare of trying to set up a business in the Greek state. She discovered that she was required to forecast her profits for the first two years and then pay a tax of 50% on that estimate.  If that wasn’t bad enough, she was required to pay that tax regardless of whether she made that profit or not! But it gets worse. Despite needing just 20 sqm for her bakery, she was told she had to purchase a minimum of 150 square metres. And if this wasn’t bad enough, regulations also required additional toilets, fire exits and the building of new walls.

Ladies and gentlemen, there is no happy ending to this story. Her business was over before it began. She and her husband, with their dreams and aspirations, ended up leaving Greece. Despina missed out on her dream of being an entrepreneur. Her family and her country is all the poorer for that.

THIS STORY is by no means unique to Greece. Every single year in Australia, state and federal governments pass more than 25,000[8] pages of legislation to regulate our lives. That’s more than double what it was just twenty years ago. According the NSW Business Chamber, red tape is costing NSW Businesses more than $8.4 billion each year, thanks to regulation across all three tiers of government[9]. Despite the fact the NSW government has committed to reducing regulatory costs by $750m annually by June, 2015[10], there is clearly still more work to be done.

The other defining hallmark of Big Government is that it crowds out the private sector and, therefore, reduces overall economic opportunity, something I found out firsthand when I become Finance Minister last year. The NSW government runs a fleet of nearly 30,000 cars. So as well as a government, we’re also fleet managers. We build and maintain our own computer systems, so we’re a technology company to boot. And we have our own portfolio of buildings and properties, so we’re also into the real estate game. This is not to mention storing our own paper records, running our own call centres, constructing our own buildings and even employing our own stonemasons. It’s hard enough to run one business, let alone dozens.

Jim Collins in his book “Good to Great[11] says companies that want to succeed should work out what they are the best in the world at, stick to that, and do nothing else. Governments, I believe, are no different. The core business of state governments is service delivery and this is what we should be focusing on. Being too involved in other activities is a distraction that will cause our core business to suffer.

Greater involvement by the private sector is what the people want as well. A survey of millennials across 17 different countries, conducted last September, found that 73% felt that government couldn’t solve societal issues by themselves, and 83% wanted corporations more actively involved[12]. Trendwatching.com cite this reseach in their predictions for 2015[13].  They say that one of the emerging trends of the next 12 months will be what they call ‘Branded Government” – where business identifies government shortcomings and then, acting in partnerships, gets more involved in service delivery.

Governments shouldn’t be too big. But they don’t necessarily need to be small either. What they need to be is lean — doing only what they have to do, and doing it very well. Yet while pursuing a lean government focused on service delivery would seem to be a common-sense approach, it is worth pointing out that all this has been achieved in the face of heavy opposition from NSW Labor. While we have turned around the states economy from last in the nation to now first[14], Labor has simply stood in the way. We shouldn’t be surprised.  Everywhere they go, Labor leaves behind a destructive trail of fiscal devastation. Whether it’s at a state or federal level, the signature achievements of Labor governments are always the same — debt and deficit, centralisation and high taxation, regulation and redistribution. As one columnist put it recently – Labor has no idea how to do anything about debt besides create it[15]. I encourage you all to visit the NSW Labor website and read their statement of principles. It talks about the ‘struggle of the working class against capitalism’, the ‘redistribution of power’ and the ‘socialisation of industry.’ NSW Labor might have their party principles published on a flashy website using modern, free market technology, but it’s clear they’re still partying like its 1969.

In politics, ideas matter. They animate governments, politicians and policies. The ideas of individual freedom and free markets have been part of the Liberal party platform since its inception and have stood the test of time. In fact, back in 1942, Robert Menzies was warning of a future government that would “nurse us and rear us and maintain us and pension us and bury us.[16]” By contrast, as Nick Cater has written, when Whitlam spoke of that style of government, he meant it as a promise, not a threat.[17] The Labor Party is mired in an outdated and failed agenda of trade unionism, old-style socialism, big bureaucracies and red tape. Try as it might, Labor cannot escape from its roots as wealth-takers, not wealth-makers. And as we are now seeing, it’s a path that’s paved to ruin for the next generation.

THOSE OF you who follow European politics will know there’s another former socialist politician who’s rapidly learning the benefits of free market economics. In 2012, the French President promised to employ more public servants, reduce the retirement age and oppose austerity measures. His landmark proposal was a 75% supertax on earnings above 1 million Euros — a policy described as ‘Cuba, without the sun.”[18]. Fast forward three years and on the first of January this year, that tax was quietly scrapped: the wealthy simply left the country and the tax didn’t raise much money. The French government has now done a complete U-turn and is planning to cut payroll taxes and hoping to boost foreign investment.

What is interesting here is not the supertax itself, but the thinking behind the move: rather than try to boost the creation of wealth, governments should simply take it from their citizens and spread it around.

When businesses go through tough times and capital is tight, they cut back, trim down, become more efficient — “do more with less”, that was the mantra during the GFC. By contrast, in tough times many governments simply turn to their citizens and increase tax rates, often to fund entirely ineffective and unnecessary programs. In other words, “doing less with more” – other people’s more.

There is no doubt that we as citizens should be paying governments taxes for the provision of necessary services. The problem is governments do a lot of things they shouldn’t be doing, and what they should be doing, they do very inefficiently. Are our citizens getting value for their tax dollar? Unfortunately, in many cases, the answer seems to be no. For example, over the past 40 years, the US government has invested over $22 trillion dollars  on the ‘war on poverty.[19]’ And yet the poverty rate has remained pretty much exactly as it was when the entire program started.

In one of my favorite political speeches, “A Time for Choosing”, Ronald Reagan made the same point about the tendency for governments to throw ever larger sums of money at problems, despite not making any concrete progress on improving outcomes. Here is some of what he said:

“Each year the need grows greater; the program grows greater. No government ever voluntarily reduces itself in size. So governments’ programs, once launched, never disappear. Actually, a government agency is the nearest thing to eternal life we’ll ever see on this earth.”

Reagan gave that speech back in 1964 and, since then, things have only become worse.

Government spending as a percentage of GDP is already at record levels. In Australia, it’s 39% of total GDP[20], across all levels of government. The United Kingdom, is at 41.2%, while Greece is at 53.8%.[21]Debt levels, too, are increasing, with ours at 41% of GDP, the United Kingdom at 97% and Greece at 163%, according to the World Bank. What these numbers tell us is that governments are spending too much, borrowing too much and living well beyond their means. And to finance all this, they’re going to once again tap their citizens on the shoulder.

It’s here that I have to partially disagree with someone I have a lot of respect for, Federal Treasurer Joe Hockey. In a landmark speech at the Institute of Economic Affairs in London a few years ago, he said ‘age of entitlement is over’ for citizens and business[22]. Joe was half right. It is not just citizens who need to realise the age of entitlement is over, it is governments as well. It’s become pretty clear to just about everyone, apart from Bill Shorten, that simply confiscating ever-increasing amounts of money from citizens to prop up ineffective programs is not only unsustainable but a betrayal of social and generational justice. Our citizens are increasingly saying, ’enough is enough!’

That’s why, to me, the current calls by some Liberals to broaden the base of GST are disappointing. Not because it’s necessarily the wrong move, but because it’s the wrong conversation. The GST is simply a mechanism of collecting tax – it is not a tax policy. As some commentators have noted, simply broadening or raising the GST is more of a ‘tax grab’ than a ‘tax reform’[23].

The only question that Liberal governments should ever be asking is “How do we reduce the tax burden?” The current debate over taxation assumes that there is some kind of revenue problem and, if only governments had more money, it would be fixed. But it’s becoming very clear that governments don’t just have a revenue problem, they have an expense problem as well.

My personal view is that the GST can be expanded, as long as other taxes are reduced and we end up paying less tax overall. It’s worth pointing out that John Howard and Peter Costello introduced the GST by making the case that it abolished other, more expensive and inefficient taxes like the wholesale tax, and citizens would be better off.  But we all know that tax reform is difficult — this is why it’s urgent that reform of the Federation occurs sooner rather than later. As some have suggested, the starting point[24] for this reform should be the clear outlining of responsibility between all levels of governments — a necessary move to immediately get rid of duplication and unnecessary cost.

After the model of government is determined, then the taxation mechanisms can be geared to follow. The current system, with its vertical fiscal imbalance, means that the Commonwealth collects most of the tax revenue while the states have more responsibility for spending, creating a mismatch in allocation and policy. Then there’s the distribution model of the GST, which I think rewards mediocrity and offers states little incentive to push for economic reform.

While the Federation debate takes place, it’s worth asking: “How can governments deliver services while not raising taxes? Governments that are too greedy take capital away from individuals and businesses which need it, and funnel it ineffectively to places that don’t. The problem with socialism, as Margaret Thatcher once said, is that, eventually, you run out of other people’s money. It’s a problem they’re finding out firsthand in Europe, and one we need to avoid over here.

My contention is that many of the economic and social policies put in place over the last 50 years by our political leaders have been well intentioned, but tragically short sighted. They have pursued instant gratification, rather than long term success. They have been more about winning elections than winning the future. And they have benefitted those in the present at the expense of those who are to come.

The old ways of big spending, big taxing and big regulation have completely and utterly failed. Their legacy is a new generation that is disengaged, disenfranchised and disillusioned with our political system. A new generation gap where the young will be paying for the excesses of the old. C.S. Lewis once said, “We all want progress, but if you’re on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive”.

It’s time for new progressive thinking. We need to move away from governments that are too big, too greedy and too backward…and have governments that lean, efficient and connected working for our citizens.

Dominic Perrottet is Finance Minister in the Baird government

[1] http://ec.europa.eu/eurostat/documents/2995521/6454659/3-07012015-AP-EN.pdf/f4d2866e-0562-49f5-8f29-67e1be16f50a

[2] http://www.huffingtonpost.com/2015/01/27/youth-unemployment-europe_n_6554804.html

[3] http://www.amazon.com/America-necessary-Conservative-perspectives-institutions/dp/082990090X

[4] http://www.nytimes.com/2012/06/24/opinion/sunday/the-generation-gap-is-back.html?pagewanted=all

[5]http://www.abs.gov.au/ausstats/[email protected]/lookup/3222.0Media%20Release12012%20%28base%29%20to%202101

[6] http://www.malcolmturnbull.com.au/meet-malcolm/first-speech

[7] http://www.nytimes.com/2014/07/03/opinion/greek-recipes-for-survival.html

[8] https://ipa.org.au/publications/2175/australia’s-big-government-reaches-record-highs

[9]http://www.nswbusinesschamber.com.au/NSWBC/media/Misc/Regions/Central_West_Orana/140417-NSW-businesses-buried-under-$8-4B-red-tape-mountain-Regional-media-release.pdf

[10] http://www.dpc.nsw.gov.au/programs_and_services/better_regulation/red_tape_reduction

[11] http://www.jimcollins.com/article_topics/articles/good-to-great.html

[12] http://mslgroup.com/news/2014/20140916-future-of-biz-citizenship

[13] http://trendwatching.com/trends/10-trends-for-2015/

[14] https://www.commsec.com.au/stateofstates

[15] http://www.dailytelegraph.com.au/news/opinion/watch-out-for-cash-poor-big-spenders/story-fni0cwl5-1227204177935?nk=bea5f914b8515f5e2ff3bcd58d83936c

[16] http://www.menziesvirtualmuseum.org.au/transcripts/ForgottenPeople/Forgotten1.html

[17] http://www.theaustralian.com.au/opinion/columnists/glory-days-of-big-government/story-fnhulhjj-1227104052001

[18] http://www.theguardian.com/world/2014/dec/31/france-drops-75percent-supertax

[19] http://www.heritage.org/research/reports/2014/09/the-war-on-poverty-after-50-years

[20] https://ipa.org.au/publications/2175/australia’s-big-government-reaches-record-highs

[21] http://data.worldbank.org/indicator/GC.XPN.TOTL.GD.ZS

[22] http://www.smh.com.au/national/the-end-of-the-age-of-entitlement-20120419-1x8vj.html

[23] http://www.abc.net.au/news/2015-01-20/berg-when-is-tax-reform-actually-just-a-tax-grab/6026750

[24]http://www.cis.org.au/media-information/opinion-pieces/article/5445-federal-state-reform-should-not-mean-more-tax

[25] http://www.bsl.org.au/pdfs/MyChanceOurFuture_AppendixA_maps_Feb2014.pdf

[26] http://www.businessinsider.com.au/the-us-government-is-still-using-floppy-disks-2015-1

[27] http://www.businessinsider.com.au/the-us-government-is-still-using-floppy-disks-2015-1

[28] http://www.cebr.com/reports/data-on-the-balance-sheet/

[29] http://www.wired.com/2013/02/is-big-data-the-new-black-gold/

[30] http://www.news.com.au/technology/home-entertainment/australias-app-economy-bigger-than-us-and-uk/story-fn81y8rt-1227008838119

[31]http://www.telegraph.co.uk/technology/news/11253016/Sharing-economy-to-create-a-nation-of-microentrepreneurs.html

[32] http://www.smh.com.au/business/tax-uber-airbnb-urges-labors-andrew-leigh-20150126-12wy8y.html

Comments [6]

  1. Hoppy says:

    Impressive speech. Probably a pity he was speaking to the converted, the Sydney Institute. I hope Mr Perrotet gets these thoughts out to the wider public of NSW, and Australia; they need to hear this message.

  2. Ken says:

    This should be compulsory reading for EVERY politician, in every parliament in Australia and also every student at all Australian schools in years 11 & 12. Unfortunately I can’t see the academics allowing this latter idea to happen, that would be way to right wing, but one can live in hopes. What Mr Perrottet is saying is so obviously right and can be clearly seen if one views it with both eyes open.

  3. Jody says:

    Brilliant. But there are too many Marxists out there now for anybody to listen. There are several elephants in the room which need also to be discussed. Why, for instance, should the taxpayer fund free public education for those in the growing middle class who can afford luxury homes, cars and overseas family holidays and who expect ‘free’ education as a birth-right. Let’s get rid of the notion of ‘universal free education’, which is a throwback to the days of the colonies when compulsory schooling was introduced. The world has moved on and we can no longer afford that luxury. Means-testing for free education must come.

  4. a propos says:

    Succinct, coherent and factual – that is how I would’ve described this speech if asked to. However, there is another dimension to this unheard of directness and honesty – it is the author’s bravery. I have not heard a politician , who dared to pronounce the name of Ronald Reagan publicly for fear of being shouted down. I congratulate Dominique for this political bravery and directness.
    Spreading, expropriating the wealth leads to universal poverty – look at any socialist country, look at Russia. Besides, transfer of an unearned wealth leads to an increase of resentment, envy and anger – the ever ready fuel of the social upheaval.

  5. a propos says:

    Succinct, coherent and factual – that is how I would’ve described this speech if asked to. However, there is another dimension to this unheard of directness and honesty – it is the author’s bravery. I have not heard a politician , who dared to pronounce the name of Ronald Reagan publicly for fear of being shouted down. I congratulate Dominic for this political bravery and directness.
    Spreading, expropriating the wealth leads to universal poverty – look at any socialist country, look at Russia. Besides, transfer of an unearned wealth leads to an increase of resentment, envy and anger – the ever ready fuel of the social upheaval.

  6. DRW says:

    There is no hope of actual reform. The Press are eunuchs in Labor’s harem and howl down anyone suggesting we live within our means. Remember how Labor wrecked all the good work of Howard/Costello, cheered on by the Press. Australia’s biggest enemy is the Press with their xenophobic hatred.