What struck me more than the announcements themselves though was the quite hostile reaction to what represented only a very marginally increased role for government. Overall, the budget increased planned Government expenditure by around one-tenth of one percent as a proportion of the total economy between now and 2010/11. Yet it was widely lambasted as a socialist budget paving the way for an era of big and bloated government. Of course, you might say that any increase in the size of government is necessarily a bad thing. But contrast the scale of reaction here to that of the UK where the Labour administration increased the relative size of government by over five percentage points in the early part of the decade (or in other words, fifty time Australia’s planned increase) without massive outcry.
Tax:GDP in the UK (1981-2011)
Tax:GDP in Australia (1981-2011)
Indeed, looking back over the two countries’ recent economic history one can observe two things. First, the size of government is much reduced in Australia relative to the UK, at about one-quarter of the overall economy compared to two-fifths in the UK. Second, the role for government in both has been relatively ‘sticky’ over a long period of time, fluctuating by only a few percentage points around their long-term average.
What could explain both the difference and stickiness? The first, and perhaps most common explanation, is that Australia’s much smaller government is a function of their electorate’s preference for greater reliance on free markets to deliver services and a reduced concern for the equity of social outcomes. I’m sure this is part of the answer, but I’m left thinking it can’t be a complete explanation – after all are Brits really so much more in love with big government that they’ll pay over half as much again as your average Ozzie? I doubt it. So, the second, and I think more interesting explanation is that public debate often revolves around starting-points or reference-points, rather than any more rigorous or fundamental assessment.
So the observed 'stickiness' is then a product of the countervailing forces of the left and right neutralizing each other about the principle of whether governments should or shouldn’t have a big role, and not the actually more bottom up assessment of what the appropriate role for government is at any given time, irrespective of whether that represents 25%, 28%, 33% or any other proportion of the economy.
This implies that public policy is often locked into particular, and perhaps random, equilibrium paths than require massive (and rare) political forces to shift. That would represent a positive result for people who believe in conservatism of social change, but bound to lead to disappointment from those who believe in a progressive role of government that has to adapt and shift as the world around changes. Unfortunately, I think the Rudd Government may prove a case in point. Really, it’s hard to see how they can deliver on the ambitious scale of change they have set themselves without winning the public case for a more active and increased role for government. Something I'll try to write more about another time...
3 comments:
Hi David - hope you are enjoying life down under. Wish you were here in Sudan - we could do with a hand!
But on the tax argument... just because everyone in Australia is drunk all the time, don't think you can get away with this sort of thing!! The internet is global and we are watching....
Maybe the most compelling explanation for the difference is, er, that the charts are wrong or misleading - most likely prepared with different definitions. The OECD aims to provide stats with a consistent basis: see relevant OECD page and graphic
And this shows the difference in tax:GDP to be much smaller 31% to 37% in 2007.
Furthermore, one has to include non-tax receipts when bigging up the govt, for which OECD also provides data [here] in which case the numbers are 35.4% and 41.7%. See graphic here
Are you sure your charts included local government taxation? A much bigger deal in Australia, whereas most local government money is provided by central government revenue support grant.
Other differences likely to arise from health sector system (US public sector looks so small because 15% of GDP is spent off the public sector accounts...) and probably how welfare transfers work.
Mind you, in UK we have PFI and have acquired a gamblers' appetite for debt... aka "taxation, only later".
Fair point - state-level GST will be omitted from the Bureau of Statistics figures which will account for a lot of the discrepancy. I'll clearly need to be a little more careful about my data in future...
Though I still think there's a valid debate to be had about the appropriate size and scope of gov't here - which is still a deal smaller and more limited than the UK - you can't promise an education revolution and then invest only an extra $50m or so over three years because you're trying to find net savings to placate the right.
David - I think 'the right size of the state' is an odd thing to focus on... is America right or Finland? ...or is the size of the state a material issue?
Surely the key is to understand the functions and effectiveness of the state. American health care versus Finnish Health Care? It tells you little about the right size of the state.
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