The Howard Government and Rudd’s Labor opposition have both embraced the notion that in general tax rates and public debt levels should not increase. This fiscal strategy is lazy and timid policy, not good governance. It is impeding the Government’s capacity to meet the nation’s infrastructure needs, forcing it to adopt financing options that are economically less efficient and denying Australians a genuine, well informed choice on the appropriate balance between public and private goods. The fiscal straightjacket is based on several myths about the impact of taxation and government borrowing.
Download Australia’s Fiscal Straightjacket: Eight myths about tax and public debt which are holding us back
| Myth | Reality |
| 1. Higher taxes are bad for economic growth | The economic impact of taxes depends on the initial tax level, how the revenue is raised, and how productively the money is spent. There is no correlation between the size of government and economic performance. |
| 2. A public debt freeze is the key to sound public finance | Net public debt is not a true measure of the strength of a government’s balance sheet – instead the focus should be on net public worth – assets minus liabilities. |
| 3. The private sector is always a more efficient owner-manager of infrastructure than government | The benefits of private design, construction, and operation of infrastructure can be captured without private ownership. The private sector often demands excessive premiums to take on political risk – and when privatised services fail, governments must still step in. Insufficient competition can also mean that the costs of monopoly regulation outweigh the benefits of private participation. |
| 4. Shifting from government borrowing to private equity helps ease pressure on inflation and interest rates | When productive resources of the economy are fully stretched, any new large scale debt-financed investment runs the risk of generating inflation but this risk is not reduced by transferring financing responsibilities to the private sector. In either case, inflationary pressures can be avoided by judicious timing of the investment or by discouraging or deferring other types of national spending. Government debt has no impact on the international cost of credit. |
| 5. If a particular infrastructure project cannot be sensibly financed by the private sector, revenue can fill the gap | It is unfair to ask today’s taxpayers to cover the entire cost of investments that will yield returns far into the future. Current revenue should primarily be used to pay for current expenses. |
| 6. There is no evidence that the fiscal straightjacket has impeded infrastructure investment | Public investment is lower today as a proportion of GDP than it was 15 years ago, and has been dropping faster in Australia than in comparable countries. The greatest decline (in both economic and social infrastructure) has been in forms of investment which do not lend themselves to private equity funding. |
| 7. Running structural fiscal surpluses is good for national productivity | By holding back investment in high-return areas such as education, health, early childhood, training, transport, etc, our obsession with surpluses may actually be holding back Australia’s productivity growth. |
| 8. The community prefers lower taxes and does not like the idea of governments borrowing | Opinion polls show a clear preference for increased spending on health and education over tax cuts. The community is only uneasy about government borrowing because they have been told it is financially irresponsible by both major parties – effective leadership could put an end to this misconception. |
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Coverage
Fred Argy‘s CPD Paper was covered in The Age on November 5, and the Canberra Times (p.6) on November 6.
