Government spending needs reform before taxes

I would like a dollar for every time I’ve read how much the Australian economy needs tax reform. Sure, it does — but what about the growth and inefficiency of government expenditure that’s driving up the tax burden in the first place? What about expenditure reform?

Advocates of tax reform often present it as a restructuring of the tax system, perhaps with a dash of simplification thrown into the mix.

But some have also been candid enough to reveal their underlying objective — to increase overall tax revenue to satisfy the growing financing demands of government expenditure.

This is not revenue-neutral or tax-cutting reform such as we have seen in the past, but tax-increasing reform.

Before even considering going down that path, we need government expenditure reform in order to improve efficiency and effectiveness of programs, rationalise roles and responsibilities of different tiers of government, and relieve the upward pressure of spending growth on taxation and borrowing.

The recently announced changes to aged care funding and the NDIS are examples of what expenditure reform should look like, at least qualitatively.

Whether either set of changes goes far enough in relieving the budgetary pressures from these programs is another matter. The aged care reforms merely lower the spending growth rate from 5.7 per cent to 5.2 per cent a year, while the NDIS changes aim to reduce growth in the cost of that program to 8 per cent — which is still very high.

But the reforms are to be welcomed for tackling two of the big pressure points on the federal budget and for making permanent structural changes that will lead to increasing savings over time.

Political sustainability is secured by grandfathering existing beneficiaries and by securing the Opposition’s support. This takes the political heat out of these issues, at least for one election ahead.

This doesn’t mean that all reform can be bipartisan. The logical end to that would be a German style ‘grand coalition’ government of Labor, Liberal and the Nationals — which has only helped Europe’s largest nation and economy reclaim the ‘sick man of Europe’ title.

The major parties should stick to their principles and give the voters a genuine choice. On many topics this means bipartisanship is impossible.

A lack of bipartisanship, however, doesn’t let the elected government off the hook of managing its spending responsibly and devising and implementing needed reforms.

Our federal, state and territory governments are not living up to that responsibility. They are best at thinking up new ways to spend more — and without giving much attention to whether the benefits justify the costs.

Too often the ‘more’ is just added to existing program costs with no attempt to review those programs for inefficiencies, ineffectiveness and potential savings.

One route to expenditure reform is to review everything at once as the basis for a ‘horror budget’. This works only when there is an economic crisis or a newly elected government with a lot of political capital.

Even then, it didn’t work for the newly elected Abbott government in 2013, which launched a whole-of-government review by an appointed commission of audit.

That exercise was notable for all it failed to achieve — not because there was anything wrong with the commission’s recommendations, but because it started a political firestorm the government could not contain.

The omnibus approach probably belongs to a bygone era when special interest groups were less well organised and resourced, social media was unheard of, and governments could usually rely on the Senate to pass their legislation.

An alternative to the omnibus approach is a methodical program-by-program review of all areas of government spending, including the overlap between the federal and state/territory governments.

The institutional structure to support this exists, including the Productivity Commission and the new Australian Centre for Evaluation within the Treasury.

It shouldn’t take a Royal Commission to set the scene for a review in any program, such as was the case with aged care. And the fact that a methodical, program-by-program approach will take time doesn’t matter.

The problem with it is of a different kind. It is that, more often than not, the focus is not on efficiency, effectiveness, value for money and restraint, but on pathbreaking social reformism with a huge price tag.

That is how the poorly designed NDIS (for example) came about in the first place, and we see the same mentality alive and well now in areas such as childcare, education and demands to extend Medicare to dental services.

If the attachment to collectivist models, government intervention and social engineering prevails, the outlook for more of what we have just seen in the aged care reform package is not promising.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former IMF, World Bank and federal and state Treasury economist.