Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin
John Quiggin

Fahey may pay for tax cuts

Sydney Morning Herald

5 Dec, 1994

If as appears likely, the Fahey government is defeated in March next year, the result will be deeply ironic. Labor under Bob Carr is running hard on the issues of health, education and law and order. Despite recent attempts at a change in direction, the government is saddled with the legacy of the Greiner government's militant economic fundamentalism and with the responsibility for cuts in existing services and failure to meet new needs. At the same time, continuing high unemployment and the ever-present possibility of new rounds of job cuts make it difficult for any incumbent government to sell a 'feel-good' message.

Yet in reality, the ultimate responsibility for cuts in services and for high unemployment rests with the Federal government. General purpose grants to the States have fallen by half as a proportion of GDP over the last decade. The steady squeeze on State finances has forced State governments to cut services, raise taxes and impose regressive and inefficient user charges. Yet it has scarcely been subject to any political debate. The only contribution of the Federal Opposition has been to demand more and deeper cuts. The only State government to resist the process was the Cain-Kirner government in Victoria, and even they followed the inevitable path to insolvency and electoral disater without a word of criticism of their Federal colleagues. Most of the Press failed to even notice what was happening and most of those who did notice acquiesced in the élite consensus that expenditure cuts were both necessary and desirable (Ken Davidson is an honorable exception here).

How are cuts in services related to unemployment ? The underlying cause of rising unemployment is a decline in the demand for labour. A major contributing factor in this decline has been the failure of the service sector to replace jobs lost to technological progress in manufacturing, mining and agriculture. More particularly, the community services sector, encompassing health, education, police, environmental services and other social services has failed to grow at the rate that was expected in the 1960s. This failure is the result of deliberate policy choices .

A change in policy would produce very different outcomes. In a recent book with John Langmore MHR, I have argued that very modest increases in taxation levels would be sufficient to fund a major expansion of employment (up to 700 000 extra jobs) and the provision of desperately needed community services. For the majority of wage and salary earners there would be no need to increase taxes at all.

It is often supposed that policies of this kind would merely change the pattern of aggregate demand but would not generate any net employment gains. This is incorrect. Each dollar of expenditure on community services goes on employment than is the case with total private sector demand. Furthermore, a large share of marginal increases in disposable income, particularly for upper-income earners goes on increased imports and therefore has no beneficial effect on Australian employment. So a change in the pattern of spending would led to a net gain in employment.

Both expansion of community services and the abolition of payroll tax would require a massive increase in transfers from the Federal government to the States. The ideal way to implement this would be the development of a genuinely co-operative Federal system with aggregate expenditure being decided jointly by Federal and State governments and detailed administration being left to the States. In the absence of such a utopian outcome we need to revive long-standing proposals that the States should be given a guaranteed share of the revenue obtained from personal and company income taxes.

The restoration of full employment would not be an easy task. Nevertheless, the primary obstacle is the lack of political will. The defeat of the Fahey government would send the message that electors are more concerned about the loss of vital community services than they are about the alleged burden of Big Government. It remains to be seen whether Bob Carr will act on that message and challenge the orthodox prescription of expenditure cuts and continued high unemployment.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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