Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

John Quiggin

The case for increased taxes

The Australian ,

June 22, 1995

The recent Newspoll on the concerns of Australian voters is revealing. Even more revealing perhaps, was the analysis, which focused on interest rates, the one issue where the concerns of ordinary Australians overlap with those of the official policy establishment. With this exception, there is almost no overlap between the issues that ordinary Australians regarded as most important, issues such as health, unemployment, family policy and the environment, and those that dominate the minds of official policy makers, including taxation levels, industrial relations policy and the balance of payments.

The difference in priorities is not simply a reflection of the overwhelming dominance of economic issues in the policy establishment. The problems of health policy, the environment and unemployment are all basically economic. Rather there is a fundamental difference in between the official view of the economy and its relationship to society and the view held by the majority of Australians.

In the official view, Australia is laboring under the burden of an overdeveloped and inefficient state. The central role of policy is to create a framework which will permit the development of a dynamic private sector expansion leading to sustainable economic recovery. A central element of this framework is that the government should minimise the cost burden imposed on the private sector to support the provision of costly luxuries such as police, assistance to the unemployed, health, education and environmental improvements.

This official view contrasts with a majority view among the Australian public that the purpose of the economy is to deliver decent living standards and that this requires improvements in key areas such as health, education and the environment. This view is implied by the priorities expressed in the Newspoll, and also in studies by EPAC indicating a willingness to pay higher taxes in return for improved community services. At the political level, it is evident in the defeat of the Greiner-Fahey government and in the absence of any noticeable response to Keating's abandonment of the second stage of the One Nation tax cuts.

The official view has been implemented, with steadily increasing rigour, for the past twenty years. The best single indicator is the fact that general purpose grants to the States have been cut by half, as a proportion of GDP, over this period. Current policy calls for grants to be maintained in real per capita terms. This is an improvement on past policy, but still implies a continuing decline relative to GDP.

The consequences have been felt in every area of community service provision. The effects include school and hospital closures, queues for treatment in hospitals and for entry to university and TAFE courses, inadequate police services, overcrowded prisons and the consequent pressure to release prisoners at all costs, neglect of pressing environmental concerns, and in a whole range of other areas. More than any of these particular problems, the continuation of massively high levels of unemployment reinforces a general view that society is failing and that worse is to come.

Meanwhile unemployment has virtually vanished from the map of official policy concern. Although the government maintains a pro forma commitment to the Working Nation goal of 5 per cent unemployment by the year 2000, official policy is based on the assumption that an unemployment rate of around 7.5 per cent is natural and desirable. If anything, recent moves to decentralise the labour market have led to an increase in official nervousness about the potentially inflationary impact of any significant decline in unemployment.

There is an alternative. A policy of expanded provision of community services would meet social needs and, because community services are more labour intensive than most other activities would reduce the level of unemployment. In addition, its expenditure-switching effects would address many of the concerns of the policy establishment such as the current account deficit and the inadequate level of national savings (the main areas of community services act to promote future as well as current well-being and are therefore properly regarded as involving saving).

The problem is that this policy, which is sensible in both micro and macro terms, requires an increase in taxation. There is plenty evidence that an increase in taxes would be politically acceptable if it were used to fund an improvement in community services. However, the official policy establishment and the major political parties, bound by the shibboleths of the eighties, refuse to contemplate such a step.

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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