Big government leaves a big bill

Bookmark and Share Economics & Deregulation and Deregulation Unit | Julie Novak
The Australian 9th August, 2013

One of the fundamental issues that electors should grapple with during this election campaign is an answer to the question: should government be larger, or should it be smaller?

The simple reason for this is that the scope, and size, of government can have a profound effect on our living standards, through the intensity and ways in which politicians and bureaucrats intervene in economic decisions made by individuals and businesses.

The extent to which the federal government has grown, across several key dimensions of government size, over the past six years has been breathtaking.

In a parliamentary democracy, approved legislation confers authority upon a government to undertake its fiscal activities in the first place. As US economic historian Robert Higgs once said: "Authority comes first: no authority, then no taxing, spending, or employment."

During its period in office, the Rudd and Gillard governments enacted 975 acts, comprising 37,371 pages of legislation, including 134 acts with 3256 pages in 2013.

The average annual number of pages of legislation enacted from 2008 to 2012 was 6823 pages, compared with an average of 6071 pages from 1996 to 2007.

A significant feature of the sausages produced by the parliamentary sausage machine during the past two terms of government was their distinctly centralist flavour.

This included new legislation consenting to a federal IR system; greater federal powers over disability services, hospitals and schools; and even approval for a now abandoned referendum on direct federal funding of the states' local government authorities.

Assented fiscal legislation accorded the Rudd-Gillard government political authority to compulsorily acquire revenues through a large number of taxation and non-taxation sources, ranging from the buffalo levy ($5124 in 2011-12) to personal income tax ($148 billion).

As indicated in the recent economic statement, aggregate tax and non-tax receipts rose from about $295bn in 2007-08 to about $350bn in 2011-12.

Although these receipts declined as a share of gross domestic product over this period, partly as a consequence of weak corporate profitability and consumption expenditure growth outside the mining states, this outcome was not for want of trying by the government.

Over the past six years, a raft of new and increased taxes, fees and charges have been introduced, including new taxes on carbon dioxide, coal, iron ore and alcopops; increasing taxes on tobacco, ethanol, LPG, luxury cars, superannuation, and income tax surcharges; and rising visa application fees.

As the multiple-year budget deficits attest, the government fervently sought additional funds from domestic and global capital markets, raising the gross debt-to-GDP ratio from 5 per cent to 18 per cent in one of the fastest loan acquisitions in the developed world. Using the current revenues collected from individuals and businesses, and then some, a spending spree of enormous proportions was launched into, lifting general government expenses from about $280bn in 2007-08 to about $378bn in 2011-12.

As a share of GDP, federal government spending increased from 23.8 per cent to 25.7 per cent. Some of the major contributors towards this spending growth were in non-constitutional areas of responsibility such as transport, housing, education and health.

Taxpayers should know that interest payments on commonwealth government debt increased from less than $4bn in 2007-08 to about $11bn in 2011-12, exceeding the entire transport and communications budget of about $9bn.

Reflecting its multi-dimensional nature, modern government is also a major user of real resources in competition with the private sector.

The Australian Bureau of Statistics estimates there were 250,000 people employed by commonwealth government entitles (excluding permanent defence force personnel, diplomats and others working overseas) as at June 2012, up from 237,100 employees in June 2008.

Regular administrative changes render it difficult to provide a consistent count of the number of agencies that employ federal government employees, but it is well known that many new entities have been developed over the past six years.

These included the Fair Work Australia IR monolith, which has been criticised for increasing labour costs; climate change regulatory and renewable energy financiers, raising the cost of living for families; and a Preventive Health Agency concocting policies to paternalistically override private consumption choices.

The brief of statistical evidence presented here suggests that statism itself has been thoroughly stimulated during the previous two terms of government, and these developments should be of great concern from an economic perspective.

Numerous studies overwhelmingly find a negative correlation between growth in the fiscal measures of government size and economic growth, and this result comes out more strongly in recent analyses reliant upon richer data sets and empirical innovations.

The basic intuition behind these findings is that larger government impedes growth due to higher distortionary taxes, resource misallocations by politicians and bureaucrats, and the diversion away from productive activity as individuals and businesses turn towards seeking political favours.

Those with a vested interest in larger government usually dismiss these concerns by quoting Keynes, stating that in the long run we are all dead.

Nothing could be further from the truth.

In the long run, we are consigned to pay the bills and clean up the economic mess that political spendthrifts and regulatory zealots leave behind.

Issues concerning the size and scope of government matter, and ought to be top of the agenda this election campaign.