Too much easy money at the federal level leads to wasteful spending. Too little money at the state level leads to excessive reliance on inefficient taxes.
Anthony Albanese has been getting a lot of bad press over the decision to allocate about $6 million to the Marrickville Golf Club located in his constituency. The money is to be used for the clubhouse renovation, a new bar, dining facilities landscaping and not, as Albanese (mistakenly, I think) told parliament, to repair a sewage problem. Quite properly, that repair is being financed by the state government.
Isn’t this just the usual kerfuffle where politicians get caught (once again) allocating public money back to their own constituents? Doesn’t this just prove that Australian politics has an integrity problem that just doesn’t get fixed?
Well, no.
Politicians spending our money on their constituents is not an integrity problem. It is a feature of representative democracy. Now we can carry on about the need for transparency and independent processes and bureaucratic oversight and what-not, but the fact is that voters expect their elected representatives to “bring home the bacon”.
Our political system is encouraged to produce this very result. In any event, I prefer an elected representative making taxing and spending decisions over any unelected technocrat making those same decisions. Democracy is a good thing and it generally works well.
Some might argue that even if pork-barrelling is encouraged, that we should, at least, have a public-interest test or cost-benefit analysis before allocating money. To be clear – there is no world where allocating federal tax dollars to build a bar and dining facilities in the middle of Sydney passes any public interest test. Similarly, that cost-benefit analysis would be better undertaken by the local council or local entrepreneurs.
The challenge we face isn’t that politicians respond to the demands of their constituents – that is usually considered important for re-election – but that politicians have discretionary infrastructure money to allocate in the first instance.
“Not only is Australia over-taxed, but also most of the tax revenue ends up at the wrong level of government.”
The problem that we face is two-fold. The federal government has a knowledge problem – it cannot ever know the needs of local communities better than those local communities. The federal government also has too much money. This creates a perfect storm where politicians encouraged to bring home the bacon end up spending federal dollars on projects best financed by the state government, local councils, or, in the case of the Marrickville Golf Club, by the private sector.
Not only is Australia over-taxed, but also most of the tax revenue ends up at the wrong level of government. The federal government – that level of government furthest removed from local communities with local knowledge – has the lion’s share of revenue. By contrast, that level of government that actually provides government services is underfunded. Ultimately, the ever-shrinking market economy has to pay for all of this.
The perverse incentive is that it becomes more efficient to lobby Canberra (via your MP) for funds to build bars and dining facilities than it is to raise those funds in the local community, or even have a local entrepreneur risk some capital on operating a bar and dining facility. This sort of investment opportunity shouldn’t need either a grant or a subsidy. Yet, the incentive to cultivate political relationships is greater than the incentive to raise money from your own community or encourage business investment.
There is a lot of talk about Australia’s horizontal fiscal imbalance – some states are in a better position to finance public services than others and end up cross-subsidising the poorer states. We should, however, also pay more attention to the vertical fiscal imbalance.
Too much easy money at the federal level leads to wasteful spending. Too little money at the state level leads to excessive reliance on inefficient taxes with high deadweight costs and reduced services. Australian taxpayers are paying champagne prices for beer-quality government services.
Vertical fiscal imbalance weakens the connection between the people who make spending decisions, the people who benefit from those decisions, and the people who pay for them.
The solutions to this problem are not “more safeguards” and “fewer whiteboards”, and definitely not increasing the GST. Australians do not need to pay more taxes; we need the taxes we already pay to be better spent, and that spending to be reduced.
As grateful as the golfers in Marrickville might be, we shouldn’t be paying for their 19th hole. Each government should be responsible for raising the money that they spend. That means changing the vertical tax mix between levels of government, as opposed to just topping up the poorer states.
