Whoever wins this election will have to find a way to escape Australia’s ridiculous and arbitrary cap on taxes as a percentage of GDP.
Indeed, government spending will need to grow faster than GDP for defence, elderly care, child care, health care, disability care and climate change.
The tax ceiling is 23.9% of GDP. It started as a working hypothesis in the Treasury Intergenerational report 2015 and became, in the words of Scott Morrison, a “speed limit” for the government, imposed by the Coalition.
Because of the empty and combative way in which politics operates, it is now a Rubicon for both major parties.
But this is more of a problem for the ALP than for the Coalition: raising total tax beyond that limit would confirm the Coalition’s dire warnings that Labor is a high-tax party, which politically would be traitor.
One way to manage the fiscal cap would be to create endless deficits and have the Reserve Bank buy the debt, in line with modern monetary theory.
It happened during the pandemic, but we’re a long way from MMT becoming accepted tax policy, and in any case, it looks like higher taxes can actually lead to happiness.
Higher taxes, happier people
Two weeks ago, the 2022 world happiness report came out, with Finland winning the title of the happiest country in the world for the fifth consecutive year.
Its tax-to-GDP ratio is 43.3%.
The five happiest countries are Finland, Denmark, Iceland, Switzerland and the Netherlands; their average tax-to-GDP ratio is 38.9%.
Australia is the 12th happiest with a total tax to GDP ratio of 27.8% (including state taxes), which puts us at 53.rd on the tax league table.
The most unhappy country in the world is Afghanistan, where taxes represent 7.6% of GDP.
Thus, a low tax rate as a percentage of GDP is not necessarily the path to national happiness; well-funded government services seem to help, knowing that tax revenues are not wasted on incompetent, semi-corrupt politicians and bureaucrats.
Fallout from 2019
After proposing tax increases in 2019 and losing the election as a result, the ALP is now sticking to its tax ideas on “multinational tax reform”. It’s both hard to complain about and hard to pin down, but it could net up to an extra $8 billion, Labor sources say. Or rather, they can credibly say that it could earn that much, which is all it takes to get through the campaign trail intact.
But the problem with using an aggregate tax-to-GDP ratio as a speed limit for government is that even “good” taxes, like hitting multinationals, or rivers of corporate taxes from the sale of iron ore to China, increase the ratio.
This is why the Coalition’s average tax-to-GDP ratio over its three terms over the past 50 years is higher than during Labor’s three terms – 22.2% vs. 20.5%: the mining boom meant that the Howard government applied an average of 23.5% taxes to GDP and finished with 23.9% (where the “speed limit” comes from).
Labor’s three terms included two recessions and the GFC, so tax revenues were understandably weaker.
However, tax revenues have not been sufficient to finance public spending for some time.
Growing budget demands
Over the past 10 years, $555 billion in spending, or 12% of the total, had to be paid for by issuing debt, and debt-financed deficits are expected to continue as far as expected.
In other words, there may never again be enough tax money to pay for government spending.
And that’s without the increased spending demands that we all know will come from defense and the various ‘care’ functions of government, and neither side is even close to tackling the cost of the climate change – that is, dealing with it, not preventing it.
the last report of the Intergovernmental Panel on Climate Change said this week that we are on track for 2 to 3 degrees of warming, which will be catastrophic for large parts of Australia, given that disasters that we already see are due to 1.2 degrees.
After the 2011 floods, the entire town of Grantham was moved to higher ground, with state and federal funding.
The land was purchased from a local farmer, quickly rezoned residential and equipped with roads and services. Residents of Grantham were given the option of swapping their plots in the floodplain for plots at the same price on the hill.
Eighty families were relocated at a cost of $18 million (a few people stayed behind and have since been flooded again) and what was once Grantham is now a park.
Something similar will surely have to be done with Lismore. Can this town really be allowed to rebuild again on the Wilsons River floodplain? No one will be able to get insurance and all residents and businesses will be sitting ducks for the next flood that tops the levee.
Lismore’s 19,097 homes were worth an average of $627,455 before the March flood. There are plenty of hills around the town, but what would it cost to move Lismore to higher ground? Way more than Grantham’s $18 million, that’s for sure.
And what about all the other floodplain towns in northern New South Wales and Queensland? Not to mention the constantly flooded suburbs along the Brisbane River, such as Rocklea, Fairfield and Yeronga.
In hindsight, none of these floodplains should be developed for housing, but they are now and those who live there cannot be left to fend for themselves in a hotter, wetter world. Likewise, those who live on the coast, or in the bush surrounded by trees.
As the IPCC says, more disastrous global warming is now blocked and will not be prevented by the emission reduction commitments made so far, or possibly by any politically possible reduction. The consequences of this for Australian governments are going to be potentially the most difficult and costly for any government in the world.
The cost of climate change will add to the cost of an aging population (eldercare), the continued feminization of the workforce (childcare), the commitment to properly care for Persons with Disabilities (NDIS) and the threat of the “arc of autocracy”. as Scott Morrison (defense) calls it.
The Treasury forecasts real GDP growth after 2023 of 2.5% per year.
There is no possibility of maintaining annual growth in public spending at 2.5%, which means that Australia’s tax-to-GDP ratio will have to go well above 23.9%.
The only questions are: which political party will carry it, what taxes will they use, and will it make us unhappy?
In the happiest country in the world for five consecutive years, the highest marginal tax rate is 67% and the GST is 24%.
Alan Kohler writes twice a week for The new daily. He is also editor-in-chief of Eureka Report and financial anchor on ABC news