Beware the one-eyed budget brigade
A great journalistic delusion is that politicians and others are always resorting to spin, so what journos do is remove the spin and tell it like it is. But too often they replace the speaker's spin with their own.
Consider the treatment of the Grattan Institute's report on budget pressures facing Australian governments. One paper reported it as concluding that "federal and state budgets will be generating yearly combined deficits of $80 billion within a decade unless welfare, health and education spending is cut".
Another national daily's version was that "Australian governments are facing a budget black hole so large that politically painful cuts to growth in public health and education spending are all but unavoidable if the nation is to avoid a European-style debt quagmire".
What the report actually said was that strong growth in government spending - particularly health spending - combined with weaker-than-expected tax collections could leave us with deficits equivalent to 4 per cent of gross domestic product in the next 10 years.
Its figuring shows this deficiency divides equally between increased spending and weak tax collections. So what solution did it propose? "That means finding savings and tax increases of $60 billion a year."
It also said: "There is no reason why a balanced budget, or more efficient government, necessarily requires smaller government. [However] history suggests that successful budget repair invariably involves both tax increases and expenditure reductions."
See the spin? So what's their motive? Probably a combination of the editors' personal ideology, self-interest (I pay too much tax already, don't ask me to pay more) and a belief that tailoring your reporting to fit your readers' prejudices will sell more papers.
But it is not just the media that take such a one-eyed approach to budgeting. Most business lobby groups do, too, plus a lot of economists. Many economists believe the answer to budget deficits is always to cut spending and never to raise tax collections, because of the libertarian political ideology implicit in their dominant "neoclassical" model.
The model assumes people are rational in all their decisions (implying governments can never know what's in my interest better than I know myself); each of us is a rugged individualist with nothing in the model to acknowledge the benefits we gain from acting collectively; each of us has roughly equal bargaining power in the market place (that's a good one); and wide disparities in the distribution of income and wealth are of no relevance.
Even so, as the Grattan report acknowledges, there is little economic support for the view that smaller government is always better than bigger.
You often hear people noting that a high proportion of the "structural saves" Wayne Swan likes to boast about constitute tax increases rather than spending cuts, as though this was some sort of crime or con trick.
But such people reveal their economic ignorance. Most of the supposed tax increases represent not the introduction of a new tax or an increase in the rate of an existing tax but the reduction or elimination of special concessions.
Economists refer to the latter as "tax expenditures" precisely to remind us they are essentially equivalent to actual expenditure. It often doesn't make a difference whether assistance to people in some category is delivered by a cheque from the government or a reduction in the tax they would otherwise have to pay.
One-eyed economists love to quote studies showing that, on average, every $1 of tax that governments raise generates a "deadweight loss" of about 30¢ in reduced economic efficiency because of the tax's effect in distorting taxpayers' behaviour. They use this to imply economics teaches us to minimise taxation. But they don't mention the hidden assumptions in the calculation, particularly that $1 of tax buys, at best, $1 of gross benefit to the community. In truth, $1 of spending on public goods may deliver benefits worth another, say, 30¢.
In any case, the more legitimate use of such deadweight-loss calculations is to compare the inefficiency of particular taxes, with a view to correcting the features of those taxes that make them more economically distorting than others.
This is where tax expenditures come in. The way to reduce the 30 per cent deadweight loss is to eliminate the special concessions built in to so many taxes and thereby reduce the tax's distortion of people's choices.
The list of tax expenditures whose removal could reduce the budget deficit and make the allocation of resources more efficient at the same time is long, but includes negative gearing, the senior Australians tax offset, the 50 per cent discount on capital gains tax, exemption of super payments to people over 60 and the various exemptions from the GST.
Twitter: @1Ross Gittins