Australia will remain one of the lowest-taxed countries in the Western world.
FEW Australians are aware that we have one of the three smallest governments in the Western world. We complain endlessly that our governments tax too much and spend too much but that is not the way we appear in international comparisons.
The International Monetary Fund estimates that, in 2012, Australia's governments, state and federal, will raise a bit over one-third of our GDP, 34.5 per cent, and spend 36.3 per cent. Of the 34 advanced economies, our revenue is the ninth lowest, our spending the seventh lowest.
That might not sound too flash. But the four lowest-spending countries are Hong Kong (19.1 per cent), Singapore (19.4), South Korea (20.4) and Taiwan (20.9), where your welfare is your responsibility.
Among those with whom we compare ourselves, only New Zealand (33.1 per cent) and Switzerland (34.3) have leaner governments.
But isn't revenue the best comparison, which means the US and Japan are smaller governments than ours? No. Both are running huge deficits as a share of GDP, 7.9 per cent in the US, 9.1 in Japan which will have to be paid for by future taxpayers. Spending, not revenue, is the test of the size of government.
Australia and New Zealand aim to run a Western welfare state while spending far less than other Western countries. The gap between us and them is huge: on average, governments spend 42.2 per cent of GDP in advanced economies, 43.1 per cent in the G7, and 48.2 per cent in the European Union. So far, you would have to say, more spending has not brought more success.
On Sunday, Australia will gain two new taxes. The carbon tax initially will raise $4 billion a year: 0.3 per cent of GDP, rising to 0.4 per cent as it settles in. Revenue from the mining tax can't be estimated accurately, but Treasury puts it at just $3 billion, or 0.2 per cent of GDP, while private-sector economists say it won't even raise that.
Neither tax will change the reality: Australia is one of the lowest-taxed countries in the Western world. If Tony Abbott becomes prime minister next year, as seems likely, he will try to repeal both taxes, and will probably succeed. But it will be only a temporary victory. Both taxes will return, probably in different forms. Both taxes will be levied by future Liberal governments.
You can predict that, because in the past the Liberals have rejected so many Labor reforms, only to adopt them later. Medicare, for example, was initiated by the Whitlam government as Medibank, scrapped by the Fraser government, reinstated by the Hawke government, then embraced proudly by John Howard and his health minister, Tony Abbott.
The Liberals initially fought Aboriginal land rights, only to adopt them once in government. We saw similar feigned anger over the Keating government's Native Title Act, only for the Howard government to adopt it with minor changes. Howard's Liberals opposed compulsory superannuation when the Hawke government introduced it. There are many other examples.
A carbon price is the cheapest way of getting companies and people to make choices that slow the growth in greenhouse gas emissions heating the Earth. Give us a price incentive, and we find ways to reduce emissions with little damage to profits or our standards of living.
The market does this better than governments giving taxpayers' money to companies to do things they would do anyway.
A mining tax is justified because minerals belong to the people, and we deserve a fair share of any super profits made from mining them. The Coalition accepts this argument for oil and gas the Howard government raised billions of dollars from the petroleum resource rent tax. A future Liberal government will agree that it makes sense to apply a similar regime to iron ore and coal. That is why Liberal governments in resource-rich states have raised royalty rates.
In Victoria, alas, Ted Baillieu does not have that option. And since the High Court interprets the constitution to mean that state governments in effect are forbidden to tax income, tax expenditure or tax production despite the intentions of the founding fathers Baillieu is left with a pack of lousy taxes, mostly on transactions, which are volatile when markets turn down, as now.
The sharp fall in housing sales and prices, flat spending on items carrying the GST, flat jobs growth: state revenue has been hit by a perfect storm. And if you don't have the revenue, you can't pay the salaries.
In 11 years, the Bracks and Brumby governments increased the public service from 23,000 to 37,000. Surely it makes sense for Baillieu to cut it back to 33,000 to help ride out the fiscal storm.
His government is in trouble for many reasons, such as its excessive cuts to TAFE, but cutting the public service should not be one of them.
On most issues, this has been a more moderate and sensible government than it has been given credit for. Its weakness is the one Paul Keating pointed to last week in the Gillard government: it lacks a compelling narrative, a credible explanation to us about what it is doing, and why.
Baillieu became Premier because of his self-discipline, good judgment, a progressive streak, careful planning and willingness to take risks.
Now he must add an ability to communicate, to define his government to us in ways we will endorse. The stakes are high.
Frequently Asked Questions about this Article…
What are the two new taxes Australia is introducing and how much revenue will they raise?
Australia is introducing a carbon tax and a mining tax. The carbon tax is expected to raise about $4 billion a year initially (around 0.3% of GDP, rising to about 0.4% as it settles in). Treasury estimates the mining tax will raise roughly $3 billion a year (about 0.2% of GDP), although private-sector economists expect it may raise less.
Will these new taxes make Australia a high-tax country compared with other Western nations?
No. Even with the new carbon and mining taxes, Australia remains one of the lowest-taxed countries in the Western world. The IMF estimated governments in Australia would raise about 34.5% of GDP in revenue and spend 36.3% of GDP, which is lower than the average spending levels in many advanced economies.
How might a carbon price affect company behaviour and investor returns?
A carbon price gives companies and consumers a market signal to reduce greenhouse gas emissions. The article argues that pricing carbon is the cheapest way to change behaviour, and with a price incentive businesses typically find ways to cut emissions with little damage to profits or living standards—so the impact on investor returns may be modest if companies adapt efficiently.
Is a mining tax justified and what does it mean for mining companies?
The article says a mining tax is justified because mineral resources belong to the public and the community deserves a fair share of any super profits from mining. The Coalition has accepted this rationale for oil and gas in the past (for example, the petroleum resource rent tax), and the article suggests future governments may apply similar regimes to iron ore and coal—meaning miners could face ongoing royalty or tax obligations.
Could a change of government reverse the carbon and mining taxes?
A change of government could lead to repeal attempts. The article notes that if Tony Abbott became prime minister he would likely try to repeal both taxes and might succeed temporarily. However, it also argues that both taxes would probably return later, possibly in different forms, because successive Liberal governments have adopted some reforms they initially opposed.
How do constitutional limits on state taxation affect state budgets and investors in state-linked assets?
According to the article, the High Court's interpretation effectively prevents state governments from taxing income, expenditure or production, leaving them dependent on transaction-based taxes. Those taxes are volatile when markets turn down, so falls in housing sales, GST-related spending and flat jobs growth have hit state revenue—raising fiscal pressure on state budgets and services that can affect investors in state-linked assets.
What fiscal pressures are affecting Victoria's budget and public services?
Victoria has faced a 'perfect storm' for state revenue: a sharp fall in housing sales and prices, flat spending on GST‑taxed items, and flat jobs growth. The article also notes that the Bracks and Brumby governments expanded the public service from 23,000 to 37,000 employees over 11 years, and suggests reducing numbers could help ride out the fiscal storm—while warning cuts to services like TAFE have been controversial.
What should everyday investors take away from these tax changes and fiscal trends?
The article's message for everyday Australians is reassuring: the new carbon and mining taxes are relatively small as a share of GDP, and Australia will remain a relatively low‑tax country. Carbon pricing encourages market-based adjustments that can limit damage to profits, and mining taxes are framed as reasonable claims on public resources. Political reversals may happen, but similar taxes tend to reappear in different guises—so investors should be aware of policy risk but not assume these taxes will dramatically change the overall tax environment.
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