THE Grattan Institute is the latest in a long line of conservative or independent think tanks to warble on about public debt. Well, yes, it is higher than it has been for a while. But government debt (federal, state and local) is historically low at the moment. Private debt is historically high.
And history shows us that recessions and depressions follow bubbles in private debt, not government debt.
Governments should remain prudent, but not manic. Australia has the second-lowest government spending as a percentage of GDP among OECD countries.
Public debt has been painted as money wasted. But not having public debt can also be seen as opportunity lost.
Individuals, for example, usually incur quite large debt when they buy a house. These days the average first-home mortgage is about five times the income of the average borrower. Think about it. In government terms, that is five times GDP, Even if you take it as a percentage of government revenue, it is still more than 100 per cent of government GDP.
Nearly everyone who buys a house and incurs this sort of debt becomes better off in the long term, even if they pay interest for decades.
Some public spending, especially in infrastructure, creates efficiencies which ultimately sounds in higher tax revenue.
But these days the propaganda war has been won by the no-debt side. Surplus, good. Deficit bad. No matter what.
The anti-debt argument reached a peak in 2010 with a paper by economists Carmen Reinhart and Kenneth Rogoff. Their analysis laid down the mantra that any public debt over 90 per cent of GDP would necessarily slow economic growth.
The argument was swallowed by European central banks which imposed austerity measures at the very time when they were not needed. The austerity measures pushed some European nations deeper into recession.
This month, Nobel-prize-winning economist Paul Krugman debunked the Reinhart-Rogoff theory. It was found that they had made a mistake in an equation in their Excel spreadsheet.
Reinhart and Rogoff shuffled their feet a bit and admitted some error, but stood by the theory.
So an error in an Excel spreadsheet sent Europe into recession.
The 90 per cent figure is demonstrably wrong. Most countries came out of World War II with debts figures well above 90 per cent of GDP, but economic growth boomed.
Debt per se is not bad. It is what you spend it on and how you raise the money to pay it off that matters.
If the Grattan Institute warning pushes the argument for tax reform and closer look at government spending it will have at least done some good.
We can tighten a lot of middle-class welfare (payments to the richly undeserving “Howard battlers”). And we can certainly tighten a lot of business tax freebies, especially accelerated depreciation schedules. We could do better at taxing superannuation.
We should also look at discretionary family trusts which in effect allow income splitting and reduce the tax of high-income, high-wealth families.
It would be smart to raise the GST and broaden its base. At least with the GST, the wealthy are forced to pay some tax.
We could look at death duties and/or capital gains tax on high-value family homes. And we could get rid of inefficient transaction taxes, like stamp duty.
There is no need for another tax review. The measures needed are well-known and fairly well understood.
What is needed is the political will and a greater understanding that the projections in health and other spending will require higher revenue.
Some lessening of the burden on the public purse brought by high population growth would also help.
A lot of our trouble stems from Howard Government Treasurer Peter Costello who handed out family payments to people who did not need them; who encouraged the third baby; who abolished tax on superannuation payments to people over 60; and who gave other unsustainable tax advantage to the elderly – all to win votes.
DOT DOT DOT
Speaking of the GST, the ACT is in for a bit of hit before long in GST distributions because of the inefficiency of our hospitals – the most inefficient in the country, according to the Australian Institute of Health and Welfare.
Under the new service-based National Health Reform agreement, inefficient states and territories will get top-up funding until 2019. The top up is the difference between the new system and what a state would have got under the old population-based system
In the ACT’s case the top up is about $85 million a year.
But the agreement is based on a new efficient-pricing system worked out by the Independent Hospital Pricing Authority under which all states and territories are to be treated equally.
This means that any top-up money will be subjected to “fiscal equalisation” by the Commonwealth Grants Commission when it dishes out the GST revenue among the states and territories.
That equalisation means that all the top up money except an amount equal to a state or territory’s population – all but about 1.6 per cent in the ACT’s case – gets subtracted from GST payments in the third, fourth and fifth year after the top-up money was paid.
The system has the greatest impact on smaller states.
Indeed, the extra money that Independent MP Andrew Wilkie negotiated for the Royal Hobart Hospital will be treated like this, according to an article in the Tasmanian Times website by Martyn Goddard.
The Commonwealth giveth and the Commonwealth taketh away.
The problem is going to get worse for the ACT unless the Government does something drastic to improve ACT hospital efficiency.
The cost per weighted hospital service in ACT public hospitals rose by 18.2% between 2010-11 and 2011-12, according to the AIHW. Nationally, health price inflation typically runs at between two and three per cent.
Yes, the Commonwealth will give the ACT top-up money for hospitals, but the cake is finite and nearly all of it will be paid for in reduced GST money.
Expect the ACT to scream at the mean Commonwealth and do nothing about its inefficient hospitals. The blame game will continue.
CRISPIN HULL
This article first appeared in The Canberra Times on 27 April 2013.