Jim Chalmers has a once in century opportunity to spend a quarter of a trillion dollars on nation building without going into a cent of debt. In fact, if he chooses his public investments well he could drive growth up, cost of living down, and pay down the Morrison Government’s debt faster than currently expected. Or he can keep Morrison’s Stage 3 tax cuts.
The stage 3 tax cuts announced in the 2018 budget are one of the most expensive budget announcements ever made in Australia. They were announced with no modelling, no costing and no offsetting spending cuts. If they go ahead their $243 billion cost over the next ten years alone is on par with the lifetime cost of our (just as poorly thought through) plan to buy nuclear submarines.
What a great time too be Treasurer. If Jim Chalmers can get Cabinet to grasp the stinging nettle of Morrison’s tax plan he can pull our entire political and democratic debate from the flunk it’s been in for decades. Australia is one of the richest countries in the world; we are in the middle of an energy price boom; we have enormous opportunities in renewable energy; but decades of tax cuts have trained us to feel poor, that we can’t have nice things, and the future is something to fear rather than embrace.
People in rich countries like Norway, Denmark, Finland and Sweden take for granted they can have nice things like free childcare and university degrees. Their quality public schools and health systems are such that private schools and private health insurance are almost non-existent. And while it may seem strange for Australians to hear, having all those nice things hasn’t hurt their economies, its helped them. Back in 1990 GDP per hour worked in Australia was about the same as that of the Nordic counties, but since we embraced the neoliberal obsessions of tax cuts, spending cuts, wage cuts and privatisation, productivity in the Nordic countries has steadily outpaced our anaemic performance.
And that’s where the real win-win for the Treasurer kicks in. While Conservatives love justifying tax cuts by saying money is always better spent by individuals than by governments, not only is there no evidence to support such a claim, there’s almost no no reason to expect it is true.
It is literally impossible for economies to grow steadily over time without enormous public expenditures on sewers, roads, public transport, police and courts. Without public investment in this foundational infrastructure even the simplest of private sector activities will struggle.
And then there’s innovation, the real source of economic growth, which comes from having a highly educated population, a great research culture in public universities and significant public investment in R&D. While private investment plays a role in turning research into new products, it is no accident countries with the best school performance have the least private schools and its no surprise that the world’s best universities are either publicly owned or run as a not-for-profits.
There is just no evidence to support the argument that giving tax cuts to people earning over $180,000 per year so that they can spend more money on Uber eats, or bidding up the price of inner-city housing, will deliver greater economic benefits than investing that same money into infrastructure and public services.
There is, however, strong evidence that investing money into services like child care will deliver much stronger economic returns than spending on tax cuts. For example, modelling commissioned from Centre of Policy Studies for the Australia Institute shows the economy could be $15 billion larger if childcare was made more affordable. Put simply, while giving tax cuts to wealthy men does little to boost their workforce participation, significantly reducing the cost of child care for young parents has a significant impact on workforce participation and, in turn, GDP.
And finally, only significant new public investment in health, education, childcare and disability services can significantly boost the wages of those low paid workers, the overwhelmingly proportion of whom are women, who are the backbone of our care economy. Not only is paying these workers properly fair, it will help improve the quality of the services enjoyed by all Australians and reduce the inequality that now dominates the Australian labour market. And these days even the IMF agrees that reducing inequality is good for economic growth.
So back to Jim Chalmers’ opportunity. There is no economic reason to believe spending $243 billion on tax cuts for high income earners is the best way to drive productivity or jobs growth. None. But there is is lots of evidence that spending more money on infrastructure and services will deliver significant social, environmental and economic benefits.
Tax is an investment in our society. It’s the price we collectively pay for the things we collectively use. There is no economic theory that can tell us what the right amount of tax to pay is, or the right range of things we should publicly invest in. And there is also no economic theory that says the less we tax the stronger our economy, or society, will be. The question of how to tax and how much to spend is ultimately a democratic one, and in the case of the stage 3 tax cuts, a $243 billion question at that. Jim Chalmers is lucky to be at the helm when this question is being asked. Let’s hope we are lucky enough for him to get to get it right.
Dr. Richard Denniss is Executive Director at leading public policy think-tank the Australia Institute, and formerly Chief Economist. Twitter: @RDNS_TAI
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Jake Wishart Senior Media Adviser