Freeing public policy from the fiscal straightjacket



Picture of Australian parliament house in Canberra - Effective Government header

When Australians are asked whether they would prefer tax cuts or more spending on health and education, the message is clear: invest in services. When economists and business people are asked about the challenges facing our economy, the answer is consistent: lack of investment in skills and infrastructure.

But in last week’s debate, Peter Costello and Wayne Swan shared a different set of priorities: what voters want and what the economy needs is lower tax rates and a 1% budget surplus, now and forever.

In a new discussion paper Freeing public policy from the fiscal straightjacket for the Centre for Policy Development, Fred Argy demolishes the myths underpinning this bipartisan consensus, falsely described as ‘fiscal conservatism’:

Download Freeing Public Policy from the Fiscal Straightjacket

This double barrelled fiscal stance effectively sets a ceiling on tax rates and then insists that all government spending, including all capital spending, should be fully paid for out of tax revenue. Kevin Rudd has called it “fiscal orthodoxy” and has enthusiastically committed a future Labor government to it.

We are constantly told that investment in infrastructure is impossible without finding a way to access private funding. It is just too expensive. Tunnels and train lines cost billions of dollars. Funding projects like these through public spending would be irresponsible – what if there’s not enough money in the pot to complete them? Governments might have to resort to desperate measures such as going into debt or – shock, horror – foregoing the annual round of tax cuts.

Fred Argy’s paper Freeing public policy from the fiscal straightjacket, released on the CPD website and covered in the Age today, argues that a blanket ban on government borrowing combined with a freeze on the tax-to-GDP ratio is directly responsible for the erosion of infrastructure, and has created a bias against social investments – even those with high returns and strong public support.

By freeing the ALP and Coalition from the fiscal straightjacket we could open the door to well-informed, case-by-case analysis of the costs and benefits of major infrastructure projects. And we could begin a far more interesting debate – if the federal government spent the windfall from the resources boom in the most effective way possible, what kind of environment, what kind of transport, health and education systems could we leave to future generations?