The Small Government Myth

There is a common perception that the Liberal and National Coalition parties have an ethos of small government. That is, they pursue policies that encompass low levels of government spending and low taxation versus big spending and high tax from the Labor Party.

That is the perception. Treasurer Scott Morrison has provided facts that prove otherwise. In December, with the release of the Mid-Year Economic and Fiscal Outlook, Morrison confirmed that the Coalition is high taxing and big spending and that, for many decades, Labor has been the side of politics that delivers small government. The MYEFO documents show that government spending was 25.6 percent of GDP during the first two years of the current Coalition Government and it will remain above 25.3 percent of GDP out to 2018-19. The Rudd/Gillard Government delivered only one budget that saw the government spending to GDP ratio above 25.1 per cent and that was in 2009-10 – during the height of the global depression risks – where a raft of temporary stimulus measures saw spending hit 26 percent. In every other year of the Labor administration, government spending was below 25 percent of GDP. It is a similar story with tax. The Coalition government under John Howard was the highest taxing government in history. The seven years with the highest tax to GDP ratio since the 1950s occurred under the Howard government, dwar fing any tax take in any year of any Labor administration. Under Howard, the tax to GDP ratio reached a record high 24.3 per cent in 2004-05, and was at or above 23.7 percent in six years. The highest tax to GDP ratio under the Rudd/Gillard Labor Government was 21.7 per cent while under Hawke/Keating the highest was 23.3 percent. The average tax to GDP under those Labor governments in 20 years was just 21.6 percent. In today’s dollar terms, each percent of GDP is equal to $17 billion. Perhaps the most interesting part of Treasurer Morrison’s MYEFO was the confirmation, that under the Coalition’s current policy settings, the tax to GDP will rise every year from when it was elected in 2013 to the end of the current forward estimates in 2018-19. This simply means that not only is there no hint of low taxes and smaller government, but the opposite is true with taxes as a share of the economy increasing. It is a similar picture for government spending. As the current projections stand, and assuming the Turnbull government wins this year’s election, the current Coalition will be the only government since at least the 1970s that has in every year in office had government spending above 25 percent of GDP, in this case, this is from 2013-14 to 2018-19. There is nothing in Morrison’s budget estimates to suggest government spending is being reigned in, despite the occasional spending cuts since the last election. This is probably because the proceeds of any cuts have been ‘recycled’ back into extra government spending in other parts of the economy. The trend towards higher tax revenue in the current period would have, in most previous governments, ensured the budget de ficit was not only eliminated, but that surpluses would have been likely. For the current Coalition Government, the high spending trajectory means that a budget surplus is, on current projections, still more than five years and two more elections away. Economic policy will no doubt be a dominant issue in the election campaign this year with tax policy front and centre. If, as appears probable, the Coalition have a hike in the goods and services tax as part of its tax reform platform, the Labor Party could easily use the record tax take as part of its argument against it. Treasurer Morrison’s first Budget, in May, will also be a platform for the Coalition to frame any policy changes ahead of the election. Any extra spending with an objective of swaying voters will, of course, only con firm the already obvious fact that the Coalition is the big-spending, high-taxing side of Australian politics. Stephen Koukoulas is the General Manager of Market Economics @TheKouk