License article

Joe Hockey looking in the wrong place for a budget fix

Anyone who is worried about budget deficits should be worried about tax.

There's an old joke about a drunk looking for his keys under a lamp post on a dark night. After stopping to help, a passer-by asks whether the drunk is sure he dropped them under the lamp post. "No mate," replied the drunk. "I dropped them on the other side of the road, but there is no light over there."

Like the drunk, Treasurer Joe Hockey is determined to search for a budget fix in the wrong place. He seems determined to search for savings under the glare of the Expenditure Review Committee, rather than get a torch to go looking for a solution on the revenue side of the street.

The Expenditure Revenue Committee, or ERC to most Canberrans, is perhaps the best known of all cabinet committees. Most public servants fear its gaze; indeed, apart from those who are on it, most ministers fear it as well.

Everyone knows how carefully the committee scrutinises existing and proposed policies in search of ways to either trim or trash them. The ERC starts work in November for a budget that is delivered in May. By all accounts, the process is both exhaustive and exhausting.

But have you heard of the Revenue Review Committee? Me neither, until recently, at least. It does exist and it does meet, but while the ERC process takes months, the Revenue Review Committee often only take hours. It meets late in the piece, on an ad hoc basis, and the paperwork and process is not nearly as structured or broad-ranging as the ERC.

While Hockey hates to admit it, budget deficits in Australia are primarily caused by fluctuations in revenue rather than big increases in spending. Over the past 20 years, government spending has averaged about 24 per cent of gross domestic product (GDP) with a high of 25.3 per cent and a low of 23.1 per cent. Given the swings in the world economy, the unemployment rate and lumpy purchases of defence equipment, that is quite stable.


While government revenue has also averaged about 24 per cent of GDP, it has been much more volatile, peaking at 25.9 per cent of GDP and bottoming out at 21.5 per cent of GDP. Our tax/GDP ratio is currently well below its historical average and even well below the average level when John Howard was prime minister. Put simply, anyone who is really worried about deficits should be worried about tax.

Hockey is not really worried about the deficit. On the contrary, he loves the deficit, as it allows him to focus on the thing he is really worried about, which is public sector spending. His political problem, however, is that Australians like public spending on schools, roads, hospitals and income support for the vulnerable. That's why he tried to invent a "budget crisis" - he was trying to force us to take his unpalatable, and unnecessary, medicine.

If Hockey really wanted to reduce the budget deficit, he would dedicate as much time convening the Revenue Review Committee as he does overseeing the Expenditure Review Committee. When revenue forecasts from a particular tax were not met, he would demand detailed explanations and new collection options.

A government that was determined to restore the budget to surplus would be scrutinising all existing tax concessions, not just those for fresh food. An effective Revenue Review Committee would ask the simple question: "What is the taxpayer getting in return for this?" - for every tax concession.

Successive treasurers have been adamant that the $40 billion in forgone revenue that flow from the tax concessions we grant to superannuation provide a good return to taxpayers in the form of reduced spending on the age pension. While the argument is flawed and contradicted by all available evidence, the best place to test such a claim would be a fierce Revenue Review Committee.

A remote community using diesel to make electricity does not have to pay tax on that fuel. But it is unable to exchange the future cost of the subsidy for a one-off grant to install solar panels. The diesel fuel rebate now costs the budget $5.4 billion a year in foregone revenue. A thorough Revenue Review Committee would seek out opportunities to reduce revenue losses. A thorough Revenue Review Committee would ask hard questions about whether making fuel cheaper is the best way to increase the efficiency of remote towns, or remote mines.

In the past few weeks, backbench Liberals and a range of business groups have been calling for the extension of the GST to fresh food. It is not clear where this thought bubble originated, or why its proponents prefer to extend the GST to food rather than to private schools, private health insurance or financial services. But if we had a serious Revenue Review Committee, all of these options could be systematically compared, both with each other and with the current arrangements that allow superannuants with balances of $10 million to pay no tax.

But we do not have a powerful revenue review committee and we are unlikely to get one. This is not just because Hockey does not want one, but because Treasury does not want one, either. Herein lies the fundamental problem at the heart of the structure of Australian government.

While the Department of Finance is focused on reducing public spending, Treasury is focused on reducing government revenue. Despite Australia having one of the smallest public sectors in the developed world, for reasons best known to itself, Treasury believes even smaller would be even better.

Between pressure from the Department of Finance to cut spending and pressure from Treasury to cut taxes, it should come as little surprise that the Australian public sector is under permanent pressure to be smaller, as distinct from constant pressure to be better.

Treasury, along with the Productivity Commission, has played a dead bat in relation to the enormous loss of revenue associated with tax concessions for superannuation. It has been strategically silent when poor economic arguments are used to justify the continuation of fuel tax concession and capital gains tax concessions. While both organisations rage against cash grants to business, they meekly demur when it comes to tens of billions worth of foregone revenue.

Treasury's determination to drive the tax/GDP ratio lower means it has been a poor guardian of the public purse. Rather than fight to rein in the cost of ballooning concessions, it has seen them as an effective, if inefficient and inequitable, way to shrink the size of the government revenue pie. The Australian public deserves better advice from the Australian public service.

If the Treasurer really wants to get the budget back into surplus, as opposed to simply wanting the smaller public sector that Treasury wants, he should not only form a high-powered Revenue Review Committee, he should include some of the big-spending departments on that committee. Rather than face savage cuts to spending, such departments would have a strong incentive to find tax loopholes that could be closed and tax concessions that provide little public benefit.

Imagine the meeting where the Health Department argued to rein in the private health insurance rebate to fund greater hospital spending or social services argued for a bigger age pension funded by reining in tax concessions for super. Under present arrangements, Treasury has policy responsibility for tax concessions, meaning that Sussan Ley and Scott Morrison are not allowed to tinker with tens of billions of dollars worth of policy that directly affects their portfolios.

But my guess is that Hockey won't create a high-powered revenue review committee and that Treasury wouldn't support one if he did. The last thing Treasury wants is spending ministers or the public at large to discover that Australia is one of the richest countries in the world, with one of the lowest levels if tax collection in the developed world. We could spend a lot more money on services, be far more generous to those in need and run a budget surplus if we wanted to.

But the simple reality is that those who lead us, and those who advise them, don't want that. That's why we won't have a revenue committee any time soon, and that's why, like a drunk looking for his keys, Hockey will likely continue to look for solutions to his "budget emergency" in the wrong spot.

Richard Denniss is executive director of The Australia Institute.