Federal Politics

License article

More social bang for taxpayer's buck

If you had to boil it down into one sentence, economics is all about how to allocate scarce resources to maximise wellbeing. Perhaps that's why economists can seem such miserly souls. While politicians go about merrily promising lower taxes and higher spending, it's the job of economists to point out that the honey pot has a bottom.

It's a good lesson to keep in mind as this year's federal budget approaches on May 8. Budget day is not just the social event of the year for economic reporters who attend the annual lock-up in Parliament House. It is an important chance for the Treasurer to outline to taxpayers how the government is spending its valuable dollars.

Because budgets, at their heart, are also about how to allocate scarce resources: taxpayer dollars. Of course, politicians can always lift taxes to fund whatever spending they like. But in the long term this would crush economic growth and hardly improve their re-election chances.

The gold standard of budgets is to raise taxes in the least distorting way and spend them in the most welfare-enhancing way: get maximum social bang from minimum taxpayer buck.

All taxes distort economic decisions but some taxes are less bad. Taxes applied on immovable objects like land, or mineral deposits, are the most preferred by economists. Taxes on consumption, like the GST, are generally also considered OK (we all need to eat). Taxes on labour are the least preferred (people might stop working, or work less).

On the spending side of the equation, money spent by government is likely to have the biggest welfare-enhancing effect when directed to the poor. Indeed, studies have shown that while more money does make people happier, there is a certain income point beyond which it becomes very expensive to purchase additional units of happiness.


This is why government budgets in all developed world nations are redistributive - they raise from the rich to give to the poor. Alleviating poverty by skimming funds off the rich turns out to be a proven way to raise society's total stock of wellbeing.

There has been concern recently that Australia's tax system has become less progressive. The Howard government, in particular, used the proceeds of a mining boom to lower income taxes - with the biggest dollar benefit going to the more wealthy - while also lifting family payments that were not means tested.

The Rudd/Gillard government has since done more than it likes to admit to tighten up on this ''middle-class welfare'', by introducing a means test on the baby bonus, family tax benefit part B, the private health insurance rebate and pushing out the age at which people qualify for the age pension.

A paper released this week by the Australian Council of Social Services, Waste not, want not: Making room in the Budget for essential services, says Australian welfare spending is the most targeted of all developed nations. The bottom one-fifth of households by income receive over 12 times the social security payments received by the top fifth.

The biggest fat left in the federal budget, according to ACOSS, lies in a range of tax offsets and concessions that disproportionately advantage the wealthy.

The government could easily save $8 billion a year by axing poorly targeted tax breaks, including the private health insurance rebate for extras, the education tax refund and the senior Australians and mature-aged workers tax offsets.

Cutting such concessions would not only help the government return to surplus but also go a long way to funding a National Disabilities Insurance Scheme, better dental care and a more generous Newstart allowance.

Wayne Swan once railed against the idea of budgets becoming ''a mere exercise in accountancy'' rather than ''moral documents revealing our priorities''. We're about to find out.