Australia’s most senior bureaucrat during the period of its biggest economic reforms, has warned against cutting taxes if Australia is to avoid harsh austerity measures such as those forced on Greece and other debt-laden economies.
As the Turnbull government pursues tax cuts for companies and prepares to propose personal tax cuts in its forthcoming budget, the former secretary of the Department of Prime Minister and Cabinet in the 1990s, Michael Keating, said Australia was among the lowest taxed of all OECD countries, and could not afford to go lower.
He dismissed Treasury's growth forecasts for its company tax cut as "infinitesimally small" amounting to "margin of error stuff" that few economic modellers would take seriously over 20-and 30-year time spans.
The government's projections of demand for its spending programs in the Intergenerational Report showed, despite its achievement of a small surplus in 2012, worsening structural deficits that were unlikely to be addressed if the constant refrain from politicians was that Australia is a high-tax nation, he said.
The former top economic boffin further warned that high levels of household indebtedness meant future Australian governments would be forced to borrow from foreigners rather than from their own citizens, creating the danger of sharp corrective measures being ordered by creditors, such as drastic spending cuts.
Citing research released today by the progressive Australia Institute, he said the high-tax claim was simply untrue when "total revenue by all governments (national, state, local) as a proportion of GDP" was compared on a country-by-country basis.
He said countries like New Zealand and Canada with which we like to measure ourselves have much higher revenue to GDP and although tax revenue is fractionally lower in the US, that country is lumbered with a staggeringly high deficit approaching 8 per cent of GDP.
The study found that Australia's tax-to-GDP ratio had been higher during the entire Howard era than it is now, and that Australia is currently the eighth lowest taxing economy out of 35 OECD member countries.
"Our tax debates focus on the rates of particular taxes, rarely taking a step back and asking overall, are we raising enough money to fund the kind of country we want," said Australia Institute executive director, Ben Oquist.
"IMF head Christine Legarde has specifically warned of a potential race to the bottom on taxes that would ultimately see government revenue denuded across all countries."
Acknowledging the problem, Dr Keating said recent governments appeared to have concluded that tough decisions would not be valued by voters, even though past governments had been successful after enacting difficult reforms.
"What we've got, dare I say it, is failure of leadership, and nothing could be more indicative of failure of leadership, than handing out tax cuts that can't be afforded," he said.
With the Turnbull government pursuing generous company tax cuts from 30 per cent to 25 and unspecified income tax reductions in its May Budget, Dr Keating, said political short-termism added to the danger of governments funding ordinary operating expenses through borrowings.
Dr Keating, who also headed up the Finance Department in the 1980s, has joined nearly 50 economists, academics, and other public figures in calling for a re-think on tax policy.
"You really got to take a view on what's the outlook for expenditure and then you have to raise the taxation to pay for it," he said.
"The dominance of the ‘small government’ philosophy has led to enduring shortages of revenue, even in the good years, and especially recently."
“A sound taxation system that provides the necessary revenue is critical to our future well-being and the growth in our economic capacity.”
The signatories say if anything, Australia is moving in the wrong direction with the current tax-to-GDP ratio of 28.2 per cent falling well below the OECD average of 34.4 per cent.
“We call on all political leaders to reject a tax cuts race to the bottom, and instead focus on tackling tax avoidance, closing tax loopholes, and unfair tax concessions in order to build a stronger revenue base for the nation,” the signatories said.
Mr Turnbull began hinting at personal tax relief in a speech to the Business Council of Australia in November, telling corporates frustrated by the roadblock on company tax: "I am actively working with the Treasurer and my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus".
"Our marginal tax rates are high. Bracket creep is a constant challenge that needs to be addressed," he said.
"Higher taxes penalise people who are trying to get ahead."