On taxation, spending and making political choices visible
By Jason Gay
A fiscal rule that limits spending according to sustainable revenue can easily be mistaken for an argument in favour of smaller government.
It is not.
There is no purely financial formula capable of deciding the proper size of the public sector. That question belongs to democracy. Australians may choose a government that provides more services and collects more tax. They may choose another that taxes less and expects individuals, families and businesses to retain greater responsibility for their own spending.
Both are legitimate political positions.
The purpose of a fiscal constitution is not to settle that argument. It is to require that the argument be honest.
Every permanent government program has a permanent cost. If government wishes to spend more year after year, there are ultimately only a small number of ways to do so. It can raise more revenue, reduce expenditure elsewhere or borrow the difference.
The first two options force the cost into the present.
The third allows some of it to be moved into the future.
That is precisely what makes borrowing so politically useful.
A government can provide a benefit today while spreading the cost among taxpayers who may never clearly connect their future interest bill with the original decision.
This does not make all borrowing illegitimate. As argued previously, there are circumstances where debt is entirely appropriate. But permanent recurrent expenditure should ordinarily be supported by permanent revenue.
If Australians want more government, Australians should be allowed to choose it.
They should also be shown its price.
Under the model proposed in these papers, the Independent Fiscal Commission would calculate the amount government can sustainably spend under existing tax settings. If a government wishes to expand beyond that limit, Parliament remains free to raise additional revenue.
The Commission would not possess a veto over a larger public sector. It would simply prevent the government from pretending that enlargement carries no financial consequence.
This distinction is central to preserving democratic legitimacy.
Unelected officials should not determine whether Australia should spend more on aged care, education or defence. They should not decide the proper tax burden. Those choices belong to voters and their representatives.
But once Parliament has chosen the revenue base, government should have to live within the financial reality that choice creates.
The same principle must apply to tax cuts.
Fiscal responsibility becomes partisan if spending increases are treated as dangerous while tax reductions are treated as free.
A permanent reduction in revenue without an equivalent reduction in expenditure creates the same fiscal gap as a permanent spending increase without new revenue. The arithmetic does not care whether the deficit was created by a popular program or a popular tax cut.
A serious fiscal framework should therefore require both sides of politics to confront the cost of their preferences.
A party promising substantial new services should explain the revenue or savings supporting them.
A party promising substantial tax reductions should explain which expenditure will fall or why the remaining fiscal position can absorb the loss.
This could change political debate in a useful way.
Australian elections often involve promises presented largely in terms of benefit. Voters are shown what they will receive, while the cost is distributed through broader Budget documents, future borrowing or taxation that may be less politically visible.
A binding fiscal envelope would make trade-offs harder to hide.
If one priority rises, another may need to fall. If government wishes to do more overall, it may need to collect more overall. If Australians want lower taxes, they may eventually need to accept fewer services.
None of these choices is automatically correct.
The value lies in making them visible.
Bracket creep complicates this principle because it can increase the tax burden without a dramatic political decision. As wages rise, taxpayers can gradually pay a larger share of income in tax even though Parliament has not explicitly legislated a higher rate. The revenue base grows, and with it the government’s sustainable spending capacity.
If that process quietly finances an expanding state, Australians may never be clearly asked whether they wanted the expansion.
For that reason, the Fiscal Commission should identify how sustainable revenue is changing. Revenue generated by economic growth should be distinguished from revenue generated by explicit tax changes and from revenue generated by bracket creep.
This is not because bracket creep must be eliminated.
It is because the growth of government should be visible.
The deeper principle is that public services are not free simply because the link between the service and the payment is indirect. Every government eventually asks citizens to surrender resources through taxation, borrowing or both.
Democracy should therefore involve not only choosing what we want government to provide, but choosing what we are prepared to pay.
A fiscal constitution would not tell Australians that government is too large.
It would tell them that government has a price.
And it would require politicians of every persuasion to put the price beside the promise.
Leave a Reply