I spent an enjoyable week visiting the Centre for Independent Studies in Sydney, and while there I was roped into drafting a short post for their regular Friday Ideas email. My post was on a recent conference paper by Griffith Economics Professor Tony Makin, my ESA Qld management committee colleague Julian Pearce, and Griffith econometrician Shyama Ratnasiri on the optimal size of government in Australia:
Cut government share of the economy
Here’s an extract from the post:
Prior to the Whitlam government of 1972-75, total Commonwealth, state and territory government spending in Australia was around 25% of GDP. In the four decades since the Whitlam government, it has been around 35%.
There is no question it would be good for the economy and taxpayers to reduce this burden.
The CIS has previously set a realistic target of reducing government spending to 30% of GDP, as part of its TARGET30 campaign. A new economic research paper presented at the recent 2018 Conference of Economists provides fresh support for this objective.
In The Optimal Size of Government in Australia, Makin, Pearce and Ratnasiri estimated the optimal size of government in Australia is around 31%. This represents the level that maximises economic growth.
The 2018 Australian Conference of Economists paper by Makin and co-authors (still to be peer reviewed and containing only preliminary results I should note) can be downloaded at this link:
The Optimal Size of Government in Australia
Note that local government spending (which I forgot to mention in my summary) is included in the figures referred to above.
What do you think are the paper’s strongest and weakest points?
Hi Nicholas, in my view, its strongest points are its review of the international data and literature on the growth of government. As for its weakest, it arguably relies too much on a single econometric equation in reaching its conclusions. It would have been good to have seen some cross-country econometric analysis in the paper.
You are very generous with your wording to suggest that 35% of GDP is “spent”. Government spending of 35% GDP would suggest a fair exchange of goods and services.
However, it is clear that an increasingly large proportion of government spending is actually waste. Government is demonstrating an inability to manage large welfare programs, consider the systematic and organised rorting of the Vet-Fee-Help program, the family daycare program, and now the NDIS and home doctor programs.
Organised crime has found an easy target in extravagant and poorly managed government programs, and the additional spending is not on goods and services, but being squandered on waste and rorting.
Unfortunately, there is no appetite for accountability. Ministers of failed programs are promoted out of the portfolio, and billions of tax-payer dollars written off. Rorters are not held to account in our legal systems, as governments are complicit in the mis-handling of the billions of tax payer dollars.
Something has to change.
Thanks Katrina. Yes alas there is a lot of rorting. At a federal level, we probably need a federal ICAC and maybe something along the lines of Nicholas Gruen’s evaluator general proposal:
At a state level, we need to at least reform the parliamentary committee system.
Thanks. Set me off thinking. It’s still a big whack of national income going on taxes.
Yes indeed. Thanks Graham.