Joanne Knight

February 18, 2009

Business Out, Government In

For too many of us the political equality we once had won was meaningless in the face of economic inequality. Franklin D. Roosevelt, 1935

As the Federal Opposition snarl and gnash their teeth and ardent neoliberals sigh and shake their heads, it seems that the Rudd government is willing to reclaim the role of government as the provider of social investment. The Federal Government’s stimulus package provides long overdue funding to schools and housing, social infrastructure long neglected during the Howard years. As business is unable or unwilling to sustain its social investment with the global economic crisis, in the style of ABC Learning and Rio Tinto, it becomes clear that government has an important role to play in providing this. But not only during crises. Government’s investment in social infrastructure must be ongoing and significant and if business cannot sustain its input during bad economic times then they need to be forced to provide in the good times.

Despite pleas from the government to maintain employment, Rio Tinto abruptly closed its WA mining operations and sacked 2000 workers in spite of WA government money put into the project. Until recently the orthodoxy has been to reduce the size of government to a far smaller percentage of GDP. One argument is that governance functions can be performed by other institutions such as corporations, non-government organizations, and communities. The collapse of ABC childcare and the current Connex debacle seems to demonstrate quite clearly that the private sector has a limited role to play in the provision of public services. This is clearly the role of government. The government is finally showing some leadership in this direction but they must go further.

This package reverses the trend of the last 10 years of transferring government debt to personal debt. The government instead of expecting individuals to carry the burdens of the State is shouldering these responsibilities and ultimately the government has greater resources, particularly if it requires business to make a fair contribution. In 2005 the Senate Economics Committee found that the large current account deficit in 2004-5, which exceeded 7% for the first time, was primarily driven by household debt in housing finance. The household sector made a dramatic move between 2000 and 2005 from saving to borrowing, resulting in a large rise in household debt. In the same period, credit card debt also increased by a similar order of magnitude.

According to associate professor Steve Keen from the University of Western Sydney, Australia’s debt has grown rapidly from less than 80% of gross domestic product (GDP) in the early 1990s to now stand at almost 170% of GDP. Forecasts of rising unemployment and a slowing economy mean an increasing number of Australians will come under pressure due to problems repaying debt. And to top it off, a recent Dun & Bradstreet survey showed that many people expect to increase their level of indebtedness over coming months.

And while Australia’s level of household debt continues to increase, in common with many other nations, Australia has been running down its stock of public assets. The public investment share of GDP has declined quite dramatically from just less than 8 percent in the 1960s to under 4 percent in the 2000s. This reflects the diminishing priority given to government investment into electricity, gas, communications, infrastructure, education and health over recent decades. Numerous empirical studies have demonstrated the shift from productive to unproductive government spending negatively impacting on productive private investment. Productive government spending tends to crowd-in private investment, while unproductive provision of transfer payments for subsides and handouts crowd-out private investment. Thus, Australia-along with the US, UK and others- has insufficiently built a public regime of accumulation for long-term investment.

Government spending in Australia is the third lowest of the 30 OECD countries and our tax collection, as a per centage of GDP, is the eighth lowest in the OECD. Dr Richard Denniss argues if Australian tax rates were equal to the OECD average, tax receipts would increase by about $50 billion dollars per year. We could use that to pay for the government’s stimulus package.

The corporate tax rate has been reduced from 49 per cent in 1987 to 30 per cent in 2001. In 2008, the corporate tax rate was 21st lowest among OECD countries. While lowering the corporate tax rate may not impact on tax revenues, they do little to bolster social infrastructure. For every $1 billion spent on reducing the corporate tax rate, three quarters of it is captured by the wealthiest 20% of citizens.

Speculation and private investment have failed to deliver solid sources of revenue for public investment. As the tide turns in the coming years, we would do well to move away from the ‘masters of the universe’ mentality. It is time to repair the damage of the past years of madness and the government’s stimulus package takes a few small steps in that direction.

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