The Dog’s Bollocks

Truth is like a dog’s bollocks – pretty obvious if you care to look.

Eight myths about tax and public debt

For those who missed it, this is from Fred Argy’s recent paper Australia’s Fiscal Straight Jacket published by the Centre for Policy Development, a new public interest think tank dedicated to promoting alternative voices in Australia’s public debate. The Friedmanites will not be best pleased with Fred, who was a high level Federal policy adviser from the 1970s to early 1990s. Since retiring, he has written extensively on the interaction between social and economic issues. He is currently a Visiting Fellow at the Australian National University, Canberra, and is a fellow of the Centre for Policy Development.

The Howard Government and Rudd’s Labor opposition have both embraced the notion that in general tax rates and public debt levels should not increase. This fiscal strategy is lazy and timid policy, not good governance It is impeding the Government’s capacity to meet the nation’s infrastructure needs, forcing it to adopt financing options that are economically less efficient and denying Australians a genuine, well informed choice on the appropriate balance between public and private goods. The fiscal straightjacket is based on several myths about the impact of taxation and government borrowing.

Myth

Reality

1. Higher taxes are bad for economic growth The economic impact of taxes depends on the initial tax level, how the revenue is raised, and how productively the money is spent. There is no correlation between the size of government and economic performance.
2. A public debt freeze is the key to sound public finance Net public debt is not a true measure of the strength of a government’s balance sheet – instead the focus should be on net public worth – assets minus liabilities.
3. The private sector is always a more efficient owner-manager of infrastructure than government The benefits of private design, construction, and operation of infrastructure can be captured without private ownership. The private sector often demands excessive premiums to take on political risk – and when privatised services fail, governments must still step in. Insufficient competition can also mean that the costs of monopoly regulation outweigh the benefits of private participation.
4. Shifting from government borrowing to private equity helps ease pressure on inflation and interest rates When productive resources of the economy are fully stretched, any new large scale debt-financed investment runs the risk of generating inflation but this risk is not reduced by transferring financing responsibilities to the private sector. In either case, inflationary pressures can be avoided by judicious timing of the investment or by discouraging or deferring other types of national spending. Government debt does not affect the international cost of credit.
5. If a particular infrastructure project cannot be sensibly financed by the private sector, revenue can fill the gap It is unfair to ask today’s taxpayers to cover the entire cost of investmentsthat will yield returns far into the future. Current revenue should primarily be used to pay for current expenses.
6. There is no evidence that the fiscal straightjacket has impeded infrastructure investment Public investment is lower today as a proportion of GDP than it was 15 years ago, and has been dropping faster in Australia than in comparable countries. The greatest decline (in both economic and social infrastructure) has been in forms of investment which do not lend themselves to private equity funding.
7. Running structural fiscal surpluses is good for national productivity By holding back investment in high-return areas such as education, health, early childhood, training, transport, etc, our obsession with surpluses may actually be holding back Australia’s productivity growth.
8. The community prefers lower taxes and does not like the idea of governments borrowing Opinion polls show a clear preference for increased spending on health and education over tax cuts. The community is only uneasy about government borrowing because they have been told it is financially irresponsible by both major parties – effective leadership could put an end to this misconception.
Advertisements

Filed under: Economics, Federal Election 2007, Politics

5 Responses

  1. Stephan says:

    I have a simple moral argument against the idea that governments should be spending more. It’s not their money! “Democracy” doesn’t make it fair, why should the minority give up their cash just because the majority has decided it?

    All this talk of 8 myths is a red herring for the most part, when we refer to government investment in things, we’re basically talking about money that has been taken from the taxpayer. Consequently, if the project fails, EVERYONE loses. In the private world, only the people who chose to take that project on lose out.

    Doesn’t it make a lot more sense to you that we stop just embarking on a project when 51% of the people who’s money it will use want to go ahead with it? Each and every person is the one best qualified to make the final call with their own economic decisions, who are you to argue anything otherwise?

  2. slim says:

    As I said, Friedmanites would not be pleased.

    “Each and every person is the one best qualified to make the final call with their own economic decisions”

    Their own economic decisions, yes. Taxation is our money and that’s why sufficient of it needs to be spent on society’s economic decisions.

    As an individual I can’t build a road from my coastal town to the city, but government can and has. The local public school was created by and is maintained by public money. While you may argue that an individual voucher system could replace the school’s funding, a voucher system would not have built the school in the first instance.

    I would also argue that if 51% of the people don’t want taxation at all then that goes against the wishes of the 49% who do. In an adversarial two party democracy it’s always going to be winner takes all. Much better to have multi-member electorates with preferential voting giving a better representation of the diversity of electoral sentiments. But I guess many are attracted to the idea of three year terms of absolute executive government – as long as it’s your team winning.

    I don’t believe that our society can be maintained by the sum of purely individual spending decisions and I am happy for some of my taxation being spent to help maintain healthy communities other than the one I live in. If nothing else, it will stop the dispossessed in marginal local economies coming and taking over mine.

  3. Stephan says:

    “Taxation is our money and that’s why sufficient of it needs to be spent on society’s economic decisions.”

    You’re trying to collectivise it, and assert that it’s owned by the collective. Which is false, because we believe in the idea of private property, that money is owned by the individuals, not the collective.

    “As an individual I can’t build a road from my coastal town to the city, but government can and has.”

    Roads are perfectly doable in a private system. Even the trains in England were initially privately created. Come on, if the market can provide train tracks, why couldn’t it do roads too? You could do on the road tolls, or GPS tolls, or even some arrangement where all the people who live on that road get together and agree upon a solution. Or you could have roads maintained by the businesses they lead to, think of now, where shopping malls build carparks.

    “I would also argue that if 51% of the people don’t want taxation at all then that goes against the wishes of the 49% who do.”

    The fallacy with this reasoning is, the 49% have no right to the money of the 51%. Nor do the 51% have the right to the money of the 49%.

    “I don’t believe that our society can be maintained by the sum of purely individual spending decisions”

    Well let me suggest a website for you, it may just change your life, if you give it a real chance. http://www.freedomainradio.com – check out the podcasts

  4. slim says:

    Yes there is a collective element to this. We are a society, not just a collection of self-interested individuals. This is at the heart of the left-right polarity of our political system.

    Free-market theory may be fine as an ideology, but no society has ever operated on its principles alone. Friedmanism has been influencing economic management for a generation now and has failed to deliver what it promised and is incapable of dealing with many pressing social and global issues. People are becoming disenchanted with it and looking again to more collective approaches.

  5. Stephan says:

    “We are a society, not just a collection of self-interested individuals. This is at the heart of the left-right polarity of our political system.”

    Yes, and what kind of society approves of violence to accomplish its goals? And yet everything the government does is via violence or the threat of it.

    Left-right is a false dichotomy, you will find that I am neither left nor right wing. I am a free marketeer, but I also believe in social freedoms such as drug freedom and gay marriage etc.

    As for no society ever having existed based on free market theory, sorry to burst your bubble: http://www.ozarkia.net/bill/anarchism/faq.html#part18

    But even if no society had ever existed in the past, that is not to say we should not move towards one like it.

    Friedman was only partially correct, I don’t subscribe to all of his views, I think you’ll find a better example to be Murray Rothbard. And if you thought our society has actually been following Friedman-like goals over the past generation, think again. Our government has not cut taxes significantly, it also spends a lot of money.

    For an example of what “Friedmanism” can do, see Estonia. http://www.foreignpolicy.com/story/cms.php?story_id=3995&page=0

    “Milton Friedman would be at home in Estonia. That’s because the small former Soviet republic has put many of the late Nobel Prize-winning economist’s ideas to the test. The result? Estonia, having shaken itself free from its communist-era shackles, may now qualify as the first Baltic Tiger; it debuts this year at number 10 in the index.

    In keeping with Friedman’s free-market philosophy, the country’s government has moved aggressively to open itself up to the outside world. For all practical purposes, Estonia has no corporate income tax, and shareholder dividends are subject to a simple flat tax. Bureaucracy isn’t a problem, either; the government just steps aside to let investors do their thing. The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Additionally, the government places no restrictions on foreign ownership of real estate, which has fueled a property investment boom among overseas buyers.”

    And that’s not even the fully correct way! If we had true free markets, this would surely have only been an even better result.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

The Dog’s Bollocks

What they say

The Dog's Bollocks: "Bollocks" is one of my favourite words, and this is now one of my favourite blogs and I've only been reading it for five minutes. – John Surname

This is the person who tried to analyse Hayek. This is actually a person who needs a shrink. – JC

Shut up slim. You’re an idiot.
Just you stay honest and keep that thinking cap on. – GMB

Insightful perspectives on politics and discussion of matters epistemological? I’m sold! - Bruce

Add to Technorati Favorites

Flickr Photos

Scan-130524-0020c

Scan-130524-0020b

Scan-130524-0020a

More Photos
%d bloggers like this: