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Sunday, March 02, 2003

Boring Choices

Commenting on what he describes as the "boring" subject of Australian fiscal policy, John Quiggin writes:

[I]n the Australian system it is the Commonwealth that collects all the taxes and the States that provide all the services that matter. This 'vertical fiscal imbalance' means that Commonwealth governments have an inbuilt bias towards cutting taxes. The States have an inbuilt bias towards spending money, but since the Commonwealth has the fiscal whip hand, it's Commonwealth biases that matter. This is one structural reason why both taxes and public spending are too low in Australia, compared to what the public would prefer, what economic analysis would imply is desirable and what other developed countries actually do."

The first reason (what the public would prefer) may be valid; after all, I am not an expert on Australian politics. The latter two "structural reasons", however, are both questionable.

What does economic analysis objectively say about the optimum size of taxation and government spending? Granted, a larger role in the economy gives the state greater freedom to influence it through fiscal policy, procurement and the like. It is, however, a legitimate politcal choice that a government choose not to influence the economy that way. In this sense the size of the state remains a politcal decision, not an economic one. States can even choose to give up discretionary fiscal policy; a Business Council of Australia paper four years ago proposed a mechanism for an independent fiscal policy. This may or may not be a good idea, but it's still a choice.

The last point, regarding what happends in other developed countries, is also suspect. One does not have to do what other countries do--the whole debate about war in Iraq makes this clear. Making this point makes it seem that homogenisation of spending levels is good in itself, not because it brings wider benefits. The differential in spending between Ausralia and the rest of the OECD is again a political choice.

Choices about the level of taxes and public spending are fundamentally about what the public would and would not want, and about what political parties would argue for or against. Economists can aid this process, but, ultimately (and sometimes to thir dismay--ask a public choice theorist) the decisions are not up to them. In making these arguments Quiggin decribes more about his preferred choices than what is generally "desireable".

I have already confessed my ignorance regarding Australia, but one could speculate that the taxation and spending were deliberately split up in Australia's constitution to achieve the present-day low-taxation result. Perhaps even Quiggin's first argument can be countered through revealed preference--Australians say they want higher taxation and spending, but keep voting for governments that deliver the opposite. Are any of these arguments right? I don't know.