Wednesday, September 26, 2012

Romney had a point:  shift balance from takers to makers

The recent statement by United states presidential candidate Mitt Romney that 47 per cent of Americans is dependent on government has created a media maelstrom in the US and drawn international attention, including in Australia.

While the conventional view is that the Romney statement has firmly switched the tide of American electoral sentiment back to incumbent President Barack Obama, the statement shouldn't be dismissed as the self-serving grumblings of a wealthy venture capitalist.

In fact the statement made by Romney raises serious questions concerning the fiscal sustainability of modern government.

Growth in the numbers of people receiving public service salaries, welfare payments and other government handouts, other things being equal, increases the amount of taxes that governments must forcibly acquire in order to commit to such spending.

If the growth in numbers of direct recipients of these government expenditures outstrips the numbers of people receiving their incomes from market transactions, then the tax burdens imposed on the latter will increase, perhaps by economically intolerable proportions.

Governments could also exercise the option of borrowing to fund spending enabling those people dependent upon it to maintain their upkeep, but that merely translates into tax burdens imposed sometime in the future.

As has been witnessed throughout the Western world over the past century or so, when the numbers of people reliant upon government payments continue to grow the nature of political discourse fundamentally changes.

The political discussion becomes increasingly less about what political representatives should do to uphold and extend basic liberties and freedoms, to how they should best satisfy the whims of those constituents who wish to vote for a living.

For that matter, when government benefits become a major source of income for a substantial number of people questions of handout redistribution, rather than economic growth and expanding private sector employment, become a focus for electoral contests.

Since people dependent upon government payments have their effective tax price of public services greatly diminished, a core voting bloc emerges in society pushing for extensions in the size and scope of government regardless of its economic consequences.

Given the substantial increase in the numbers of Australians dependent upon government largesse for their livelihoods, this problem ought to be discussed openly and frankly here as well.

Taking a sample of data from 1983 to 2010, which mainly coincides with the 1983 2007 era of so called ''neoliberal reform'', it is possible to build a partial but representative picture of growth in government dependency.

Public sector employment by all levels of government grew from 1.63 million people in 1983 to 1.84 million in 2010, even with government privatisation of financial, telecommunication and transportation assets during the late 1980s and 1990s.

In spite of generally prosperous economic conditions until recently the numbers of people receiving some form of welfare payment has also risen, from 2.75 million people to 4.87 million.

The numbers of people on unemployment benefits have fluctuated with changes in the business cycle, with increases in recent years as the post GFC-economic stagnation has dragged on.

However, it is the growth in the age pension (from 1.39 million to 2.16 million), disability support pension (from 220,300 to 792,600) and parenting payments (224,500 to 333,500) which have substantially driven growth in overall welfare dependency.

Combining these two sets of figures provides a total of 6.71 million people, or 30 per cent of the total population, directly dependent upon Australian governments in 2010.

This is up from 4.38 million in 1983.

While these figures only provide an indicative account of government dependency in Australian society, they highlight that this country confronts a net tax-providing ''makers'' versus net tax-consuming ''takers'' dilemma similar to that found in the United States and Europe.

Successive Intergenerational Reports released by federal Treasury show, in the absence of reforms to reduce government size, the economic and political balance risks being tipped further in favour of government dependents.

This is why the Hugo Chavez-style outbursts by Treasurer Wayne Swan against wealthy entrepreneurs in the mining sector and the chop-and-change tax and regulatory policy disposition of the government are so detrimental to Australia's economic interests.

The future prosperity of Australia hinges on more entrepreneurs and other makers selling quality goods and services to satisfied customers around the world.

By doing so they will earn profits and generate wealth.

Scaring entrepreneurs into taking their capital elsewhere or not setting up business at all, through anti-business rhetoric or policy uncertainty, will hurt the post-mining-boom economy.

And, ironically, it will deprive governments of revenue needed to fund basic protective services.

Putting limits on our economic aspirations will also reduce options for people who currently live off government handouts from finding more productive pursuits within the private sector.

We in Australia shouldn't dismiss Romney's core message to shift the balance back from takers to makers in economic and fiscal policies.

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