Friday, September 06, 2013

Voters like to spend other people's money

Taxation, spending and regulation are the key functions of government.

The frameworks of law, defence and policing, accounting for around 10 per cent of national income, are crucial to wellbeing.

But government absorbs another 25 per cent of national income in social spending on health, education and welfare, plus more on industry subsidies, foreign aid and the like.

Election campaigns are mainly about politicians responding to voter preferences.

Over the past 100 years, we have seen the government's share within national income tripling and the number of regulations increasing twelvefold.

Hence, rather than diminishing the taxation and regulatory load, judged by outcomes, voters prefer spending other people's money and regulating other citizens' activities.

Government spending has to be financed by taxes or debt (which is taxation of future incomes).

Although increased spending on some social initiatives — especially education — has offsetting productivity benefits, for the most part, additional social expenditures impose costs by displacing the production of other goods and services.

Regulations also impose costs because they prevent the lowest cost production and cause delays.

Hence, beyond some basic level that has long since been exceeded, taxes and spending, and also regulations, reduce national output.

This is first, because of administrative costs, and secondly because people change their behaviour both to avoid taxes and regulations and to benefit from them.

If living standards are not to suffer, raising the government footprint therefore requires compensatory gains in private sector productivity output.

Julia Gillard took pride in the new regulations her government introduced.  But recent surveys demonstrate delays in new resource developments from tougher regulations, especially those covering environmental requirements and the need to engage in protracted negotiations with unions.

In spite of a growing taxation and regulatory burden, Australian productivity and real incomes doubled over the past 30 years.

But progress has slowed.

In fact, adjusted for investment increases and hours worked, productivity has gone backwards during the past decade.

Several countries have attempted to arrest the continuous march of new regulations.

One approach, which has had limited success, requires a regulation be removed for every new one introduced.

Another, followed in Australia and elsewhere, again with limited success, is to ''sunset'' regulations, requiring them to be re-enacted.

If elected, the Coalition proposes to devote two Parliamentary sitting days a year to repealing regulations.  This is grossly inadequate as it still means 70 sitting days when additional regulations can be introduced.

But it could be useful combined with proposals to link public servants' bonuses to deregulation.

Some disciplines on government spending are in place through credit agencies' monitoring and with voters' permanent dislike of taxation.  But these have been insufficient to roll back the size of government because of the infinite calls on government for greater spending.

More spending on education and disabilities have been promised in the present campaign.

To combat the bloated size of government politicians should recognise, as a rule of thumb, that every new spend and new regulation, no matter how attractive superficially, diminishes productivity and average living standards.

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