Paying tax is good and, for better government, we should pay more

On Friday, a former top econocrat did something no serving econocrat is allowed to do, and no politician is game to do: he set out the case for us to pay higher, not lower, taxes.

For years, politicians have sought our votes by promising smaller government and lower taxes. This often helped get them elected, but it hasn’t worked as promised.

They’ve reduced the size of government by privatising government-owned businesses and outsourcing the provision of many government-funded services. But though they’re always announcing tax cuts, the hidden tax of bracket creep means there’s been no real reduction in the tax we pay. Great.

The man advocating a radically different approach is Dr Mike Keating. He laid out the case for bigger government and higher taxes in a speech to the Australia Institute’s revenue summit at Parliament House in Canberra.

The pollies seeking election by promising lower taxes take it as obvious that taxation is a bad thing – a “burden” which, like all burdens, needs to be minimised.

But Keating says we should remember the purpose of taxation. It’s to pay for a wide range of services that governments provide to us either directly (education, healthcare, child care, aged care, pensions and payments) or collectively (defence, law and order, roads). Some services we get while we’re young, some when we’re middle-aged, and many when we’re old.

Keating says there’s a wide consensus among Australians about the things we expect the government to do for us. “We recognise that all Australians are entitled to basic levels of education, healthcare, income support and shelter, and that governments have a responsibility to ensure the provision of these essential services,” he says.

Recent Coalition governments promising us lower taxes always added the promise that this could be done without reducing “essential services”.

Keating says there’s now widespread acknowledgement that these services that we pay for collectively are critical to building our community and to our sense of community.

So taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that are consumed collectively. Many of the services paid for by taxation add to our quality of life.

Indeed, he says, history suggests that our demand for these services, such as education and health, tends to rise rapidly as economic growth causes our incomes to grow. They’re what economists call “superior goods”. The better off we get, the more of our income we devote to them.

The problem for governments – which politicians themselves have worsened – is the disconnect in people’s minds between our demand for government services and the taxation needed to pay for them. We refuse to join the dots.

“We want increased access to more and better services on the one hand, and less taxation on the other,” Keating says.

So, let’s stop kidding ourselves. If we want more and better services from government, we’ll have to pay for them with higher taxes, just as when we want more or better in a shop or a restaurant, we know we’ll have to pay more.

But assuming we accept that truth, why do we already want the government to be bigger and better?

One way the previous government sought to square the circle of maintaining “essential services” while cutting taxes – including next July’s stage-three tax cuts – is by underspending on those services and hoping no one would notice.

Keating has thought of no less than seven areas where there’s little doubt that we need to spend more.

First, although the previous government acted on the scandals exposed by the royal commission into aged care, and governments have spent more on childcare, both remain underfunded. What’s more, increases in the availability and quality of care services are likely to lead to higher costs because higher wages will be needed to attract the extra workers.

Second, the Albanese government’s increased spending on “social housing” (what in the olden days was called the housing commission) is widely considered to be much less than needed.

Third, federal government grants for public hospitals will probably have to grow a lot faster than presently expected to reduce excessive waiting times. And the Medicare payments to GPs are still too low, risking shortages of doctors, particularly in the country.

Fourth, federal funding for universities hardly grew in real terms over the nine years of the Coalition government, and actually fell per student. Labor will be pressured to make this up. As for vocational education and training – TAFE – the new National Skills Agreement requires the feds to cough up more.

Fifth, unemployment benefits – this week labelled JobSeeker, maybe something else next week – are very low compared with most other rich economies. And the recent leap in rents means the rent assistance paid to pensioners and others on benefits is now far too mean.

Sixth, it’s clear we’ll need to spend a lot more on the AUKUS nuclear submarines and other defence capabilities. This could increase annual defence spending by at least 1 per cent of gross domestic product over the next decade.

Finally, measures to reduce carbon emissions and to fully develop Australia’s potential as an exporter of renewable energy will almost certainly require greater funding than the government is presently planning.

The Grattan Institute estimates that if present tax arrangements aren’t changed to cover the expected additional growth in government spending, the “structural” (underlying) budget deficit will be close to 3 per cent of GDP in 10 years. Keating thinks it’s more likely to be 4 per cent – or $100 billion a year in today’s dollars.

Continuing deficits of this size would be quite unrealistic, he says. He suggests not another review of the tax system, but a major, authoritative inquiry to assess how much revenue is needed to adequately fund all government services.

When the public has a better understanding of what we’d get for our money, then maybe we’ll be more prepared to accept the need for higher taxes.

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Reach into your pocket, rise of the care economy will come at a cost

From even before the days early last century when people began leaving the farm to work in city factories, the industry structure of our economy has always been changing. In the ’80s, we saw the decline of manufacturing and the rise and rise of the service industries.

We’re probably kidding ourselves, but it seems the pace at which the economy is changing is faster than ever before. What’s certain is that change is occurring in several fields.

As explained in a part of this month’s budget papers I call Treasury’s sermon, it’s happening on at least three fronts. What gets the most attention is our transition from fossil fuels to renewable energy. Then there’s all the change coming from the digital revolution, which is working its way through many industries, with the use of artificial intelligence expected to bring much more change.

But the industry trend that’s doing the most to change how we live our lives is the rise of the “care economy”. On the surface we see childcare, disability care and aged care, but looking deeper we see nurses, allied health professionals, social workers and welfare workers. There are those who work directly with people receiving care, and an army of support workers in clinics, kitchens, laundries and cleaning stations.

By Treasury’s reckoning, the proportion of our workforce employed in the care economy has gone from 2 per cent in the ’60s to 10 per cent today. About 80 per cent of these workers are women, and more than 16 per cent of all working women work in the care economy.

Treasury offers three main reasons for this rise. Most obvious is the ageing of the population, which is greatly increasing the demand for healthcare and aged care.

Less obvious, but more significant, is what Treasury calls “a transition from informal to formal care”. In the old days, women stayed at home to look after young kids, aged parents and anyone with a disability.

But once girls became better educated, more of them wanted to put their education to work in paid employment. So young children went to childcare, oldies went off to a home and, particularly since the advent of the National Disability Insurance Scheme a decade ago, people with disabilities got more professional care.

One of the simple truths of economics is that economies are circular. On the one hand, more women wanted to go out to paid employment. On the other, this created more paid jobs for women in childcare, aged care and disability care.

As medical science advanced, there were more jobs for women in hospitals and clinics, in the allied professions as well as medicine and nursing – which now requires a degree.

Our greater understanding of the way brains develop has prompted us to begin schooling one or two years earlier, and turn childcare into “early childhood education and care”. Play-based learning became a thing. And more childcare workers needed teacher training.

Treasury’s final explanation for the inexorable rise of the care economy is “increased citizen expectations of government”. Just so. Our growing affluence has involved increased demand for services best paid for via the public purse.

All this has a lot further to go. A former government agency expected the demand for care economy workers to double over the next 25 years or so. Fine – but that says we’ll all be paying a lot more tax to cover it.

And there are other reasons the cost of care will be increasing. One is the weird notion that women should be paid as much as men. Another is that we can’t go on exploiting the motherly instincts of women by paying those in caring jobs less than those in uncaring jobs (so to speak).

One reason we can’t go on underpaying care economy workers is that they ain’t taking it any more. There are shortages of workers, and those who do sign up often don’t stay long once they see how tough the work is.

This budget includes the cost of a special, 15 per cent pay rise for aged care workers, awarded by the Fair Work Commission because their work had been undervalued. Nothing to do with the cost of living – that’s on top. Don’t think there won’t be more work-value cases elsewhere in the care economy.

Then there’s the fate of the theory that getting the care delivered by private businesses would be more efficient and so save money. Wrong. They made their profits by cutting quality.

As for the runaway cost of the NDIS, I think it’s more a matter of providers seeing the government as an easy mark. The government’s hoping to limit the cost growth to a mere 8 per cent a year – but we’ll see about that.

In recent times, much of the nationwide growth in jobs has come from the care economy. Which should be a comfort to those wondering where the jobs will come from in future. I don’t see our kids and oldies being left to the care of robots any time soon.

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Sense about improving education, before the political bulldust flies

In the looming election campaign we’ll be hearing a lot of silly, scary and self-serving stuff. Who’s better on the ukulele, ScoMo or Albo? Who’s the more “human”? Which side “won the week”?

We’ll see the content of carefully compiled “dirt files”. Each side accusing the other of hypocrisy. The other side’s policies have been/would be absolutely frightening.

Great. I can’t wait. But last week I ran across the thoughts of someone who’s had much experience in governance, but isn’t running for office. He was on about education – a topic of direct or indirect relevance to us all – but one that won’t be heard once all the shouting starts.

He’s Professor Peter Shergold, former head of the Prime Minister’s Department under John Howard, but these days chancellor of the University of Western Sydney and writer of government reports.

At every level of education – early childhood education and care, schools, universities and vocational education and training – the polite judgement on our performance is: could do better.

Shergold had many sensible things to say in a report to federal and state education ministers that lobbed only after the plague had begun.

He starts by putting education in a broader, more balanced context. “Education must prepare young people both for active citizenship in a democratic society and for purposeful engagement with the labour force,” he writes.

“This is vital at a time when trust in democratic governance and institutions is at a low level and cognitive technologies are transforming the future of work.”

School leavers don’t just need to be employable. They need to be adaptable, flexible and confident. Education must provide students with the essential attributes they require for lifelong learning in whatever fields of endeavour they may choose, he says.

The professional and applied skills they need will change significantly over their lives. The jobs they do will be transformed. Most will switch careers.

Academic achievement is important but not the sole reason for schooling. We need to focus more on preparing the whole person, no matter what career path they choose. Many senior secondary students enjoy school. Some, for a variety of reasons, just want to leave as soon as possible. Both groups need to be supported by more flexible learning.

Education will remain the foundation of a “fair go” Australia, Shergold says. Senior secondary students from disadvantaged backgrounds should be supported to ensure they can follow the same pathways available to others.

Literacy, numeracy and digital literacy should be recognised as essential skills for every student. At a time of technological transformation, when the future of work is uncertain, these attributes are more important than ever, he says.

Students must be supported to attain capabilities in these areas before they finish school. “Every young person who leaves school without them is having their economic and social future short-changed.”

All pathways through school should be delivered to the same high standard. While university will remain an aspiration for many young people, academic pathways should no longer enjoy more privileged access to school resources than apprenticeships, traineeships or other vocational education and training.

Shergold gets more specific in a report he wrote for the NSW Education Department with someone whose name seems familiar, a David Gonski. They find that vocational education and training – VET – is plagued by problems across the nation.

Skills development hasn’t received the level of government investment required, which has helped reinforce the public perception that VET is less valuable than university education. This misconception is too often instilled in students while they’re still at school.

When they move on from high school, they enter a world bifurcated between university and vocational education. Forced to choose, many opt for a uni degree, for which there are no upfront costs, rather than paying fees for certificate-level vocational education.

Partly because career advice is so poor, many parents and students believe the demand for vocationally qualified workers is in decline. This is utterly mistaken, Shergold and Gonski say.

Federal figures on skilled occupations show shortages in many trades, including mechanics, panel beaters, plumbers, electricians, bricklayers, plasterers, carpenters and cabinet-makers. A rapid rise in demand is forecast for certificate-trained workers in child care, aged care and disability care.

Get this: a “significant proportion” of uni graduates then move to VET to enhance their employability. It’s clear to me that a lot of kids who struggle through uni (with many failing to make it) would have been better going to VET.

Little wonder Shergold and Gonski want to bring universities and VET into a single system. They want much better career advice, which should be available to people throughout their working lives, including those obliged to make mid-career changes.

They want senior secondary schooling to be less obsessed with having kids direct all their efforts to maximising a single number, the Australian Tertiary Admission Rank. There are better ways for unis to select good recruits. And high schools could do more to get students started on a vocational “pathway”.

All this is worth debating in the coming weeks – but ain’t likely to be.

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Top economists think much further ahead than Morrison & Co

If Scott Morrison and Josh Frydenberg are looking for ideas about what more they could be doing to secure our economic future – after all, they’ll be seeking re-election soon enough – they could do worse than study the views of the 56 leading economists asked by the Economic Society of Australia to comment on this month’s budget.

Two points stand out. First, almost all the economists were happy to support the budget’s strategy of applying more fiscal stimulus to get unemployment below 5 per cent. They were pleased to see the government abandon its preoccupation with surpluses and debt.

As Professor Fabrizio Carmignani, of Griffith University, said, “the good thing about this budget is that it was not about repairing the deficit and debt accumulated in 2020”. Professor Sue Richardson, of Flinders University, said: “the debt and deficit mantra was never justified”.

Second, with one notable exception, the economists were critical of the government’s choice of things to spend on. The exception was its big spending on the “care economy” – aged care, childcare, disability care and mental health care – which most respondents welcomed. Indeed, quite a few thought there should have been more of it.

After that, the economists had plenty of constructive criticism of the government’s priorities. For instance, quite a number were happy to see big spending on “infrastructure”, but critical of the government’s narrow conception of what constitutes infrastructure.

Carmignani said: “there is in this budget – as in the past – an almost blind confidence in the power of investment in physical infrastructure to drive future growth and development. In fact, the future prosperity of Australia depends on innovation that requires social rather than physical infrastructures”.

Professor Gigi Foster, of the University of NSW, said: “childcare should be viewed as the social infrastructure that it is, and invested in as such. Instead, when we heard ‘infrastructure’, it was mainly code for transportation”.

So even in the area of physical infrastructure, the budget shows a lack of imagination. Professor Michael Keane, also of the University of NSW, said very little of the infrastructure money was “allocated to such urgent needs as renewable energy, climate change adaptation, environmental sustainability, water resources, etcetera. This shows a real lack of ambition.”

Richardson agrees. “The future is one of zero net greenhouse gas emissions,” she said. “The transformation of the energy, agricultural, transport and manufacturing systems that this requires is enormous, will require unprecedented levels of investment and needs to start now.“

Now that’s interesting. Historically, treasurers and their advisers have regarded the budget as the place for discussion on finances and economics, not the state of the natural environment nor the challenge of climate change.

The economy in one box, the environment in some other box. The natural environment has been seen as of such little relevance to topics such at the budget and the economy that it has barely rated a mention in the five-yearly supposed “intergenerational report”.

But that’s not how our leading economists see it. At least a dozen of them have criticised the budget’s failure to respond to the challenge of climate change. Professor Warwick McKibbin, of the Australian National University, warned that “the world is likely to be taking significant action on climate change which will substantially impact Australia’s fossil fuel exports and the future structure of the Australian economy”.

Another topic barely mentioned in the budget – one of the industries much damaged by the pandemic – was universities. Unsurprisingly, more than a dozen respondents noticed the omission. They’re self-interested, of course, but they make a good case.

Dr Leonora Risse, of RMIT University, said succinctly: “investment in the university sector [is a] generator of productivity-enhancing skills, knowledge and research”. Meanwhile, McKibbin added that “a key ingredient is an investment in human capital”.

But the academics’ concern is wider than their own patch. Risse has called for more attention to the long-running drivers of growth, such as “investment in the workforce capabilities, resourcing, wages and working conditions of high-need, high-growth sectors” such as the care economy.

Dr Michael Keating, a former top econocrat, said restoring past rates of economic growth won’t be possible without addressing the structural problems in the labour market. “This will involve much more investment in education, training and research” but “the extra money in this budget for apprentices and trainees only makes up for past cuts.”

Notice a theme emerging? Budgets should be about investment – spending money now, for payoffs to the economy later – but investment needs to be in people, not just in physical and traditional things such as roads and railways.

It’s easy to accuse academics of pontificating atop their ivory towers, but they seem able see much further into the economy’s future needs than our down-to-earth politicians.

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