Various Arguments Regarding Australias Revenue versus Spending Position - Case Study Example

Running Head: “AUSTRALIA DOES NOT HAVE A REVENUE PROBLEM” “Australia does not have a Revenue Problem – It has a Spending Problem” Introduction In recent times, Scott Morrison – who is the treasurer of the Commonwealth of Australia, was one of the people who argued that “Australia does not have a revenue problem”, and instead suggested that the country “has a spending problem” (Grudnoff, 2015). This view is driven by the notion that Australia has adequate revenue but faces a problem when it comes to spending the revenue prudently. Others, like John Fraser who is Australia’s Treasury secretary, are of the view that Australia has economic problems on two fronts: spending and revenue (Hutchens, 2016). Still, there are others like Cassandra Goldie – chairman of the Australian Council of Social Service (ACOSS), who have suggested that Australia has a revenue problem (“Does Australia have a revenue problem”, 2014), meaning that the country gets less revenue than its expenditure. The different views given by different people regarding the state of Australia’s economy make it difficult for one to tell the exact position of the country’s economy. This essay will explore the different arguments and give an opinion as to whether Australia has a revenue problem or a spending problem. Various arguments regarding Australia’s revenue versus spending position According to various newspaper articles, the treasurer of the Commonwealth of Australia, Scott Morrison, suggested that Australia has a spending problem and not a revenue problem (Grudnoff, 2015; Jericho, 2015). Based on this point of view, it is argued that Australia has a problem in terms of its budget in that the country is spending more than the revenue that it gets (Jericho, 2015, para. 1-2). There are several points to support this notion. To start with, former Treasurer of Australia, Joe Hockey who served between September 2013 and September 2015, noted in an interview in February 2015 that Australia was spending $100 million per day more than it was collecting in revenue (Stewart, 2015). While noting that such a level of spending was unsustainable, Hockey also added that Australia was spending approximately $40 million per day as part of the interest on the debt that the country had by that time (Stewart, 2015). Yet this was not the first time that the former treasurer of Australia was alluding to the fact that Australia’s expenditure exceeds its revenue collection. Earlier on, Hockey had made similar statements in interviews while supporting the position of the Australian government that there was need to implement cuts on spending so as to reduce its deficit (Stewart, 2015). Evidence that Australia is spending more than the revenue that it collects can also be seen when one looks at historical figures. Data from Trading Economics (2016) shows that since in 2002, Australia’s government spending has increased almost steadily to the current period (2016). As figure 1 shows, the government’s spending grew from about 5000 Australian dollars in 2002 to about 7500 Australian dollars in 2016. Figure 1: Australia government spending, 2002 to 2016 Source: Trading Economics (2016) The level of the Australian government’s spending can be better understood by comparing expenditure with Australia’s gross domestic product (GDP). According to Stewart (2015), in the period between 2002 and 2016, spending has increased by 1 per cent of the country’s GDP while revenue has decreased by 1.5 percent. As a matter of fact, in 2002, Australia’s budget was in balance since revenue and spending were both 25 per cent of the country’s GDP (Murphy, 2015, para 8). However, the situation has changed in that currently, Australia’s spending is 26 per cent of GDP while revenue stands at 23.5 percent of GDP (Murphy, 2015, para. 9). There are various reasons why Australia is spending more than it collects as revenue. To start with, it has been suggested that in the past years, Australia experienced a boom in resources, which enabled the government to pay off debts but led to a situation whereby Australian households went into even deeper debt (McTaggart, Findlay & Parkin, 2013). Thus, the situation has been such that the debt burden on Australians has increased. Further, over-borrowing and overspending by the government has made matters even worse (McTaggart et al., 2013). This point is reinforced by another point that was noted earlier in the essay that Australia is spending about $40 million per day as interest on the debts that the country has, as noted by Stewart (2015). The notion that Australia’s problem lies with spending rather than revenue is also highlighted in a document by the Liberal Party of Australia (2013). In the document, the Liberal Party argued that the Labour government had no economic plan, and that all the government thought was the answer to every problem was “more spending and more taxes” (Liberal Party of Australia, 2013, p. 12). The same source further notes that “Australia has been living beyond its means, recklessly spending more than it earns”. Based on this argument and the supporting evidence that was analysed earlier, it can be said that in deed, Australia has a spending problem and not a revenue problem. Another point of view regarding Australia’s economy is that the country has a revenue problem, as noted by ACOSS chairman, Cassandra Goldie. (“Does Australia have a revenue problem”, 2014). Goldie takes the view that Australia has low revenue because the country has one of the lowest tax bases among the Organisation for Economic Co-operation and Development (OECD) countries. Thus, Goldie thinks that Australia should increase its taxation rate in order to get more revenue. Existing data show that Australia is indeed a relatively low tax country. For instance, in 2011, Australia’s tax revenue accounted for 26.5 per cent of the country’s GDP (“Does Australia have a revenue problem”, 2014). As well, in the same year, Australia’s tax rate was significantly lower than the OECD average of 34.1%. Further, only four countries, Korea (25.9%), the USA (24%), Chile (21.2%) and Mexico (19.7%) had a tax revenue base lower than Australia’s 26.5 per cent. However, according to the ABC, although Australia charges lower taxes compared to most OECD countries, the country’s government spending has also been on the rise, and the trend is projected to continue (“Does Australia have a revenue problem”, 2014). This suggests that spending, and not revenue, could largely be the problem that Australia faces. Another opinion regarding Australia’s economy is that of Australia’s Treasury secretary, John Fraser, that the country has “a spending and a revenue problem” (Hutchens, 2016). In particular, Fraser contested the assertion by Treasurer Scott Morrison that Australia does not have a revenue problem, noting that a successive drop in tax revenue has been the main cause of each budget reduction since 2014. As such, it was projected that in 2016, Australia would face yet another year characterised by reduced growth, lower than projected tax receipts, as well as lower income resulting from decreasing prices of commodities (Hutchens, 2016). The issue of declining commodity prices is an important one because the reduction in bulk commodity prices has reduced the growth of household incomes, profits earned by companies, and government revenue (Gorajek & Rees, 2015, p. 31). The fall in prices has been associated with a reduction in mining investment, and by reducing the increase in aggregate demand, has limited the capacity of the non-mining businesses to grow (Gorajek & Rees, 2015, p. 31). The decline in commodity prices in particular has had a significant impact on Australia’s economy. This has been experienced in the prices of commodities such as iron ore, thermal ore and coking ore – which Australia produces in large quantities. The decline in prices is therefore likely to have had a major impact on Australia’s revenue since export of bulk commodities accounted for more than 30 per cent of the country’s export revenue in recent years (Gorajek & Rees, 2015, p. 31). Therefore, looking at the three arguments (whether Australia has a spending problem, a revenue problem or both), it is not easy to agree or disagree that “Australia does not have a revenue problem – it has a spending problem”. This because although Australia’s spending has increased over the years, there is also evidence that the country’s revenue has decreased over the recent years. It is therefore safer to say that the country has “a spending and a revenue problem” as suggested by Treasury secretary John Fraser. Conclusion Australia has both a spending problem and a revenue problem. The spending problem has been caused by the country’s increased spending which is considerably more than the revenue that the country has. Spending particularly increased when there was a boom in commodity prices that enabled Australia to pay off its debts, but at the same time, the country increased its level of borrowing. The over-borrowing and overspending constitute a spending problem that the country currently has to grapple with. Along the same line, the recent decline in commodity prices has reduced Australia’s export revenue and also adversely affected other industries in the country. The resultant limited capacity of the mining industry and other industries has thus meant that Australia has not been able to get as much revenue as it used to get in the previous years through taxation. Therefore, it is not prudent to agree or disagree that “Australia does not have a revenue problem – it has a spending problem”; instead, it safer to say that the country has a problem in terms of both revenue and spending. References Does Australia have a revenue problem, as ACOSS chief executive Cassandra Goldie claims? (2014, May 8). ABC. Retrieved from http://www.abc.net.au/news/2014-05-08/does-australia-have-a-revenue-problem/5420474 Gorajek, A., & Rees, D. (2015, September). Lower bulk commodity prices and their effect on economic activity. Reserve Bank of Australia Bulletin, 31-38. Retrieved from http://www.rba.gov.au/publications/bulletin/2015/sep/pdf/bu-0915-4.pdf Grudnoff, M. (2015, September 25). Morrison says spending, not revenue, is the problem - sound familiar? ABC. Retrieved from http://www.abc.net.au/news/2015-09-25/grudnoff-its-still-a-revenue-problem-scott-morrison/6805084 Hutchens, G. (2016, January 29). Treasury secretary John Fraser: Australia has a spending and a revenue problem. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/federal-politics/political-news/treasury-secretary-john-fraser-australia-has-a-spending-and-a-revenue-problem-20160128-gmgj11.html Jericho, G. (2016, March 2). Is Morrison right about a spending problem after all? ABC. Retrieved from http://www.abc.net.au/news/2016-03-03/jericho-is-morrison-right-about-a-spending-problem-after-all/7212844 Liberal Party of Australia. (2013). Our plan: Real solutions for all Australians. Retrieved from https://books.google.co.ke/books?id=TNAej7uqkVsC&pg=PA12&dq=why+australia+has+a+spending+problem&hl=en&sa=X&redir_esc=y#v=onepage&q=why%20australia%20has%20a%20spending%20problem&f=false McTaggart, D., Findlay, C., & Parkin, M. (2013). Economics. Frenchs Forest, NSW: Pearson Australia Murphy, K. (2015, September 23). Scott Morrison: Australia has a spending problem, not a revenue problem. The Guardian. Retrieved from http://www.theguardian.com/australia-news/2015/sep/23/scott-morrison-australia-has-a-spending-problem-not-a-revenue-problem Stewart, M. (2015, February 13). Fact check: Is Australia spending over $100m a day more than collected in revenue? The Conversation. Retrieved from http://theconversation.com/factcheck-is-australia-spending-over-100m-a-day-more-than-collected-in-revenue-37172 Trading Economics. (2016). Australia government spending. Retrieved from http://www.tradingeconomics.com/australia/government-spending Read More