Market Watch

  • Date:01 Oct 2007
  • Type:CompanyDirectorMagazine
Government is big business in a modern economy, but these days more so through taxation than production. Phil Ruthven reports.

The business of government

In the fiscal year ended in June 2007, the revenue of Australia’s three tiers of government was $506 billion or 17.2 per cent of the nation’s total revenue of $2.95 trillion.

Of this government revenue, $313 billion was taxation and $193 billion was generated via Government Business Enterprises (GBEs) – such as electricity authorities and water boards – and general government entities such as schools, universities and hospitals.

There was a time when government business revenue went close to matching tax revenue. However, the privatisation of businesses such as the Commonwealth Bank, state banks, Qantas, Telstra, some utilities (especially in Victoria) and many others, meant that rising taxes had relegated the remaining businesses to 38 per cent of all government revenue, heading down to one third.

Nevertheless, government plays a significant role in a number of Australia’s 17 industry divisions as Figure 1 reveals.

Clearly, the Government Administration & Defence industry division must be 100 per cent government by definition. But once, also 100 per cent government owned, was the Utilities industry division (now 68 per cent) and the Communications industry (now just 25 per cent). Education remains the second most government dominated industry division at 79 per cent. Still significant, despite some privatisation are Personal & Other Services (42 per cent, due largely to the police and prison industry components) and Health (37 per cent). Transport has dropped to 19 per cent government, but was once more than double that share when Qantas was a government business enterprise, ANL was a significant overseas shipping line and local passenger transport (trams, buses and rail) was exclusively government in the public transport sector.

In income rather than revenue terms, government generated some $350 billion in F2007 or 33.6 per cent of GDP. Of this 33.6 per cent, 30 per cent was taxation, the other 3.6 per cent being the profit of GBEs and the surpluses of general government businesses. So, governments are more about taxation and its distribution these days rather than being a major producer. Its production role might contribute 38 per cent of all government revenue, but it contributes only 11 per cent of its income.

With some exceptions, government has historically been an inefficient producer with high prices (unless subsidised), with low productivity and poor service. Indeed, the overwhelming majority of all monopolies in the 20th Century were government monopolies, giving no choice to consumers across a wide range of needs. So, government is better out of production and concentrating on vision, welfare, defence, legislation and administration. This is a worldwide trend anyway.

Only our state governments, captive to outdated ideologies, persist with such monopolies in areas such as utilities and public transport. And, it shows in terms of water shortages, inadequate rail services, sub-optimal health services and other shortcomings. The Federal and local government tiers are far more enlightened and consumer-oriented and have largely exited the production arena.

If taxation is now the main source of government revenue, how do we compare with other developed nations, and are taxes increasing or decreasing as a share of GDP?

As it turns out, Australia is the third lowest taxed nation in the OECD along with Switzerland and Ireland – also on 30 per cent of GDP in 2007 – as we are. Only the USA and Japan are lower, at 25 per cent of GDP, but both these nations are running horrific government deficits, so the level is artificially and unsustainably low. The OECD average is around 36 per cent of GDP, but some Scandinavian countries are around the 50 per cent mark.

Our corporate taxes, on the other hand, are in the middle of the OECD ladder at 53 per cent of net profit before tax. Such taxes include income tax, payroll tax, superannuation and/or social contributions, GST, sales taxes and others (for example, FBT and Resources Rent Tax). Our GST rate is very low and our income taxes are also low. It is the other taxes on corporations that take us up to the middle of the OECD ladder.

Our taxation had been rising as a share of GDP until recently, as Figure 2 shows.

We had reached a level of 31.5 per cent of GDP, but are now down to 30 per cent. However, given the challenges of an ageing community, increasing pressure for ‘free’ health services and other demands, it may not be easy or even possible to resist increases in the next few decades.

Taxes have risen by 50 per cent as a share of GDP over the past 47 years – from 20 per cent of GDP to 30 per cent. On the other hand, corporate taxes – including income taxes, payroll taxes and FBT – have doubled to 7.2 per cent of GDP. To some extent, rising profitability of corporations in Australia over the past decade, long overdue in terms of world best practice, explains the rise from six per cent to seven per cent of GDP shown in Figure 2.

Of course, if other taxes such as superannuation, RRT and others (but excluding GST) are added, then there has been a trebling of corporate taxes as a share of GDP over the past half century. Clearly, successive governments have seen the business world as an easier mark than individuals and households and a more efficient gatherer of taxes for government.

With all this money – coupled with policies, legislation and management – which side of Federal politics has proven to be the better economic manager?

Figure 3 reveals an interesting mix of performance measures.

The table covers the two unusually long periods of government by the ALP and the Coalition over the past quarter century.

The Coalition has performed better in virtually all measures, significantly so in areas of confidence levels, investment growth, productivity, lower interest rates and full employment.

Whether that counts in the coming election is an interesting question. Or are the deciding issues outside economic management and in the arena of industrial relations, the continuing divide between rich and poor, and other areas?

Phil Ruthven is the founder and non-executive chairman of leading strategic business information provider, IBISWorld.