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thank you very much Ebony and thank to the Australian Institute for the opportunity to give this talk um let me say a starting point for any discussion of public policy should be the purpose of that policy it's only after agreeing on that purpose that we can then begin to analyze the effectiveness of the policy in achieving its purpose now to me that seems pretty obvious doesn't it but in the case of Taxation that is not the way most discussion proceeds instead the starting point is typically that taxation is a burden with underlying assumption that this burden must be minimized thus over the last decade the distinguishing feature of the governing coalition's tax policy was that setting up a limit for re the for its Revenue equivalent 23.9% of GDP no real attempt was ever made to justify this upper limit it was just an arbitrary assertion and I suggest the new labor government is not much different while labor has no explicit Revenue Target and while it's generally sympathetic to the various demands for better Services labor insists that its responses must be limited by what can be financed by by much the same taxes as in the past but in this talk I want to argue for a fundamentally different approach to taxation instead of setting an arbitrary limit to taxation my starting point is to consider the purpose of Taxation and that purpose is of course to pay for a range of services that governments either provide themselves directly which or which they are expected to at least partially Finance but even if we agree in principle the purpose of Taxation is to fund government services and assistance we then need to agree on what services the government the government should be responsible for and who should pay reaching such an agreement is not always proved easy in the past historically the role of the state and its service respons responsibilities have evolved with major differences between different political parties and different philosophies originally the only people who had the power to determine the role of the state were Property Owners consequently the state's role was essentially limited to the protection of property rights this in turn meant that taxation was only required to pay for the defense of the realm and the justice system but with the spread of democracy and Universal voting the demands on the state inevitably increased for a long time after the introduction of universal suffrage the responsibilities of the state were contested issue in most of the advanced democracies conservatives could always promise to reduce taxes by refusing to fund some services or limiting entitlements to assistance but post the second world war there was a general agreement in most of the developed countries to expand the role of the state in terms of income support and health and education what's sometimes called the Advent of the welfare state in particular the UN Declaration of Human Rights which which was promulgated immediately after the second world war that declaration asserted that and I quote everyone has the right to a stand of living adequate for their health and well-being of himself and of his family including food clothing housing and medical care and necessary social services and the right to Security in the event of unemployment sickness disability widowhood old age or other lack of livelihood in circumstances Beyond his control end quote that's the UN Declaration of Human Rights now this un declaration both reflected and encouraged a new consensus about the expansion in the role of the modern State nevertheless the speed and extent of this transformation and the role of the state was debated for the next 30 or more years today however I think there is a large amount of consensus concerning the role of the state and its expenditure responsibilities we recognize that all Australian are entitled to basic levels of Education Health Care income support and shelter and that governments have a responsibility to ensure the provision of these essential Services furthermore there's now widespread acknowledgement that these Services financed collectively are critical to building our community and our sense of community indeed as the Great American jurist Oliver Wendel h said and I quote I like to pay taxes in this way I buy civilization end quote in other words 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 collectively consumed moreover many of these Services paid for by TA by taxation add to our quality of life and history suggests that a demand for these services such as health and education tends to rise relatively fast as our incomes increase over time through economic growth and everything I've said so far I think was reinforced by the three politicians we heard earlier on the role of the state and and its role in providing Services the for governments however is that the present disconnect in the public mind between people's demand for services and the taxation to pay for them in effect we're schizophrenic or we have a split personality we want to increase access to more and better services on the one hand we want less taxation on the other and we don't see it's a contradiction but the response to this dilemma cannot lie in cutting expens expenditures by reducing government responsibilities most obviously the last such attempt by an Australian government to roll back some responsibilities was the new Abott government's first budget in 2014 where the only person who doesn't seem to have repented was the then Treasurer Joe hocky but the reality was that the popular reaction against these savings measures were so strong that the government over R ruled Joe hocky I imagine and quickly withdrew them following that debate I suggested Coalition governments were not prepared to incur the wroth of the electorate by seriously reducing government responsibilities the Coalition had learned its lesson and did not challenge the public consensus on the range of service and assistance that governments were expected to provide instead the Coalition relied on stealth by underfunding many program programs to achieve its budget targets but even with that underfunding the Coalition could not achieve its budget Targets in its last budget before the impact of coid that's 20189 where after that you could argue the budgets were distorted but in that last budget in 201819 total payments were 24 a half% of GDP and that's significantly more than the coalition's revenue ceiling of 23.9% of GDP nevertheless even if we're largely in agreement on the role of the state and its service responsibilities the alesi government does not appear to consider that pres present tax revenues are inadequate to finance those responsibilities or at least they won't acknowledge that they're inadequate thus the recently released intergenerational report projects that if the government's existing policies are maintained payments will increase over the next 10 years from 24.8% of GDP to 26.6% in 20 3233 total receipts are projected to increase from 25% of GDP in 2223 26.3% in 20 3334 the net impact of these increases in expenditure and revenue is the budget deficit will be below 1% of GDP for most of the next 10 years and falling but it'll then start growing well to GDP from the mid uh 2030s onwards I'd like to suggest however that this projected budget deficit May well be optimistic the intergeneration reports projections assume that productivity will increase an average rate of 1.2% and that's much faster than over the last 10 years from 2012 to 2022 when the average annual rate of productivity growth was only half a percent half percent compared 1.2% furthermore the slowdown in productivity was common to just about every developed economy the and suggests that you know weather can be reversed when it's such a common feature probably reflecting a slow down technological change it's very questionable it could be reversed and of course if productivity growth is slower than projected then budget Revenue will be less and the deficit will be larger than projected in the government's intergenerational report nevertheless the tone of the intergenerational report and the associated government statements impli that the government's not concerned by its projected deficit and the risk that it could be even higher the clear inference is that the albanesi government consist considers that present tax tax arrangements are adequate to cover the cost of its existing policies and I emphasize its existing policies but the problem then is that those existing Pro expenditure policies are effectively governed by the existing taxation Arrangements thus service provision at present has been limited to what can be accommodated by those existing taxation Arrangements unfortunately a good reason to doubt that this level of service provision is adequate including most notably in the following areas of service provision many of which have been referred to in earlier discussion but I'll go through them again first while the government's responded to the Royal commission into Age Care and expanded access to child care it's arguable that both remain undef funded in addition the increase in the availability and quality of care services is likely to lead to a rise in their cost because of the wage increases required to attract the necessary numbers of Staff second the government has all increased the H funding for social housing but again this extra funding is widely considered to be much less than what is needed we had some eloquent references to that earlier third Australian government Hospital funding is projected to grow over the next four years at an average annual rate which is 1% faster than over the previous nine years under the Coalition that faster increase is I think to be welcomed but it's questionable whether that will be sufficient to reduce the waiting times that are presently excessively long similarly the funding for Primary Health C Health primary health care services and Labor's latest budget includes additional funding for a range of measures to strengthen Medicare as as recommended by that task force but the Medicare rebate is still very low risking a growing shortage of GPS particularly in lowincome and Rural regions where the patients can't afford large gap payments fourth over the nine years of the coalition government real funding for tertiary education hardly increased and that meant it fell per student over the next four years under labor this funding is projected to increase at an a average annual rate of 3.8% in nominal terms that rate of increase effectively means that labor is planning not to restore the past Cuts in real funding per student in higher education and that real funding per student may even fall a little bit further while in the case of vet or vocational education and train to spell that the Almani government has already acknowledged that its existing policies were inadequate since the release of the intergenerational report this week the government released a new skill National skills agreement where the federal government will contribute an annual average of2 A5 billion dollar this is significantly higher than the uh average of $1.6 billion per year under the previous policy and Al that and thus add to the projected budget deficit and there a variation already of the existing policies in the budget fifth Australia's level of income support for unemployed people is very low compared to most developed economies similarly rent assistance should be a priority especially given the recent rises in rents sixth the deterioration in International Security means that an increase in defense spending on foreign aid is likely to be needed defense experts argue that to accommodate the cost of the orcus nuclear submarines without jeopardizing other defense capabilities the defense budget will need to increase by at least 1% of GDP over the next uh decade or so in addition foreign aid has been seriously underfunded for a long time in 20 2223 uh that's very recently Australia's overseas development assistance was 0.2% of gross national income that's down from 0.33% under the Gill Gillard government a decade ago and similarly well below the oecd average of 0.32% of national income it's only 2third of the sort of standard realistically I'd suggest our diplomatic effort to improve our security uh has to be increased of course obviously but will will also require a dramatic and significant lift in foreign aid seventh action to reduce carbon emissions and to fully develop Australia's potential as an alternative source of uh energy will certainly require greater funding than has presently be provided under existing policies as Senator David poock elaborated on in his talk so after making a modest allowance for this additional spending in response to these various demands The gron Institute came to the conclusion that the structural budget deficit will be close to 3% of GDP in 10 years time if present tax Arrangements continue to prevail my own personal assessment is that the government meets public expectations for adequate services and income support then unless there is some offsetting action to reduce some other expenditures or to increase taxation the budget deficit will be closer to 4% of GDP furthermore I think that trying to finance government service provision by increasing budget deficits and borrowing is quite unrealistic the budget balance should always be determined by the need to offset the difference between private savings and investment in Australia it's likely this difference will require a balanc budget or even a small Surplus Whenever there is full employment and of course that's the aim of policy to keep us at full employment however before arguing for higher taxes the other alternative would be to reduce some expenditures I want to insist however that major savings would require policy changes that will reduce services and I doubt as I've already made clear the willingness of governments to make such policy changes to reduce Services less controversial are savings from improving program efficiency and incoming governments often promise that well obviously any such opportunity should be invested in investigated including the use of Consultants I doubt that much can be expected from any efficiency reviews and I'll say that with some experience as six years as head of the Department of Finance um in this first budget the albanesi government did find expenditure savings equivalent to half a percent of GDP but I want to suggest that's not a lot when we need 4% of GDP and presumably the these were the easiest savings and even then they included some modest policy changes they weren't just from efficiency so that reinforces the doubts that much more can be done to reduce budget outlays without significant policy changes to reduce some service or assistance just as as side referring to Senator Barbara pook's remarks about consultant I share her Appo you know that I share her view that the use of consultan has been appalling but as she put it the public service will need to be strengthened and so my rough guess off the top of my head was you'd be lucky to get a quarter percent of GDP savings if you limited the ReUse of consultants and turning to the policy changes which is the only way to get significant savings I estimate that 2third of Australian government expenditures relate to entitlement programs where the entitlement is specified in the legislation or alternatively they represent very high priorities such as defense or public hospitals and the administrative costs of the entitlement programs are negligible so efficiency gains cannot be expected there while after a decade of underfunding by Coalition governments I doubt that there's much in the way of savings from increased efficiency that can be achieved in other high priority programs um remembering also that a lot of them had efficiency dividends applied to them so that still leaves a third of Australian government expenditure where potential savings might be easier however the other the aggregate expending on these other programs was already projected in the October 22 2022 budget to fall at an average annual rate of 7.8% % and that's in nominal terms so the real fall might be even bigger and that suggests to me at least that further Savings in these programs would be very difficult too the one obvious exception is government investment in new infrastructure where the vast majority of pro projects have been agreed by governments without any evaluation but the reason for that is probably because the politics of infrastructure inv M overrides what governments expect would be a negative evaluation and that's why they don't have one in any event while a more disciplined approach to infrastructure investment should be welcomed this is still unlikely to result in major budget savings the total expenditure by the Australian government on road and rail transport represents only 2% of of the stran government's total budget outlays so even Haring that investment in infrast in Road rail transport will not be anywhere near enough to make up the shortfall in other program expenditures I've got no doubt that conservatives will disagree and continue to assert that they can lower taxes by reducing government outlays I think they should be pushed to say where but they won't say where because they know they can't such claims that taxes can be lower should therefore not be taken seriously ever the other argument that conservatives will employ in favor of lower taxes is it will accelerate economic growth these supporters of low taxation typically argue that tax cuts will incentivize people and businesses indeed it's not unknown for some politicians to assert that tax cuts will increase our economic growth growth sufficiently to cover the cost of the services that we demand the conservative government in the UK recently argued that way well they got rid of her but she yeah they this trust certainly areu that and I I AC accept that we can all think of specific taxes that if they are levied at a high rate they will change Behavior that's the intention of taxes on cigarettes and carbon and charges on congestion but the empirical evidence shows that there's no correlation whatsoever between overall levels of Taxation and a country's economic growth rate many high taxing countries in northern Europe for example have a higher growth rate in their per capita GDP than low taxing countries such as America similarly the drop in the Australian income tax rates in the 1980s was not associated with any increase in employment participation or productivity growth and Australia is already one of the lowest taxing countries among the developed nations of the oecd instead what really matters is what a country does with its taxation Revenue if it's spent wisely on functions such as research and development Education and Training health and infrastructure then this taxation can actually increase the nation's economic capacity for example that's why even within the same country uh such as the USA the economic performance of Massachusetts has always been better than that of Mississippi although Mississippi has lower tax rates so even if Australia increased its taxation Revenue by as much as another 4% of GDP as I've suggested is needed I contend that that would not harm economic growth growth taxation in Australia would still only be raising about the same amount of Revenue relative to GDP as the oecd average and Australian taxation would still be lower than in Canada and the UK and well below the average of the 17 Euro countries so how do we change the political debate which been touched on earlier today already I think in short the case for increased taxation right now in Australia depends upon establishing that existing government policies will not adequately fund the true cost of providing necessary services and assistance to the needy but how do we get that message across and hopefully thus change the political debate in favor of popular support for increased taxation fundamentally I suggest we need to improve the link in the public public mind between its demand for services and the taxes necessary to pay for them ideally the government would admit the challenges inadequately financing the provision of essential Services the aim would then be to set the scene for a fullscale independent public review of the funding required for adequate service provision this review could also build upon the findings of other expert uh reviews such as the I Royal commissions the Medicare task force the economic inclusion advisory committee the women's economic equality committee and the defense for structure review and the various follow-up defense reviews that have been since commissioned the aim of this review of uh how much is necessary to fund uh Services would be to achieve an informed assessment and debate about that range the range and scale of the services to be provided and the cost once that desired amount of P Des once that amount of desired public expenditure has been authoritatively established the government would then be on much stronger ground to argue that that amount of Revenue should determine the amount of Taxation Revenue that therefore needs to be raised hopefully this authoritative estimate of how much revenue is really needed will then shift the national conversation away from demands for lower taxes to a discussion about how best to raise that required Revenue now I don't have a lot to contribute to the discussion about new or change Revenue sources to me the critical issue is to get agreement on the need for more Revenue how that additional Revenue has obtained is for me at least a secondary consideration also I fly acknowledge that others are more expert than I am about how best to change the tax mix indeed probably the best starting point for this discussion about the tax mix is still the expert Henry report written a decade ago but nevertheless I'm going to offer a few thoughts um first a high priority would be to rely more on those taxes which improve efficiency such as a carbon tax congestion charging and substituting a land for stamp Duty second Australia raises relatively little from its GST compared to other countries it would be possible and arguably desirable to raise more by a combination of broadening the GST tax base and raising the GST tax rate third resource rent tax so that the community shares some of the super profits that mining companies can make due to fortuitous circumstances run the effort their own effort or initiative fourth the avoidance of a company Tax has become an industry as I said I'm not an expert but I urge close consideration of Ross G's proposal to substitute a tax on corporate cash flows for the present company Tax fifth loopholes in the personal income tax system such as an inadequate rate of capital gains Taxation and negative gearing should similarly be closed Sixth and finally we need a more progressive income tax rate scale the starting point should be to at least adjust the stage three tax cats but a full scale review of the of the rate scales would be better as things presently stand if we combine the three stages of the previous government's tax reform package and I think you should rather than just focus on stage three that you know was introduced as a total package then modeling by the Parliamentary budget office shows that in 20 2425 a huge 64% of the total cost of the package goes the top income quinal that's top 20% of people lodging in income tax return 20% of the total cost goes to the fourth quintal but less than the third to the mid quinol and almost nothing to the bottom two quinols furthermore projection of this tax package shows that because of bracket creep if not if no changes are made by 20331 the lower four quintals of tax payers by income will have a higher average tax rate than they had in 20178 before the package was introduced those in the second and third quintals and that's low to Middle income earners well they will face the bit largest increases of about 4 percentage points in their average tax rate by contrast the average tax tax rate for those people in the top quintile will still be slightly lower this shift to a less progressive income tax system is inequitable and will be counterproductive in a society where inequality has already increased and is a primary cause of economic stagnation on the other hand not it's it's not hard to think of good ways to raise the additional Revenue that will'll need to sustain a decent civilized society so now to sum up there is ample evidence that government services and assistance in Australia are presently underfunded and service provision is therefore inadequate the only way to fix this is to increase the amount of Taxation Revenue but this will require an important change in government policies which are found on almost no significant change to taxes and while the government seems sympathetic to many of the demands for improve improved services it's most unlikely to change its tax policies without popular support so we need to change the public debate the public needs to overcome its present schizophrenia schizophrenia and accept that you can't have adequate service provision without paying more taxes ingly my proposal is an authoritative review and assessment of how much revenue is needed to adequately fund all government services when the public has a better understanding of what they will get for their money and how much is needed then hopefully they'll be more prepared to accept the need for increased tax ratees thank you thanks for watching and a very special thank you to all our supporters who 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