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My 2012-13 Queensland budget

June 19, 2012

The recent Queensland budget audit showed an expected 2012-13 operating deficit of $4.9 billion (up from $4.2 billion), and proposed a range of tax increases and soft spending restraint over several years, with serious structural reform only briefly hinted at in a few sentences on page 203. We can do better.

This document shows how we can immediately return to surplus, fundamentally reform hospitals & schools, cut taxes in half, and slash regulation to get the economy booming.

The below reforms are a clear break from “business as usual” and would require brave political leadership. The spending cuts will be unpopular, especially from those people who previously received the “free” money.

However, while these reforms introduce some short-term pain, the long-term benefits are clear and significant. A more competitive hospital and school system will lead to better quality health and education. Dramatically lower taxes and fewer regulations will spur new investments and productivity growth – leading to more jobs and higher wages. And importantly, these reforms ensure the budget position is sustainable so that we do not leave a legacy of debt and deficits for future generations.

1. Immediate return to surplus

To return the budget to surplus it is necessary to reduce government spending by about $5 billion, which represents a 10 percent reduction. The below table shows how this can be achieved:

Removing climate change spending and reduce environmental spending on activities not related to water or land management. $0.3 billion
Abolish all spending on employment and innovation. These programs are command and control corporate welfare that distort the market, and should be immediately removed. This includes abolishing Tourism Queensland. $1 billion
Remove the Community Service Obligations (CSOs) for transport and energy, and replace with a simple $200 voucher per person. CSOs lack transparency, distort the market, and reduce competition. $1 billion
Abolish all spending on State-financed tertiary education. If tertiary education is effective in improving needed skills, then it will lead to higher wages, and the government does not need to be involved. If tertiary education is ineffective, then the government should not be involved. $0.7 billion
Reduce spending on community services by removing funds from multiculturalism, women’s services, ATSI services, youth services, housing, and sports and recreation. These are already covered by Federal government programs and further spending should be covered by councils and community groups. $0.5 billion
Remove most of the prevention, promotion & protection part of health services. We don’t need a “nanny state”. $0.2 billion
Remove spending on transport safety. We don’t need the government spending our money telling us to be safe. $0.2 billion
Reduce the size of the bureaucracy, excluding medical staff, teachers and police. Also, reduce public service pay across the board by 5%, including for politicians. $1 billion
Abolish the planning section of local government agency. $0.1 billion
Remove nearly all arts & culture spending $0.1 billion
TOTAL $5.1 billion

With no change in taxes and the above spending cuts, the government would change the 2012-13 budget from a $4.9 billion deficit to a $0.2 billion surplus, as shown in the table below.

ALP budget ($b) Alternative budget ($b)
Revenue 43.1 43.1
Spending 48.0 42.9
Budget balance – 4.9 0.2

2. Long-term reform: hospitals & schools

Much health and education spending now is in fact churn , where taxpayers give money to the government to then receive the same money back in subsidized and inefficient services. This churn is wasteful and unnecessary, and under this plan it will be reduced.

Instead of the current bureaucratic approach, Queensland should pursue a “community-based” approach to hospitals and schools, with total control of individual hospitals and schools being handed over to local councils or non-profit community groups.

These community schools and hospitals would be independently run, and would not receive any direct State government support. This means they would have to charge a price for their services.

Instead of subsidized services, the government would provide “hospital vouchers” to all citizens so that they can afford community hospital insurance (or equivalent), and “school vouchers” to all parents so that they can afford community school fees.

Efforts should be made to include Federal government health and schools spending into the voucher, and if this is not possible then adjustments will be made to the voucher system to control for the Federal spending. Ideally, the Federal government should hand over all responsibility for hospitals and schools to avoid wasteful and counter-productive duplication.

The voucher system should include a means-test so that government help is being directed primarily towards low-income families. Ideally, this means-test should be matched with offsetting cuts in income tax to ensure that the effective marginal tax rate (EMTR) remains unchanged.

If the Federal government refuses to provide offsetting income tax cuts, then the means-test should have a very low taper rate of only 1% to ensure that it does not significantly alter work incentives.

In the first year of operation, the voucher will fully cover the costs of community hospital insurance and community schooling, and so this will make little noticeable difference to families.

Over time, the voucher system will result in more competition between hospitals and between schools, leading to improvements in quality and reductions in costs. If the cost of hospital insurance and/or schooling falls below the amount of the voucher, then the excess money may be spent on other health or education related expenses.

3. Long-term reform: halving State taxes

The idea of the welfare state is that the government should help those who cannot help themselves. This means that as people become richer, then there should be less need for the welfare state.

It is somewhat of a paradox then that while average incomes have more than doubled over the last fifty years, the welfare state has continued to grow both at a Federal and State level. In Queensland, government spending has increased so much that we have lost the mantle of being the “low tax State”.

It is possible to slash taxes in half and once again make Queensland the low-tax State by introducing a nominal spending freeze for only two years.

This would involve some short-term pain, primarily as the amounts of the hospital and school voucher would be frozen, which could mean that some people would need to contribute to some of their own health and education costs. But given rising incomes it is appropriate for people to pay for some of their own services, and the long-term benefits more than compensate.

The budget audit predicted revenue would rise to $13.1 billion by 2014-15 with no changes. If nominal spending was frozen for two years from 2012-13 then taxes could be slashed to under $6 billion instead (~2% of Gross State Product). This means it would be possible to entirely abolish payroll tax and land tax, and significantly reduce vehicle registration fees and other government charges.

As well as lowering the cost of living, Queensland’s low tax environment would spur economic activity, drawing in additional investment that leads to more jobs and higher incomes. Instead of ever-growing welfare, we would have a cycle of ever-growing wages, lower costs, and better services.

4. Long-term reform: Reducing regulations

Many governments talk about reducing regulation, but the sad truth is that the number of regulations continues to grow, creating ever-higher costs that especially hurt small businesses. Below are five meaningful regulatory reforms that would dramatically lower regulatory costs and so further help to spur economic activity and higher wages.

Remove regulation on micro-business All government regulations should become “voluntary guidelines” for any business with fewer than five employees. Any micro-business that does not follow government guidelines must advertise that fact, but will be otherwise allowed to continue operating.
Regulatory compensation Government at all levels should be forced to pay private property holders if new regulations destroy the value of their private property. This will ensure fairness, and decrease the incentive to introduce new regulation.
Publish the costs of regulation Queensland Treasury should annually publish the “tax equivalent” costs of regulations, showing the impact on small, medium and large businesses.
Regulatory sunset clause All regulations should be modified to include an automatic sunset clause of no more than ten years. This will ensure pointless regulation is easily abandoned, while important regulations will be re-passed.
Cut anti-competitive regulations Transport, health and education are all harmed by government regulations that reduce competition. Any regulation that restricts entry or exit of new businesses should be removed. This includes allowing competitive private mini-bus companies and for-profit schools.
Solve mining regulations with private property The current impasse between mining companies and land-holders can be easily solved by returning to the market principle of strong private property rights. The “right of access” should be given to land-holders, who are then free to sell access to their land to mining companies. This does not mean that land-holders own the underground resources, but it does mean that they have to be engaged before any mining can go ahead. Voluntary agreements between mining companies and land-holders (like all voluntary agreements) tend to create win-win outcomes, ensuring that everybody is satisfied with the outcome and a fair price is paid.

5. Long-term reform: Fixing the federation

One of the biggest public policy problems is also one of the hardest to solve and the least exciting. Since federation, political power has increasingly been centralized in the hands of the Federal government, undermining competitive federalism. The growing vertical fiscal imbalance (where Federal government raises over 80% of revenue and then distribute the money to the States) means that State governments are becoming little more than administrative arms of a massive central bureaucracy.

The best way to solve VFI and give States control of their finances is to return income tax back to the States, as it was before WW2. If the States kept income taxes and the federal government kept GST then it would also be possible to decentralize all health and education spending to the States, removing all of the current unnecessary duplication.

It would once again become possible for States to compete meaningfully against each other to introduce the best public policy. This sort of competition between governments is the best defense we have against incompetent public policy, as well as allowing diversity and policy innovation.

In addition, it is perhaps worthwhile exploring the possibility of creating extra States. Australia started as a nation with six States and nearly four million people. If we had kept the same ratio to today, then we would have about 35 different States.

Smaller States would allow for the possibility of States merging their responsibilities with local councils (as exists in the ACT) which makes it possible to achieve two levels of government instead of three. Smaller States also allow for more diversity, competition between jurisdictions, and policy innovation.

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