Over-spending and over-taxing problems coincide with us falling from the fourth most competitive economy to the 25^th! What’s going on?

In a speech today, former Treasurer Peter Costello will make the point that we have over-spending and over-taxing problems coinciding with us falling from the fourth most competitive economy in 2004 (behind US, Singapore, and Canada) to now being at number 25. This fall is partly explained by a bloating public service sector.

Costello warns that younger Australians will bear the burden, making up for these budgetary and anti-productivity problems by paying far too much tax. “Our prospects have declined. This is the legacy we are leaving for the young,” he explains.

The Australian’s Matt Cranston had early access to Costello’s speech, which spells it out that “the Albanese government is ‘softening up’ young Australians for tax hikes to pay for its unsustainable largesse amid a rapidly widening chasm between spending growth and tax take.”

Here are some of the main points Cranston gleaned from the Costello speech:

1. Tax increases are coming to highest government spending as a percentage of GDP in 40 years, except for the Covid years.
2. Government spending per person in constant dollar terms has grown by about 32% (about 2% a year since 2007 on average) to $26,299.
3. “Twenty years ago, we had no net debt. Today net debt is just under $20,000 per man, woman, child and baby,” Costello calculated.
4. Institute of Public Affairs’ Kevin You has shown that since 2000, government spending has increased by 165% in real dollar terms, while private sector investment and net exports have ­ increased by only 40%.

What this implies is that the government sector has ‘crowded out’ the private sector. Another way of saying this is that the private sector has been so disincentivised that it has reduced investing, and the government sector has blown out to keep the economy growing.

With the capital gains tax discount likely to be reduced in the upcoming budget in May, it makes sense to wonder why we’ve needed government spending to grow and taxes to rise.

The best answer lies in our productivity problem. Productivity increases production and income while reducing the costs of achieving this, so it not only makes us wealthier, but it also reduces inflation.

Economically speaking, productivity is ‘magic pudding’ but being magical it takes a lot of expertise to conjure it up.

And it’s why we have too high inflation and why interest rates are rising here. In contrast, in the US, UK and other similar economies, rates are falling.