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Eurozone v Australia: Why We Beat Them

November 29, 2011

Contrasting the budgets of the Eurozone states and Australia is timely. Nobody has drawn attention to this particular contrast: the size of the public sector in Australia (Federal, State and local government ) as a proportion of the economy has been around 33 percent; in Europe it ranges from 45 percent to 55 percent.

The reason for this difference is that Australia has selective or means-tested welfare compared with universal welfare. In fact, when I gave a speech to a business audience on the subject of the big things Australia got right, I nominated this as one – among a number of – commanding public policies that has served Australia well. In this speech, reproduced in my book Thoughtlines (Penguin Books Australia 2002) I said:

[One of the decisions Australia] got absolutely right was to steer away from universal welfare schemes in favour of targeted support to those in need. In Sweden the State sector is 54 per cent of the economy; in Germany, 46 per cent; in France 51 per cent – in each case this sector is so large because they have a universal welfare model. We, by contrast, have always veered towards selective or discriminating welfare, despite Dr Evatt in 1954 promising to do away with means-testing pensions. But even in the 1990s, the Labor Government in Canberra is boasting in its budget papers that its ‘priorities have moved away from universal provision of benefits towards means-tested benefits targeted to this most in need’.

As a result, Government spending in the Australian economy is at 32.5 per cent – that is local, State and federal – compared with 44 per cent in Canada and those very high percentages in the European countries. We have got Government spending, in short, at the same level as a percentage of our economy as it is in the United States and that gives us the flexibility appropriate to a regional power in a competitive world.

This has made it possible for Australian State and Federal governments to pursue policies of debt retirement. In the 10 years I was Premier, for example, my government became the first in the state’s history to retire rather than add to debt. We retired $10 billion of debt (while spending $61 billion on new infrastructure). Comparable policies had also been applied at the Federal level. The Hawke and Keating governments did the hard task of winding back spending as a proportion of the economy; this was continued under Howard, although Costello allowed middle-class welfare and churning of tax dollars to intrude in later Coalition budgets.

But debt retirement rather than European-style debt accrual has been possible because, as a rule, we means-test. The result is more budget flexibility even in recessions than the big spending, big borrowing economies will ever manage.

6 Comments
  1. November 29, 2011 10:07 pm

    It is good that we means test benefits. It is a pity that the interaction of means testing and the progressive income tax system leads to some quite perverse effective marginal income tax rates. My own EMTR hit nearly 80% at one point after our third child. I think a more integrated approach along the lines of a negative income tax or a taxable social wage (along with abolition of the minimum wage) is the way to go. However I have no trouble acknowledging that we have struck a better balance than most of Europe. It would seem that they are about to underline that point.

  2. scott permalink
    November 30, 2011 3:01 am

    I think you’re kinda missing the point. It’s not the size of the debt, it’s how you can pay it back. The US debt situation is massively worse then the Europeans, but they have the flexibility to choose various options to repay it, and the Europeans in the Eurozone do not.

    Australia’s in a healthy situation, but that’s because, once again, we’re the ‘lucky country’. If Australia didn’t have the minerals boom we’d be in a bigger hole then Greece.

    • Bob Carr permalink
      November 30, 2011 6:16 am

      Yes, it is debt as a proportion of the economy and govt spending as a prop of the economy that I am talking about. Your capacity to pay it off is somewhat influenced by the existing level of your taxes and your rating. It’s better to have low levels.

    • Pemtin permalink
      November 30, 2011 10:22 am

      I do not understand why the US has “various options to repay it” (their debt) I understood that because they had an international reserve currency the dollar was in demand and US government bond can be issued at a low relative rate to European sovereign bonds. There is also the issue that China wants to keep the US afloat as it is such a large customer for its exports and is content for the time being to invest at these low rates. In the medium to long term none of these factors inspire confidence in the US fiscal situation.

  3. scott permalink
    December 1, 2011 4:40 am

    @Pemtin,

    The US can induce inflation and devalue their currency, and the nations in the Eurozone can not do this. Paul Krugman’s blog is the ‘go to’ blog on this issue. He’s pointed out in the last few days the economics of the various Nordic countries. Finland, in the Euro, is starting to face higher rates on their bonds vis-a-vis Denmark and Sweden, even though they have very similar economic conditions- but the Finns are trapped in the Euro and don’t have the devaluation option.

    In the medium to long term we’d all better start learning Mandarin, (I for one welcome our new Chinese overlords) but in the short term the lesson is that the Euro turned out to be a spectacularly bad idea.

  4. December 6, 2011 11:20 am

    Wow, I didn’t realise the actual percentages between Australia and Europe public sectors. I did have an understanding that taxes where higher and public sector services supposedly more. This is interesting although in the United States the public sector is smaller than ours and their economy is struggling. There is perhaps a sort of equilibrium?

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