Eurozone v Australia: Why We Beat Them
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.