Tag Archives: state budget

State Tax Reform: A South Australian Perspective

In 2014, I was part of an unusual campaign – to call for increases in state taxes. The SACOSS “Without Taxes, Vital Services Disappear” campaign was a response to the social service sector constantly being told that there was no money to fund the various services and policies to address poverty and disadvantage. This was true in that budgets were in deficit, so the state government was already spending more money than it was getting in through taxes, grants and other income.

Ten years on, the situation has changed. The last state budget brought in an operating surplus for 2023-24 and forecast surpluses across the forward estimates. In this sense, there is money to expand expenditure on addressing poverty and disadvantage, so the issue would seem to be political priority rather than needing to raise taxes and revenue. However, the tax questions remain crucial because, despite the budget surpluses, state debt is increasing and the interest payments on that debt are undermining the state budget.

Opportunity Cost

As SACOSS noted in its analysis of the last state budget, the South Australian government will spend more on interest payments on debt than it will on the Department of Human Services – the department responsible for supporting the most disadvantaged South Australians. The graph below shows the increase interest payments, both in absolute terms and as a proportion of state expenditure.

Graph showing state budget interest expenses going from under 2.25% of state expenditure in 2021-22 to a projected 6.7% in 2027-28.
Source: SA State Budget Papers

The interest payments are growing because of a combination of higher interest rates, and increasing state debt driven by infrastructure spending. Conventional economics would suggest that going in to debt to fund infrastructure is not a problem, and the government argues that the debt is not a problem as the debt-revenue ratio is under control. However, this has always struck me as an apples and oranges comparison. It says little about the capacity to repay the debt or the impact of the debt on the government.

The more important ratio is the cost of debt servicing to total revenue. The red line in the graph above shows that this is increasing as interest rates account for more of the state budget. This inevitably has an opportunity cost as that money is not available to be spent on government services.

This is why the level of debt and deficit matters – not because it shows mismanagement or over-spending, or a need for austerity, but because it constrains the operations of government and their ability to support citizens.

And underlying this is a concern about equality. As I have noted previously, governments have a choice in financing their activity as they can tax or to borrow from those with surplus cash. Taxation represents a flow from those with resources to the common good, whereas borrowing creates a flow from the common treasury to those with capital resources to loan money.

This is not to say that there should never be state debt, but simply to recognise that it comes at a cost – an opportunity cost and a cost to equality. But in light of the rapidly increasing impact on the state budget, there is a fair argument now that we need to raise more state revenue.

Tax Reform Opportunity?

Unfortunately, the record for tax reform in South Australia, at least in terms of increasing taxes or introducing new taxes, is not promising.

The last time there was a broad public review of SA state taxes was in 2015, when the then Labor government released a discussion paper canvassing a range of reform options. The highest profile reform, a proposal to replace conveyance duties with a broad-based property tax – including on owner-occupied housing, was met with a media outcry about a “tax on the family home” (which ignored the fact that conveyance duties are also a tax on the family home). The proposal was ruled out in a matter of days – even before the formal consultation process closed.

Overall, despite the Treasurer publicly welcoming the SACOSS submission (which proposed raising revenue), the 2015 review resulted in the abolition of a range of taxes and decreases in other taxes totalling some $670m in lost revenue over four years to 2018-19 – all in the name of improving the business environment.

Outside of the 2015 review, the record is no more encouraging:

Panel of 8 men speaking at a forum organised by SA Best to oppose tax reform to closing avoidance loophole in land tax aggregation.
Adelaide’s “men of property” at a forum opposing
closing loopholes in land tax aggregation, August 2019.

Of course, over the years there have been changes to rates and thresholds of existing taxes, but these are generally in the direction of tax “relief” rather than revenue raising.

There are two notable exceptions where new revenue-raising taxes have been introduced over the last 20 years. There was the 2017 introduction of the Foreign Ownership Surcharge – a 7% extra stamp duty for foreign owners purchasing real estate, and the point of consumption wagering tax introduced in the 2016-17 state budget. The former had been explicitly rejected in the government’s response to the State Tax Review a year earlier, while the later was flagged but not immediately implemented.

These two examples are telling – not so much because they show that new revenue measures are possible, but because they show the importance of the politics. By definition, the Foreign Ownership Surcharge had no resident vested interests opposed (because they were overseas), while the point-of-consumption wagering tax came at a time when the sports betting industry’s peak body and political lobby was in disarray (and the big companies did not want to risk their own brands in defending registration in tax havens).

Not exactly repeatable examples as a basis for a campaign strategy or a hope of reform.

A similar story could probably be told at the federal level from the experience of mining super-profits taxes, Labor’s 2019 mild capital gains and negative gearing reforms, and more generally in relation to the Henry Tax Review – comprehensive and steeped in Treasury’s market logic and legitimacy, but still largely gathering dust.

Conclusion

The reality is that it is always much easier to oppose a new tax than to pass one. A new or increased tax creates a vested interest in opposition, and they can always find or invent a deserving case study for whom the tax is unfair, or tell us how the tax will cripple the economy. By contrast, the vested interests who will benefit from the tax (the general public who will benefit from government revenue and spending) are too amorphous or too far removed from the specific proposal too mobilise in support.

I think the point of the story above is not to abandon all hope of tax reform and of raising sufficient revenue to fund vital services, but rather to see it as a political exercise rather than a policy one. It will require a long-term shift in public thinking and a mobilisation of political power, not simply a well-researched policy or a polite proposal. It will require political resources to oppose the vested interests, and an appropriate vehicle to drive the change.

In that sense, tax reform is both a part of a bigger project of social democratic renewal and dependent on that project.

Do we ever really know what is in federal or state budgets?

The federal and state budgets are key moments in the Australian political calendar and can have significant impacts on the lives of many people. After all, budgets are the definitive statements of government priorities, not just what they say they are interested in, but what they are actually spending money on – or not. However, trying to get a grip on what is in a budget, especially in the mania of budget day, is difficult or almost impossible – even for economically literate and experienced stakeholders. My experience is largely with the South Australian state budget, but I don’t know that it is very different in other states or for the federal budget.

For many who are playing the game, budget day starts in the “budget lock-up”. In the hours before the Treasurer formally introduces the budget to parliament, the media and selected stakeholders are locked in a room and given access to the budget papers so that they can make better informed commentary on the budget. It is daunting to go in to the lock up and be confronted by the stack of budget papers – literally thousands of pages to navigate in just a few hours – without the aid of phones, computers or the usual tools of analysis.

In my work at SACOSS, I have done at least 10 state budgets and a few budget lock-ups. In the lead up, I run workshops for first-timers to help them find their way around the papers, or least to give them a pointer to where to start and where to find things. But this knowledge does not help me much with the budget day analysis.

State Budget title page showing topics of all budget papers.

Budget Day

My political economy approach wants to focus on the macro-economic underpinnings of the budget and what is happening at the aggregate level, but the reality is that the lock-up and the budget day is dominated by “budget measures” – the new initiatives announced and costed in the budget. There is of course a media and political focus on the macro-economic bottom line – surplus or deficit, but there is little analysis of revenue or expenditure trends, or changing expenditure patterns within the budget. Faced with a mountain of government media releases and budget documents spruiking new spending, the media races to summarise these for their audience, while stakeholders in the lock-up cram to find out if there are new measures relevant to them before they walk out to give their two -minute summary to a media scrum.

Realistically, this focus on budget measures is probably all that is possible on the day, but the commentary model is fundamentally flawed. This is not just because there is little time for a proper analysis beyond the headline new measures, but also because it inevitably makes the budget discussion about “what’s in it for me/us”. This is self-interest hard-wired into the budget commentary, when broader perspectives are required.

Further, the focus on budget measures can be misleading.

Measures in the SA State Budget

Take for instance the most recent South Australian state budget. The government media releases and budget papers trumpeted an additional $1.8bn in health spending over five years from 2022-23, and there were 18 new health initiatives announced in the Budget Measures Statement. Similarly, there were 9 new measures in human services costing $110m in 2023-24 (net of the Commonwealth government contribution to the Energy Bill Relief Plan).

These sound like significant investments in health and human services and were highlighted as such in media reporting. But after the media had gone and all the expenditure data could be analysed, in particular adjusting the dollar values in the budget papers for inflation, a different picture emerged.

Despite the new initiatives, both health and human services departments saw their funding decrease from the current (2022-23) year to the 2023-24 budget year – and in real terms the expenditure declined over the forward estimates. This was partly because the expenditure in those departments (and a range of others) increased markedly in 2022-23 with inflation providing extra revenues and costs. So the 2023-24 decrease was a readjustment from an inflated highpoint, but the decline over the forward estimates is also a function of indexation of departmental funding not keeping pace with inflation, plus the hangover of older “operational savings” targets which reduce departments’ base level expenditure.

These long-term expenditure cuts stand in stark contrast to the impression of massively increased expenditure created by the budget day highlighting of new measures.

Agency Statements

Four of nine volumes of the SA Budget Papers are agency statements – detailed statements of expenditure, targets and performance of each government department. These should be a wealth of knowledge and interest to stakeholders, but they are not consistent across departments or through time, or even have a long enough financial time frame to enable a decent analysis after a couple of days – let alone in the couple of hours of the media cycle.

For instance, in the detail of Budget Paper 4, Volume 1, there was a projected rise in the number of children in out-of-home care in the coming year, which could be seen as a failure of the family support system. In Volume 3 there was a transfer of a sub-program out of Wellbeing SA that left the flagship preventive health unit as a small blip with less than 1% of the department’s funding. Later in the same volume, we find that the spending on Youth Justice in Human Services will decrease despite a projected increase in the number of kids in the system. These are just a few items captured in SACOSS’ extended Budget Analysis. However, this analysis takes days, and even then, the document is dominated by new budget measures. It is actually hard to find this analysis amid summaries of government programs and verbage.

A week is not enough time to properly analyse the budget, yet the window for public commentary is only hours. But it is not simply about time – it is also about who/what defines the terrain of the political debate (and how we cooperate/resist).

Tricky Measures

And all the above, is without even considering the politically difficulty of explaining in a short sound byte that, while the government’s signature energy bill relief plan is really important and welcome, they are wasting around one-quarter of the massive expenditure on households who probably don’t have problems with their energy bills, while failing to assist renters on a minimum wage who, unless they have kids, get no relief – no matter how big their energy bills are. Simply saying “some people are missing out” plays into populist politics of middle-class interest, but it is very hard to put the full analysis while also ensuring that the importance of the scheme overall is not lost in the midst of a budget scrum. And in this instance, we had the details in advance – it is even more impossible if confronted with a similar initiative for the first time in the budget lock-up).

Reflections

This post is not about the South Australian state budget, or the merits or otherwise of the budget measures referred to above. It is about how we approach political economic commentary – and how the structures of information provision and media cycles shape and limit the discourse around what is a fundamental process for the distribution of income and wealth in our society.

At the big picture level, the budget debate and our response raise longstanding issues around political power – from Gramsci’s 1920s analysis of political/cultural hegemonic power to Lakoff’s 21st century focus on the importance of framing (and elephants). The power to define the debate is fundamental, but contestable – though in this instance I suspect we are more entrapped than contesting.

But the issues go way beyond a government budget. They are replicated in the big challenges of whether and how we can talk about the wholesale changes necessary to address climate change or the massive, systemic inequalities which have arisen over the past 20-30 years. Such change will be almost impossible if our key political debates are conducted one measure at a time within a narrative of how each measure impacts me or my group (with a subtext that nobody can ever be worse off).

At the more local level, it is about how we make best use of a window of couple of hours a year when a large number of people are paying attention to public policy? How can we get beyond the spin, hold governments to account, and make arguments for progressive change. I confess, after 10 state budget cycles, I am not sure I am close to working this out – but I suspect it is less about the content analysis and more about changing the way we engage in the budget process.