26. The Consequences Of Reformism And The Size Of Government
From 'The Australian Achievement' by M Cooray (1996)

Figures and indicators provide some perspective on the growth of government. Public sector outlays as a percentage of GDP in 1985 were 43.9%. This meant that 43.9% of the expenditure in the economy came from government. This represents a 30% increase over the last ten years. Australia is no longer a land of private enterprise. The percentage of public sector employees in Australia as compared to other countries is informative. In Australia, 25.4% of employees are in the public sector. The figures for other countries are: United Kingdom 21.7%; Canada 18%; USA 16.7%; Germany 14.9% and Japan 6.6%.

Legislation in the modern age is more often than not directed at the implementation of government policy. As such the extent of legislative activity constitutes a reliable indication of the expansion of government. In the period 1966-80, Australian legislatures (Commonwealth and State) passed 12,612 statutes and the executive branches made a staggering 25,986 sets of subordinate legislation (regulations, rules, orders etc) under powers delegated to them by parliament. This constituted a 40 per cent increase in primary legislation and a 62 per cent increase in subordinate legislation over the statistics of the previous decade. A majority of these enactments were regulatory and hence intrusive upon private rights and freedoms.

Another leading indicator is the extent to which governments have appropriated personal incomes and national resources for their own purposes. The welfare concern has always been a key feature in government policy in Australia. Yet until 1966 the tax burden on the public remained tolerable with the increases being quite gradual. In the 20 year period 1966 to 1986, government expropriation of private wealth became double that of the entire period dating back to federation. During the same period, the numbers of people employed by government out of public funds increased by 800,000.

The Commonwealth was established in 1901. It took 75 years for federal government spending to reach $20 million a year (including the Whitlam spending spree — an era of thoughtless extravagance). By 1982, only six years later government spending had jumped to over $40,000 million. In 1985 only three years later government spending had topped $60,000 million a year. In 1987 (after two more years) spending exceeded $75,000 million. Even allowing for inflation these figures provide an example of the growth of government.

In apportioning responsibility for these developments a distinction can be drawn between Commonwealth and State governments. States in fact have accounted for 50 per cent of all government expenditure, 65 per cent of all public employment and the vast majority of invasive laws passed by government. Both Labor and Coalition governments are responsible for the expansion, although the extent of growth under Labor per year of office on the average is much greater than that under the Coalition.

This vast expansion of government was undertaken for the purpose of progressively improving the lot of Australians. But some basic facts indicate that the results have been quite the reverse. In 1966, Australia had virtually full employment. Today, by conservative estimates, unemployment stands at almost 11 per cent. In 1966, the average income earner paid 16 per cent of his earnings in income tax. Today he parts with a quarter of his earnings in income tax and a further 15 per cent in indirect taxes and other imposts. Although welfare spending increased by $18 million (from 18 per cent of the Commonwealth Budget to 28 per cent) poverty has actually become more widespread. That is not all. An ambitious attempt to nationalise health care has left the hospital system in deep crisis. The public education system from primary to tertiary levels has been undermined and weakened. Governments are unable to cope with their essential function of protecting the citizen against rising crime. The expansion of government into areas previously regulated by private arrangement has actually provided opportunities and encouragement for corruption and fraud by both officials and private citizens.

The growth of government is the consequence of governments undertaking many tasks which could have been, all things considered, better left to private enterprise. This is illustrated by the following examples:

The above illustrations are extracted from Facts, Autumn (1986) p 4.

Figures can provide a misleading perspective on the nature and extent of government activity in Australia. The proponents of bigger government will argue that by comparison to Scandinavian countries, Australia rates very favourably. The figures quoted are the government expenditure component of GDP. This in itself is not an argument. It is not an achievement that Australia is not at the top of the big government ladder. Figures are often misleading because they are compiled according to different criteria in different countries. The definition of public servant and public enterprise varies. Problems arising in this context include the manner in which statutory institutions (such as ABC, Telecom) and public-private sector joint enterprises (Qantas) should be classified.

Figures also do not demonstrate the extent to which some Australian regulations are avidly anti-business and anti-private enterprise. Governments in Sweden may spend a far greater amount as a percentage of GDP. A great deal of this money is expended on welfare and government activity. On the other hand, Swedish governments have tended to tax small businesses, but leave them relative freedom (by comparison with Australia) for entrepreneurial activity. In Australia small business is more heavily regulated and is subject to active discrimination.

The industrial system in Australia is regulated in a manner which finds no comparison anywhere in the democratic world. The Fringe Benefits Tax is an example of anti-business activity. A Fringe Benefits Tax imposed on the person who receives the fringe benefit is legitimate. Levying the tax on the business is symptomatic of the exploitative and anti-business attitude in Australia which finds few parallels in the democratic world. The closest parallel was the United Kingdom which, however, under Thatcher has dismantled some of the most obnoxious features of the anti-business attitudes.

Supporters of interventionism are prone to refer to OECD figures to argue that on a comparative level Australia's public sector is not as "big" as those of other OECD countries but under the OECD definition, general government outlays include only those public enterprises which mainly produce goods and services for government itself or primarily sell goods and services to the public on a small scale.

Australian budget statements, however, define the public sector as including all public authorities. This is a more realistic measure of the public sector. Academic supporters of interventionist government activity focus on the OECD figures rather than the measurement adopted by the Australian government, which is more realistic.

Government regulation and control cannot be entirely measured by figures, though figures provide a valuable indication. Mancur Olson, The Logic of Collective Action, Cambridge (1971) p. 133, argues that Australia has some of the highest import tariffs in the west. He calculates that

"their levels of protection are two or three times the level in the OECD and the United States and four to five times as high as those of Sweden and Switzerland ... the impact of protection levels that are uniquely high by the standards of the developed democracies is made even greater by the small size of Australia ..."

Australia has also the most highly regulated system of industrial relations in the democratic world. Some of the other factors peculiar to Australia mentioned in this chapter combine to present Australia as one of the most regulated countries in the free world, if the effect of protection levels and industrial regulation is taken into consideration.

Paul Johnson in his book History of the Modern World, London (1983) demonstrates how in England government spending as a proportion of the gross national product fell from 15% to 8% between the years 1830 and 1890. This period, he also documents, witnessed the longest sustained period of rising living standards in that nation's history. This combination of economic and social advancement in the context of individual liberty was in the view of Paul Johnson

"not only the most important event in secular history but the most beneficial".

The gradual improvements in living standards and the slow but sure reduction in poverty from the Industrial Revolution to the early part of the twentieth century took place in the context of limited government and individual freedom. But as the size of government began to grow in the twentieth century (from the 1950's) progress in the slow reduction of poverty process began to taper. There is an inescapable connection between the growth of government in the last few decades, in the western world, and the increase in the levels of poverty, together with the tapering off of the rise in living standards. The growth of government marks the end of the long period of the gradual reduction of poverty.

The industrial revolution emerged within a political environment which gradually minimised the role of government. Paul Johnson points out that this development took place not because of the state but in spite of the state and

"was made possible largely through the withdrawal of government from economic affairs".

The western democratic order has made possible a greater degree of freedom and provided better avenues for expression of views and human action than has existed at any known point in the history of organised societies occupying a significant area of territory and containing a large population. These commonsense perspectives and lessons of history are being lost. Big government is growing bigger. If the present trends are not reversed, the indications are that the optimum levels of liberty have been reached and the future will witness a steady decline. Private enterprise has been an essential factor in the development of liberal and representative democracy. Restrictions on economic freedom except those which are essential unduly restrict the scope of freedom.

Freedom has never been more important than today, when there is an aggressive, fractured but extremely effective challenge to freedom from those who criticise and exaggerate the evils of private enterprise, calling for bigger and bigger government and for ever expanding government expenditure on a variety of activities.

The argument has been made above (section 3) about the trickle-down effect of expansion of the private sector which reduces inequality and provides higher standards of living. Christ said, "the poor you will always have with you". This a statement of a realism, not of cynicism. The process which operated through the nineteenth century and up to the 1970s was gradually reducing levels of poverty and inequality. Recent figures for the US together with general historical perspectives demonstrate that, as government became bigger, the process has gone into reverse in the last decade. Up to the 1970s, the rich were getting richer and the poor were getting less poor. From the 1970s onwards, the very rich are still getting richer, the employees in the government sector, with indexed incomes and fat superannuation, as well as private individuals who, and organisations which, receive benefits and patronage from governments, are holding their own, but the poor are getting poorer and many others are finding that standards of living are falling. The cause is the growth of government.

A standard response of regulationists to the pleas for smaller government is to argue that this amounts to support for the laissez-faire system which in the nineteenth century was responsible for exploitation and suffering. The problems of nineteenth century Europe arose not from laissez-faire but from the then existing feudal based laws and regulations, administered by government, which prevented the formation of associations of workers (trade unions) and in other ways discriminated against workers. The present argument is not for laissez-faire (no government), and not even for small government, but for prevention of increases in, and for gradual reduction of, the magnitude of modern government.

As government grows, expenditure correspondingly increases. Such expenditure is met in four ways:

  1. by direct and indirect taxation;
  2. by other government payments and charges, eg exorbitant and unnecessarily high telephone fees, postal and electricity charges, which reflect the waste and the inefficiency of government;
  3. by borrowing, which pushes up interest rates; or
  4. by printing more money, which causes inflation.

All these factors, especially the first, affect private business that alone can provide full employment. There is a direct correlation between growth of government (and government expenditures) and unemployment.

One of the often repeated socialist demands is that government take action to deal with unemployment. How can government create jobs? An employee must be paid a wage. Where will the money come from for the payment of his wage? A great deal of the money for most government servants and those in statutory enterprises comes from the tax payer and other government revenue which consists largely of various types of levies and charges on taxpayers. A major part of the money to pay for government jobs must necessarily be extracted from private enterprise and individual taxpayers. Government enterprises such as Telecom (restricted competition introduced recently) and Australia Post pay employees from profits. Yet these monopolies are characterised by excessive charges in the case of the former and notorious inefficiency (as well as high prices) in the case of the latter. Other government commercial enterprises such as the railways, electricity commissions and Qantas function at a loss. The taxpayer is subsidising these. Government commercial enterprises are exempted from many of the taxes, levies and charges which private institutions must pay.

There are other government departments and educational institutions where the entire burden of paying for the employees falls on private companies and individuals. On the other hand, the private sector, by and large, pays its employees out of its own earnings. Some private enterprises are supported by government. These are not examples of private enterprise and should be phased out. They are properly characterised as part of the public sector or as constituting a private/public sector. The employees in the private sector earn their keep.

The common sense and practical dimension which those who demand government job schemes ignore is that most government jobs must be paid for by individuals and business.