By Yogi Vidyattama and Jinjing Li
The problem of Big Government often comes into the debate during the release of a budget paper. This is because big government is often seen to crowd out the financial capability of the private sector to grow the economy as the government collects tax and engages in various forms of redistributionto finance their activities. In addition, there is an argument that government is often inefficient in allocating investment especially when it is viewed to be too close to special interests. On the other hand, government spending is important for delivering public goods and services and addresses issues such as poverty and inequality through social protection schemes. The question then is whether the Australian government has become too big and is taking too much tax from society?
To look at this issue, data from the Australian Bureau of Statistics (ABS) and statistics from the Organisation for Economic Co-operation and Development (OECD) provide some insight into the tax paid by Australian society to government and presents an international comparison of whether Australia has an issue with Big Government and whether Australian society has been burdened by too much tax to finance their government. The tax revenue and government spending in this discussion refers to the tax and spending of general government that consists of central, state and local governments, as well as the provision of social security funds.
The Total Tax We Pay
Australians paid more than $445 billion in tax during 2014-2015. Figure 1 shows that the number has been growing since the 2009-10 budget. However, the growth has actually been slowing since the 2012-13 budget. The problem is that the slowing down of tax growth may be due to the slowing down of the economy itself. In fact, the size of the revenue should be seen in proportion to the size of the economy itself.
Tax Revenue (All Levels of Government)
Figure 1 Australian Tax Revenue by different type of Taxes
Source: ABS 5506.0 - Taxation Revenue, Australia, 2014-15
What does it mean for the individual citizen?
So what does it mean for each individual? Based on NATSEM’s estimates; the total revenue in 2014-2015 means that everyone in Australia (children and toddlers included) contributed nearly $19,000 over the last financial year, or $29,000 for everyone between the ages of 15 and 64. This is equivalent to a little over 19 weeks of work if everyone between the ages of 15 and 64 works full time at the average earning rate. While the total tax we pay has increased over time, the number of full-time working weeks required for Australians has not changed much since 2011, it even slightly decreased in 2014-2015 (Figure 2).
Average Amount of Tax paid
Figure 2 Average amount of Tax paid per person
Source: ABS and NATSEM’s calculation
Where does Australia stand internationally?
Figure 3 shows the amount of tax as a proportion of GDP that represent the size of economy. Figure 3 confirms that the size of tax revenue in terms of GDP increased from a slight downwards trajectory from below 26% in 2009 to nearly 28% in 2014. This proportion is still below the average tax revenue proportion of OECD members at around 33-34%. The Australian proportion is also smaller than other country members with a tax revenue proportion below the OECD average in places such as the UK, New Zealand and Japan. Korea and the USA (and more recently Switzerland) are examples of a small group of OECD members with a smaller proportion of government tax revenue. This may indicate that the size of Australian government is relatively small but this measure can also be used as a tax ratio, which is often interpreted as the capability and efficiency of the government in collecting tax as well as the level of compliance of society in paying tax. Therefore, we look at another indicator that could show the role of government in the economy – expenditure as a proportion of GDP.
Proportion of tax revenue to GDP (%)
Figure 3 Total tax Revenue, as a share of GDP
Source: OECD Tax revenue and ABS 5506.0 - Taxation Revenue, Australia, 2014-15
One indication of the size of the government across countries is general government spending, as a share of GDP. This proportion of government spending to GDP is presented in Figure 4. The proportion of Australian government spending is also below the average proportion of the OECD members. The figure further indicates that the proportion of government spending is decreasing, albeit slightly from 38% in 2009 to around 35.5% in 2014. It is important to note that there are some adjustments in the OECD database for the Australian Government spending number and its proportion of GDP is not directly available via the web. However, the ratio of this number to GDP in the OECD database is comparable to the number calculated from ABS Government Finance Statistics (ABS 2016b) and National Accounts (ABS 2015). The numbers produced from these publications fluctuate between 35 to 36%. Similar to the proportion of tax, the proportion of government spending confirms that the size of Australian government is relatively small. The UK, New Zealand, Japan, Canada and even the USA all have a higher proportion of government spending to GDP.
Proportion of government spending to GDP (%)
Figure 4 General governments spending, as a share of GDP
Source: OECD General Government spending and NATSEM’s calculation based on OECD adjusted number
So far, it seems that the size of government in Australia is relatively small and hence, the burden of tax is higher. One factor that could make the tax burden seemingly higher is the proportion of direct tax. Figure 1 indicated earlier that the proportion of taxes on income is quite high at more than 50% of overall revenue. From OECD data, this tax on income can be calculated by adding tax on personal income and tax on corporate profit. At 17.9% of total tax, the proportion of tax on corporate profit in Australia was the second highest after Norway in 2013. The proportion of personal income tax to overall tax revenue is even higher at 39.2% and the highest among OECD countries followed by the USA at 38.7%. This composition leads to the proportion of taxes on income to GDP in Australia being higher than the average OECD countries (Figure 5). In the past three years, only New Zealand, Norway and Denmark have been higher than Australia; all with much smaller tax bases. In addition, the proportion has been increasing. One factor that kept the overall tax revenue to GDP ratio low in Australia is the relatively small ratio of tax on goods and services to GDP as well as to overall tax revenue. Nevertheless, the high proportion of taxes on income to GDP could make the amount of tax needed to be paid in Australia seem high as it is a direct tax.
Proportion of Tax on income (incl. profit) to GDP (%)
Figure 5 Taxes on Income, as a share of GDP
Source: OECD Tax on personal income; OECD Tax on corporate profits and ABS 5506.0 - Taxation Revenue, Australia, 2014-15
Concerns over the size of government always play a role during any conversation regarding tax policy and the launch of a new budget. In this article, we examined the size and burden of Australian government and tax. The gravity of the evidence suggests that Australian government is relatively small and the tax contribution is still within our means to pay. Nevertheless, Australian tax could be perceived as somewhat excessive because of the size of taxes relative to income both for individuals and the corporate sector.
ABS (2016a), Taxation Revenue, Australia, 2014-15. Cat no. 5506.0, Released at 26 April 2016 (Accessed on 28 April 2016), http://www.abs.gov.au/ausstats/abs@.nsf/mf/5506.0
ABS (2016b), Government Finance Statistics, Australia, 2014-15. Cat no. 5512.0, Released at 26 April 2016 (Accessed on 29 April 2016)
ABS (2015), Australian System of National Accounts. Cat no. 5204.0, Released at 30 October 2015 (Accessed on 29 April 2016)
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