The United States of Australia?


Is the Abbott government turning Australia into America? Judging by the letters to the editors of the print media, many citizens would say so, but they would be wrong.

Many Australians, probably the vast majority, don’t realise that capitalism's heartland, the flag-bearer for the free-market, the good old dog-eat-dog land of the USA has a substantially larger government than this country, and spends significantly more on social programs.

The OECD Factbook 2014 shows that government expenditure in the United States is equal to 40 per cent of GDP, whereas the expenditure of Australia's governments is a comparative paltry 32.2 per cent. This is not new, as the figures below show:

Comparisons on an exchange rate basis can be deceiving, but the difference only gets larger when the figures are translated into purchasing power. By this measure, the US spends comfortably above the OECD average, whereas Australia remains below average:

Nor has Australian government spending increased rapidly in recent years, as the Abbott government would have citizens believe. As the figures below show, the annual average increases in Australia over the decade 2001-11 have been below the OECD average, and much lower than in the US:

With respect to social spending, the US invests more public money, and dwarfs Australia when privately funded social programs are included, as shown below (from 2009, the latest available from the OECD): 

Again, this is not new. The only time we've been above the US in public social spending was briefly during the Howard years, when we edged ahead by a tiny margin (if we exclude private funding):

What about pensions? Abbott and Hockey keep saying everything is 'unsustainable', particularly pensions. The difference is stark, especially in public pensions, where, incredibly, Australia only spends half as much. Again, Australia's expenditure is way below the OECD average:

The differences between the US and Australia

There are three key differences.

The first is what's known as 'horizontal fiscal equalisation', which stems from what's referred to as 'vertical fiscal imbalance'. Volumes of econo-babble are spoken about these two concepts, but the truth is that they constitute the structural backbone of the nation. The US federal government is the most powerful government in the world, but it doesn't have as much domestic power over its own states as Canberra has over our sub-national jurisdictions. This stems from the fact that Washington only collects about 20 per cent more tax than it spends, whereas Canberra collects about 50 per cent more. These funds are then distributed back to the states and territories in a way designed to ensure all jurisdictions can provide the same average level of services. In school funding, for example, every Australian state and territory government has the capacity to provide the same average level of service, whereas in the US, rich states such as New York and New Jersey spend three times the money per pupil as poor states such as Utah and Idaho. Such gross inequity cannot happen in Australia. 'Horizontal fiscal equalisation' is one of the unsung magic ingredients in the constitution of Australia; building a basic level of social equality and cohesion into the very experience of being an Australian, however miserly the overall expenditure compared with the US.

The second major difference is Australia's universal system of health care. Some 40 million Americans have no health insurance in a country where going to the doctor or a hospital and buying medicine is extremely expensive. Even in countries that have universal health schemes, including Australia, every study that's ever been done shows a correlation between low incomes and poor health. Universal health care is a major reason why Australia has a lower infant mortality rate and longer life expectancy than the US. The US spends more public funds on health care, but when we include private spending, the absence of universal provision and the power of the drug companies has led the country to spend about twice the amount Australia spends on health as a proportion of GDP. There is no health system on earth that is more unfair and more inefficent than the US system, but don't kid yourself that Australia's system is generous (or 'unsustainable'). As this graph shows, we are still below the OECD average:


The third major structural difference is that Australia has a higher minimum wage, which has prevented the appearance of the working poor on the same scale as the US. Integral to this difference is a stronger trade union movement, which has also secured more reasonable overtime and penalty rates for citizens who must work outside normal hours.

Comparing differences between countries is of course frought, and there are a myriad other and smaller differences between the US and Australia. But in basic living standards, these are the three big structural advantages that ordinary citizens in this country have over their American counter-parts: (1) horizontal fiscal equalisation (and the pre-requisite vertical fiscal imbalance), (2) universal access to health care services and reasonably priced medicines, and (3) the higher minimum wage (and the pre-requisite stronger trade union movement). On every other major count, Australians are worse off.

All three points of advantage are now under serious attack by the Abbott government, the first in the proposal to shift more funding responsibilites onto the states (particularly health and education), the second in the introduction of the punitive co-payments for visits to the doctor and medicine, and the third has been proposed by the Commission of Audit. If the Abbott government is successful, it's sheer fantasy (or deep conceit) to imagine that Australia will become like the US, where citizens are advantaged in almost all other major respects, and obviously in the generosity of social programs (not to mention having a bill of rights). If we are stripped of these three compensations, Australia will not be like the US, but far worse. It would be more accurate to say that the Abbott government is trying to turn Australia into Mexico.

The horror budget

The obvious truth to be drawn from all this is of course that Australia does not have a large government by any fair and objective comparative test, and nor does it have generous social welfare provision. The general truth is that the expenditure of governments in countries with fully developed economies is broadly equal to between 30 and 50 per cent of a year's GDP and Australia is near the bottom of the scale.

It should also be obvious that Australia has no 'budget emergency'. The Rudd-Gillard Labor government left the nation's books in remarkably good shape, particularly given the outstanding performance in managing the effects of the GFC. If Australia has a 'budget emergency', then the rest of the developed world is irretrievably doomed.

Back in the real world, the truth is that the federal government has a small revenue shortfall to be dealt with over the medium term. Assuming no further increase in the country's comparatively modest public debt, this could be handled by a modicum of progressive taxation on wealth. The OECD has recently pointed in directions that include:

  • Abolishing or scaling back a wide range of tax deductions, credits and exemptions which benefit high income recipients disproportionately;
  • Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options;
  • Shifting the tax mix towards a greater reliance on recurrent taxes on immovable property;
  • Reviewing other forms of wealth taxes;
  • Examining ways to harmonise capital and labour income taxation;
  • Increasing transparency and international co-operation on tax rules to minimise “treaty shopping” (when high-income individuals and companies structure their finances to take account of favourable tax provisions in different countries) and tax optimisation;
  • Broadening the tax base of the income tax, so as to reduce avoidance opportunities and thereby the elasticity of taxable income;
  • Developing policies to improve transparency and tax compliance, including continued support of the international efforts to ensure the automatic exchange of information between tax authorities.

What were they thinking?

The budget is of course distinguished by the great number of broken election promises it embodies, a political sin magnified by the prime minister's epic hypocrisy. But the most intriguing question is what explains the apparent political stupidity in being so unfair to so many citizens, all at once? Why would a government trash its prime minister's reputation by reversing on its election policies in such spectacular fashion to address a problem that doesn't really exist by screwing the bottom 90 per cent of the citizenry, all at once?

Many will no doubt think that the viciousness and mendacity merely continues the conservatives' pre-election form. It's easy enough to find people who believe that the election and budget were driven by the same ruthless neo-liberal zealots, who likewise imagine that pliant public opinion will be readily redialed come re-election time. Perhaps. An alternative scenario is that Abbott is actually a weak prime minister. Unloved by the public, Abbott is hog-tied to maintaining his popularity within the cabinet, which has made him a patsy for the treasurer, Joe Hockey, and the finance minister, Mathias Cormann, apparatchiks from the NSW and WA branches of the Liberal Party, respectively. Flattered to find himself cast as a neo-liberal darling by the Murdoch media's echo chamber in the wake of his 'Age of Entitlement' speech, Hockey threw every cockamamie idea that Mathias' finance department has ever dreamed up into the budget to cement his image at the big end of town - and Abbott didn't have the internal strength to save his own credibility.

Whatever the internal dynamics, there's a larger question. The budget probably presents the biggest challenge of any budget to Australia's idea of itself as an egalitarian nation. For neo-liberals, the present might be forever 1980, but the extraordinary reception of Thomas Piketty's new book, Capital in the Twenty-First Century, shows that the world has moved on. As Christopher Sheil says in his review of Capital in the Twenty-First Century in this issue of the Evatt Journal, 'astonishing but true, the biggest intellectual topic of conversation in the world today is social inequality'. Piketty's blockbuster has not yet been released in Australia and the discussion has been muted, but, as Dr Sheil writes, 'no book becomes a blockbuster unless it resonates with the spirit of the times'. Given the backdrop of the Australian egalitarian legend, it's reasonable to expect that the book will resonate even more loudly here than it has elsewhere. If so, if the neo-liberal current has indeed turned, then the Abbott government may well be curtains.   

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Suggested citation
Editorial, , 'The United States of Australia?', Evatt Journal, Vol. 13, No. 3, May 2014<>