Colin Clark, Quadrant, November 1986, pp. 66-67.

Inexorably rising government expenditure, government employment, government borrowing, and excessive taxation, meet objection from business leaders, from Opposition politicians, and from concerned academics. But when they are asked, quite reasonably, which government expenditures they would cut, they take refuge in condemning such comparative trivialities as retirement allowances to politicians, the extravagant design of the new Parliament House, subsidies to crazy minority groups, etc; some may go a little further in criticising payments to “dole bludgers” and unmarried mothers.

But suppose that all these abuses could be remedied. The harsh fact is that total government expenditure would remain as high as it is now, and be still inexorably rising, perhaps even at a faster rate of increase. The principal elements in its gigantic total are health, education and pensions. And of all those who demand massive reductions in government spending, no one — politician, academic or journalist — even mentions these fields of expenditure, let alone proposing their reduction. What about the innumerable votes which would be lost by any government which made the slightest reference to these issues.

The cause of the excessive burden of taxation is the “Welfare State”. “Welfare State” is, to use the American parlance a “weasel word”, treacherous. Is not the welfare of its citizens the concern of the state?, we will be asked. Of course it is. But, it should not be the concern of the state to provide people with services which they are capable of providing for themselves.

But the average family cannot afford, we shall be told, to make provision for old age and widowhood, still less to pay for its health and education. What a nonsensical statement, when we come to look at it. The average family does pay for them now, pays for them out of taxation, a much more clumsy and costly way of providing them.

This should be obvious. But many people seem to have been misled to believe that there is a great reservoir of taxable capacity in the hands of people richer than themselves. Only a very small proportion of government revenue comes from taxpayers who could be deemed rich. The great bulk of the revenue has to come from the ordinary family, by heavy taxation on their wage or salary, their drink and tobacco.

Can we set a reasonable limit to taxation? The reply comes from an unexpected source.

At one time I was Economic Adviser to four Labor premiers of Queensland. Of these perhaps the most outstanding was E.M. Hanlon. His career had been unusual. He had been a tram driver and had taken the lead in a famous strike, had run a small business, and had taken his army discharge in Europe after serving in the First World War. In 1944 I was discussing with him possible social service developments, when he suddenly said: “All this is going to mean more taxation. How many empires in the past have collapsed through excessive taxation?”. He required me to make an investigation into the economic limit of taxation.

The result of my investigations was published in Economic Journal, December 1945. Economic Journal at the time was under Keynes’s editorship, and I have a personal letter from Keynes agreeing with my conclusions, which were based on the limited evidence available at that time, that taxation in excess of 25 per cent of national income (about 22 per cent of gross national product) would create inflationary pressure. Subsequent evidence confirms this conclusion, which is widely known through the world —  though nobody has acted on it.

Without considering a host of lesser expenditures, let us look at the three main “tax eaters”; pensions, education and health. The principal requirement of pensions (disability and single-parent pensions are a different matter) is to provide for the old age of either spouse. The difficulty is that old people do not know how long they are going to live. In the past their needs could be met by annuities, when people expected money to maintain its purchasing power through they years. Such an assumption clearly cannot be made now.

It is hard to understand the present enthusiasm of Labor leaders for superannuation — apart from the prospect for a few of them being able to play at being fund directors. They seem to have a touching faith in the future value of money. Especially we should take into account the diminished number of children now being born, well below replacement rate, who will grow up to find themselves having to work so much harder to pay for all superannuation, both public and private. There will be great political pressure to repudiate by means of further inflation.

What is needed is a system of annuities indexed for price changes. Not knowing how long they are going to live is the principal obstacle in the way of the aged making rational use of their resources. As the proceeds are to be indexed for price increases, the annuities should be calculated on a low rate of interest. Such a proposal was put forward by Sir Leslie Melville and W.C. Wentworth, but the Treasury declined to consider it. Insurance companies and other private agencies could not offer such annuities because price rises are unpredictable, and it would have to be a government scheme.

These annuities should be available only to individuals, not to financial institutions. People could buy as much or as little as they wished — though there might be a case, at a later date, for requiring everyone to take a minimum holding.

Next, education. Let us confront the problem head-on. Why should we expect the state to pay for our children’s education? No satisfactory reason can be given. In the nineteenth century it was argued (probably falsely) that the parents themselves were so ignorant that they would neglect their children’s education unless it were provided free. This is certainly not the case now. Our ancestors in past centuries, and present day Asians and Africans, have expected to pay for education, often incurring considerable hardships in so doing. The only exceptions which should be made are provisions for unusually large families, and scholarships for gifted pupils.

We must be on the look-out for “moral hazard” i.e., the knowledge that insurance is available may make people incur greater expenses and risks than they otherwise would. Unemployment insurance is in this, and some public provision will have to be made for it, though this should be subject to work tests strictly administered. There is no moral hazard in saving and insuring for old age, or for one’s children’s education.

The difficulty also arises in insurance for health. The moral hazard here is not only with the patients, but also with doctors and hospitals, who may order and perform treatments which are not really necessary, in expectation of government or insurance payments.

The solution appears to be what is called the Kaiser System, designed in the USA. Such a system, for example, has a collective enrolment for members of the United Automobile Workers Union in Detroit. It centres on the hospitals, which are regarded as public non-profit institutions. The patient pays an annual contribution and the hospital, which now has an incentive to make all possible economies, decides which treatment is necessary. Non-hospital medical treatment is provided with the patient paying half the usual fee to doctors who are salaried employees of the hospital.

But, still, would dismantling the welfare state not be an impossible task? We have to consider not only the present recipients of government payments, but the much greater number, particularly those of advancing years, who have expectations of pensions and social services. And would the large tax remissions which would become possible with the progressive dismantling of the welfare state have to be distributed evenly, leaving some much better off and some much worse off?

But would this be necessary? It would be possible, though unusual, to have two classes of taxpayers, one paying much lower tax, but forgoing entitlement to social services, other than in exceptional cases (such as disabling illness or accident, educational scholarships for gifted pupils, and the like).

The way to do this is to begin at the beginning, with young workers entering employment for the first time. Employers would no longer deduct tax from their wages, but a compulsory saving. They could draw on such savings (Mr Santamaria has proposed) on marrying or reaching the age of 25 to make part payments on a house, furniture, household equipment etc. After that age they would remain exempt from tax, but required to purchase indexed annuities to a point where they could make provisions for old age, widowhood, etc.; and would be expected to pay for their own medical accounts and school fees. Parallel provisions might be good for immigrants.