According to International Monetary Fund (IMF) data in Fiscal Monitor, Australia’s government debt in 2013 stands at 28.8 per cent of Gross Domestic Product (GDP) while that of a typical Organisation for Economic Cooperation and Development (OECD) nation is at 107 per cent. OECD shows that Australia’s health care bill was projected to increase by 1.9 per cent of GDP (2.7 per cent for OECD) over the period 2014-2030. The corresponding rise in public pensions is 0.7 per cent of GDP (1 per cent for OECD). Thus, Australia’s public finances are clearly not in crisis, as in the USA and Europe.

It seems that the alleged deficit crisis was a pretext for tough measures that are ideologically driven. In fact, the 2014 budget draws heavily on a 1942 speech by Robert Menzies titled ‘The forgotten people’ where he spoke of two groups of people, the ‘lifters’ and the ‘leaners’. According to him, the ‘maladies of modern democracy’ include: the lack of ambition; the envy of success; dependence on the state, and the taxing of work effort and entrepreneurship.

The foundations of this ideology lie on some brave assumptions. First, it assumes that wealth creation and income originate in individual effort, frugality, and investment on new ideas and skills. Second, despite the rhetoric about ‘contribution’, the lifters are those in (paid) employment and not the carers, givers or volunteers. Nor are they those who contribute to public revenues since the ultimate goal is a small state that does not interfere with markets and inherited endowments (i.e. wealth, abilities and skills). Third, with minimum interference from the state, markets provide opportunities for everyone and they reward effort and new ideas. Finally, property rights and the law keep the privileged and powerful (i.e. executives, regulators, and the rich) accountable.

On that basis, it was to be expected that the Coalition government would focus on lower taxation and a tax re-structure towards consumption taxes, limits to unemployment and disability benefits, encourage a more responsible use of health services via co-payments (i.e. a new tax) and slowly privatise higher education as a means to employment. Yet, success can lead to the neglect of family values, social trust and cooperation. Who can claim that (s)he is totally self-made? Who has not benefited from information and knowledge, relatives, friends, colleagues, exclusive rights (eg. IP rights), or public infrastructure? First generation migrants take pride in their success against adversity though hard work. Yet, they cannot deny the importance of family, friends, and community networks.

French economist Thomas Piketty in his new book Capital in the 21st Century shows that wealth creation is again increasingly disconnected from merit (i.e. work effort and skill) since the 1980s due to the steady decline of tax contributions by the rich, and lower growth rates that make it harder to benefit from skill, frugality, and hard work. Piketty shows that public pensions and the provision of education have been the great equalisers in the 20th Century.

Professors Daron Acemoglu (Why Nations Fail) and Josef Stiglitz (The Price of Inequality) point to the role of economic power that has a pervasive effect on institutions; public policy is not neutral and independent of influence by vested interest, the rich have a disproportionate influence on public policy on taxation, on Intellectual Property (IP) rights, and on workers’ rights and conditions. Of course, some investments that have the capacity to benefit society are very expensive and risky. Hence, the provision of exclusive IP rights so as to stimulate innovation. By the same token, investments in education are also risky and the returns uncertain. Nobel-prize winners Paul Krugman and Josef Stiglitz document that the ‘trickle-down’ effect (i.e. ‘a rising tide lifts all boats’) is a myth that blinds successful people, the privileged and policy makers. They point to the fact that IP rights often lead to monopolies that do little innovation and in reality there is no level-playing field. Further, inherited wealth significantly limits social mobility while ‘limited liability’ and policy capture (e.g. ‘too big to fail’) make it very difficult to punish fraud.

Ernst Fehr and others have shown that a lack of meritocracy and fairness can have detrimental effect on work effort and social capital (i.e. trust and cooperation). Professor Angus Deaton claims that we cannot ignore significant inequalities that have a negative impact on health; emerging evidence shows that life expectancy for white low-income men in the USA has declined in the last two decades.

Last but not least, in line with the Menzies philosophy, the budget avoids touching on generous tax rules that allow high-income earners and millionaires to use superannuation and negative gearing so as to reduce their ‘taxable income’. Note, Australia is one of the few advanced OECD countries without a wealth or inheritance tax.

*Dr George Messinis is a Senior Research Fellow at Victoria University.