Advice from Charles Dickens

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

The observation of Charles Dickens’ character, Mr Micawber, is equally relevant to national accounts today as it was to the readers of David Copperfield in 1850.

Individuals, families, businesses and nations that live beyond their means court misery.

All can borrow for a while, but ultimately income has to exceed expenditure for financial happiness.

The temptation for governments facing financial challenges is to raise taxes, rather than rein in expenditure.

Instead of an honest debate about the role and reach of government, the increase in taxation is a tantalizing alternative.

In Australia, this can occur without the need to modify legislation or regulations. Over time, bracket creep in personal income tax results in a greater fiscal return for the government.

Hence the temptation to tax and spend becomes an alluring prospect – and far easier than making tough decisions about limiting programs and entitlements.

Dickens’ observations are pertinent to the current debate about tax reform in Australia.

In particular, various individuals and groups have been advocating a 50 per cent increase in the rate of the Goods and Services tax from its current level of ten per cent to 15 per cent. Many have also proposed widening the goods and services which are subject to the GST.

But consider the extent of the spending challenge. A decade ago, the federal government spent $240 billion, which was $15 billion less than it received in taxes. In 2015-16, it is expected to spend $430 billi0on which is $32 billion more than tax receipts.

Social security and welfare expenditure will be about $154 billion; health $69 billion; and education $31 billion. Over the next decade, the welfare bill is predicted to soar to $277 billion a year.

As the population ages, the expenditure challenges compound, with proportionately fewer workers and a growing older population. In one form or another, the demographic changes will challenge national finances for the next two decades.

Having started down the long difficult path of reining in expenditure now is not the time to abandon it. To do so would be to condemn future generations to a poorer existence.