Sunday, June 06, 2004

Taxes and Government Spending

There have been a number of interesting Blog postings on (to name a few) No Right Turn, David Farrar, about Government spending as a % of GDP. Your favourite phantom was inspired to take a closer look at the breakdown of the numbers (to peek beneath the veil as it were) with some interesting findings. The most recent year I could find the detailed figures for was the year ending June 2003. The government's total revenue for that year was 43.7 billion or 34.0% of gdp.

The fact that most struck me is that only 6.2 billion (the "Net cost of Goverment-produced services") was spent on the traditional function of "governing the country". Rather more than one could lay the spectral fingers on at short notice but less than 5% of gdp. Add in another 3.6 billion for "Social Assistance Benefits in Kind" provided by government departments to get the "Final Consumption Expenditure" of 9.8 billion (about 8% of gdp). This figure represents the complete costs of running core government services including the salaries, stationery, accommodation, travel, coffee, red tape and paper-clip budgets of all government departments, courts, judges, police and defence forces, prisons, members of parliament, ministers, parliamentary and ministerial offices and more specifically -

(1) The cost of keeping Ahmed Zaoui in prison;
(2) The cost of operating and manning speed cameras;
(3) Official receptions for VIPs;
(4) Fees, Purchases, koha and other payments made to external consultants, lawyers, accountants, Kaumatua, etc;
(5) CEO expense accounts;
(6) Meal allowances for Security Intelligence Service agents;
(7) Any other pet peeve you wish to nominate.

The remainder of the tax take goes on Interest (2.6 billion), Social Assistance Benefits paid in Cash (13.2 billion), Other transfer payments (13.4 billion - mainly for the health and education systems) and a 4.5 billion Current Account surplus.

In other words the Government did NOT take 43.7 billion from the private sector and tip it down a black hole - it took 43.7 billion from the private sector and -

(1) gave 13.2 billion straight back in cash
(2) spent 17.3 billion on education, health, etc services which would have otherwise fallen on households
(3) paid 2.6 billion interest on public debt (some of it to households)
(4) laid aside 4.5 billion savings for a rainy day
(5) spent just over 6 billion on all core government operations.

The Net aggregate Tax take by the NZ government is actually very modest. The impact of the tax/social spending system has more to do with the facts that -

(1) the 17 billion that the state spends on education, health, etc on behalf of its citizens may not be spent in quite the same way as the citizens would choose to spend it themselves.
(2) the 30 billion paid in (cash or kind) benefits do not accrue to indivual households in proportion to the tax they pay and so the overall system leads to a redistribution of income between households in the private sector.

I'm not convinced that the first of these two (the loss of personal choice in spending) is that important. No one chooses to be sick, most people take private health insurance (and thereby abdicate their future spending choices to the insurance provider) whenever state provision is not available and the large increases in tertiary education fees have not prevented increasing number of New Zealanders from taking up tertiary education (often with large student loans).

Some people (particularly on the right) may object to any form of income redistibution but I suspect most New Zealanders approve of a reasonable, fair system of redistibution which appropriately balances need, ability to pay and preservation of incentives to work harder (or otherwise increase gross income). There is a good argument that we could have a much fairer and effective redistribution regime than we presently have but let's focus on those issues rather than spurious red herrings (NZ is overtaxed, inefficient Government expenditure is throttling growth, individuals are denied choice by State provision of health and education) or by a mindlessly bleated chorus of private spending good, state spending bad.




5 Comments:

Blogger TomV said...

An interesting post but I have to take issue with your comment "No one chooses to be sick, most people take private health insurance (and thereby abdicate their future spending choices to the insurance provider)"

When I, or anyone buys medical insurance, we get a clearly defined list of services provided. ie they will treat x at a cost of y to a set standard. State funded health does not provide this. Also private health insurance doesn't say that they only budgeted for x operations this year and sorry but we've already done our quota.

They do all the operations that fit within their defined criteria as their clients need them, and if the costs are higher than budgetted, either the premiums go up or the criteria are tightened.

I'll note that I'm not opposed to a state health system per se, just the way ours is run.

10 June 2004 at 1:45 PM  
Blogger Greyshade said...

Tom
I didn't mean to imply that any state system was identical to private health insurance. My point was that the uptake of private insurance in countries where good state systems are not available would suggest that few people are interested in the "choice" of forgoing (GP) treatment to save money. Actually that choice could be a rational one for the very poor - they might well get a better health outcome from spending the money on better food, clothing or keeping their house warmer rather than paying for a GP visit. Ironically they get a community services card so they don't get to make that choice. The middle classes are given the choice (to forgo treatment) because the Government is confident they won't take it - what sort of choice is that? I fully agree with your final sentence.

10 June 2004 at 3:06 PM  
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