The biggest public policy issue in Australia at the moment is the size of our budget deficit. It affects everything from our capacity to cushion the impact of the global recession to our ability maintain and improve our health and education systems, through to our capacity to address climate change.

The Government has so far spent more than $50b on stimulus measures, the bulk of it in infrastructure and housing. Debate the effectiveness and the pros and cons of that expenditure as you like, but it is dwarfed by the collapse in revenue. In February, that was estimated at $115b over four years. It will be much more now — at least $20b more.

As Access Economics pointed out earlier this week, this collapse is far greater and far more rapid than in previous recessions. The origins of the collapse and what to do about it should be one of the central concerns of policymakers and economists. Slashing spending will help, especially once we move into recovery. But that is only one side of the equation.

This is the reason why our revenues have collapsed. This graph shows how much of our total tax receipts have been composed of company tax receipts and individual tax receipts. It is based on actual revenue outcomes from each year, except for this year, which is based on the MYEFO forecast from November. It is a crude but revealing analysis of how our tax base has changed in the last decade.

In essence the Howard Government presided over a permanent change in our tax mix, reducing income tax through successive tax cuts and allowing the economic boom to fund it, meaning company tax receipts grew to over a quarter of the whole tax take, when in 2001-02 it had been 18%. In 1996-97, it had been less than 15%.

Even in 2007-08 and this year, as the global slowdown has hit profits, company tax receipts will still be nearly a quarter of the tax take, while income tax has dropped toward 40%.

And there’s more personal income tax cuts scheduled for next year.

As a consequence, the Commonwealth is now significantly more exposed to a collapse in company tax revenue.

The man most responsible for this shift is Peter Costello. In a long article in yesterday’s AFR, Paul Cleary examined the nature of Treasury advice on the sustainability of the resources boom and concluded Treasury, in deciding the increase in Australia’s terms of trade was permanent, made the wrong call in arguing that the increase in tax revenue it generated should be treated as ongoing.

But it was Costello who aggressively pushed within Government for using the windfall from the mining boom to fund tax cuts. Costello presided over a massive increase in both permanent and one-off Government expenditure on cash handouts via middle-class welfare. He is keen to blame John Howard for this profligacy, but he was Treasurer. You don’t get to pick and choose what you’re responsible for.

For Costello to now attack the Government for its high levels of debt, as he did in his Fairfax column and at the launch of Peter Hartcher’s book yesterday, shows that the man is either a fool who has minimal understanding of Government finances despite running them for a decade, or that he is a colossal hypocrite.

The Government now faces a massive deficit mostly because of the unsustainable tax mix Peter Costello bequeathed to it. Kevin Rudd and Wayne are partly responsible, given they presided over two huge stimulus packages. But they did so with a specific intent of staving off a rise in unemployment. Costello, presumably, would have adopted Julie Bishop’s approach of doing nothing but “waiting and seeing”.

Rudd and Swan also made the election campaign call to me-too the bulk of Peter Costello’s last round of tax cuts, which have pushed the tax mix further toward company tax dependency. So they share some of the blame.

But it is Costello who should wear the bulk of the responsibility for pursuing a shift in our tax mix without any apparent regard for our greater dependency on corporate profits. Any criticism he now makes of the Government’s fiscal policies lack credibility, or should at least be prefaced with a mea culpa for getting it so wrong when he was Treasurer.

As time goes on, it becomes clearer and clearer just how lucky Australia was to avoid having this man as Prime Minister. Thankfully John Howard had his number. And so too does Kevin Rudd, in the event the Liberal Party is foolish enough to give him the leadership.

Peter Fray

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