How to tackle debt: lower taxes and stabilise currency
Mediocre. Disappointing. These are the words that can describe the new budget revealed by the Coalition government this Tuesday. Its critics have labelled it a ‘Labor budget’, and one could not think of a better way to describe it. With tax increases and generous lashings of government spending, this new budget has officially transformed the Liberal Party into the new Labor among the eyes of those on the right.
As always, the central theme in this new economic policy is Australia’s government debt, which now stands at just above $550 billion. One would expect an apparently conservative government to, at the very least, reduce spending and cut taxes, yet one would be wrong. As explained in the Unshackled’s official Budget Reply, the government is flaunting its politically motivated desire to cave in to the leftist establishment of politicians and the mainstream media, rather than actually caring about Australia’s ‘vassalisation’ to various countries through a massive debt.
If there’s one major event that proves the leftwards drift of traditionally centre-right parties, then this is it. The Liberal Party has betrayed its own platform by neglecting its usual commitment to economic conservatism. The major pitfall of the budget involves its complete and utter disregard of the magic formula to tackling debt: lower taxes and stabilise the currency. What we have is the exact opposite, and it’s sure to lead to an even greater debt. As always, history provides us with a lesson, and the world’s most recent event where tax increases backfired is the United States.
In 2010, former US President Barack Obama (surprise, surprise) released a very similar budget to that of the Coalition today, except with bigger numbers. Despite saying that the US “simply cannot continue to spend as if deficits don’t have consequences”, he raised taxes by $3 trillion and federal spending by $1.6 trillion. The Heritage Foundation predicted that this would contribute to a doubling of the national debt, and lo and behold, the debt doubled under President Obama. Considering this lesson and applying it to today, Australians should brace themselves.
This begs the question, how can we actually go about reducing the debt? The straight answer is, you can’t. It’s no easy feat to reduce a national debt that has been accumulated over decades. However, there is a better and more practical solution: increase GDP to counter the debt. This is where the magic formula makes its grand entrance: lower taxes and stabilise the currency. Once again, a stroll through the past provides the wisdom needed to understand the legitimacy of this solution.
Immediately following World War II, the United States was afflicted with a debt/GDP ratio of 125%, and then by 1970 this dropped to 25%. Interestingly, this includes reasonable government spending, with the US government increasing its expenditure from $30 billion immediately after the war to $195 billion in 1970. When you take into account inflation, this is a reasonable amount. This shows that it’s actually possible to continue moderate spending while handling a large debt. The key is to reduce taxes.
In 1945, the Revenue Act reduced corporate and income taxes, which were further reduced in 1948. The US dollar was also stabilised against the gold standard at $35/oz. using the Bretton Woods system. This resulted in a dramatic surge in GDP, which went up from $233 billion in 1947 to $1103 billion in 1970, allowing the government to reach the very safe debt/GDP ratio of 25%. This is despite the government debt actually climbing to $381 billion in the same year.
Ironically, yet unsurprisingly to economic conservatives, lower taxes actually resulted in greater tax revenue due to the associated GDP surge, further making clear why tax increases in an effort to increase revenue is a left-wing sham. In fact, studies by the National Bureau of Economic Research show that tax increases lead to reduced GDP, which leads to a domino effect of economic problems. If complemented with lower spending, despite not being compulsory, this can lead to an even better economic situation.
It may be of further interest to discover that tax-havens like Singapore and Hong Kong, which have a much lower tax rate than the US or Australia, provide essentially the same government services, including universal healthcare. Yet the focus right now is on the Australian government debt. If the so-called Liberal government of Australia was to prioritise economic matters over political games, then it should’ve followed the economic formula. A lowering of taxes, a revival of the gold standard and a stabilisation of the currency will allow a more practical and productive handling of the debt, which Scott Morrison may realise after the results of his budget are manifested.