Anyone who works for the ATO is an overhead of the tax system. Anyone who works in the civil service adminstrating the budget is an overhead. Any tax accountant is an overhead. Any tax lawyer is an overhead. The whole infrastructure of the state is an overhead, including the politicians themselves.

Even if you state that private businesses would have overhead costs, these overheads would ocme out of the bottom line of private capitalists, not taxpayers. Welfare costs don’t just include the cost of money in the pockets of the poor, but also the civil servants who dole it out.

It isn’t just a question of efficieny either. If everyone in Australia was trained to make left foot running shoes, and that is all we did, we’d be very efficient at making left foot running shoes. This ignores the opportunity cost of making left foot running shoes, and the opportunity cost can only be determined by individuals deciding what thewy would rather invest or spend their money on. Efficiency of resource allocation in a capitalist market isn’t about minimising wastage, it is about maximising utility. The state is not adept at maximising utility, which makes it a poor manager of resoruces, even if each individual project it undertakes minimises waste.

I don’t personally see a lot of evidence to suggest that the goods & services that are provided to us by the Australian government are done so particularly inefficiently, or that private operators could do immensely better. I’m not sure I’d say the same for the U.S., where the proportional amount of tax paid is about the same, but the level and quality of government services strikes me as being generally quite poor. And the U.S. has huge advantages of economies of scale and population density over Australia.

That’s not to say there aren’t other good arguments for allowing private operators to compete with the government on providing said goods and services.

The ‘operating balance’ is the difference between revenue and expenses (which are defined as transactions that reduce net worth, so they don’t include investment). That’s what we mean by public saving (although depreciation is not included as an expense here). The fiscal balance is the operating balance minus net capital investment (net purchases of non-financial assets minus depreciation). It’s explicitly intended as a measure of the saving-investment balance, and in turn the public sector’s contribution to the national account.

The reason this is confusing is that the operating balance sounds at face value like a more naive measure, but in fact it’s a better indication of what you and I mean by the public sector deficit, i.e. the G-T in the twin deficits identity.

Of course the state also provides some goods and services that can be counted towards the GDP, but it also consumes income. It does through the direct cost of employing a civil service to administer and enforce the tax code and the budget expenditure, and through the indirect cost of private citizens and businesses ensuring tax compliance and tax minimisation. There is also the cost of tax as a disincentive to effort, particularly for the lower paid, and the opportunity cost of using the income paid in tax for other purposes that would actually be more efficient, and generate more wealth.

What we are debating however is how the medium term budget balance target is ACTUALLY being interpreted by Treasury (and presumably by Swan). And my reading of it is clear. The underlying Budget Balance is defined as Revenue less Recurrent outlays less Capital Outlays. So the fiscal target envisages that all new capital outlays (meaning outlays on physical capital) will be paid for out of recurrent revenue - i.e. there shall be no net government borrowing over the cycle

It is a silly view and we both wish it were not so - but it is the political reality. We can’t hide our heads in the sand and pretend it is not so. On the contrary, we should both be pointing out the stupidity of that structural target.

So, there’s no problem with making such investments and financing them by the issue of bonds. Over the cycle, governments can borrow an amount equal to their net investment, which is about right.

In political terms, since the government has made the commitment already, it’s important that we stress the sensible interpretation rather than the silly one.

If that is the Rudd commitment it means it is precluded from net borrowing over the cycle.

Under that formula, if the Government invests in financial assets it has no effect on the budget balance but if it invests in physical infrastructure it increases outlays and thus reduces the budget surplus or increases the deficit.

My understanding is that Swan has embraced the same set of goals. At least that’s how the election promise read when I last saw it. Perhaps there is a loophole I am not aware of.

SJ, you are right to pick me up. Rudd is no libertarian in terms of the kind of society he wants to achieve. I only meant to say that the fiscal constraints he is imposing on new public investment are more consistent with the libertarian stance than with either the interventionist or agnostic stances.

If taxation became voluntary tomorrow, and everyone continued to pay the same amount of tax (because they individually determined that they were getting good value for money for the services that the state provides)

If pigs flew past my window, could I shoot them and say they were heffalumps?

So Kevin Rudd running a perpetually surplus budget isn’t libertarian at all, but rather a conservative fiscal position. A libertarian government would be less concerned about fiscal swings, long term budget surpluses greeted with tax cuts, long term deficits greeted with budget cuts. Even considering the social democrat government we have now under Rudd and the social democrat government we had under Howard, as a libertarian I’d be pressing for tax cuts and budget cuts even if it momentarily caused the government to go into deficit. I don’t think Rudd is proposing budget cuts, just growing the budget slower than economic growth.

Rudd is a fiscal conservative, not a libertarian.

They’ll look at it absolute terms, i.e. is the existing situation libertarian, rather than in terms of possibilities of future changes in direction.

Firstly, a libertarian would prefer a smaller surplus, and for the money to be given back. But the reason Rudd can do both (ie, bigger surplus + tax cuts), is because the economy is still growing. Look at Howard: he slashed individual tax rates, but still managed to increase total tax revenue by an enormous amount - and though he had ever increasing surpluses, he achieved this at the same time as massive increases in spending. Rudd and ALP are simply continuing this trend.

You actually think his policies are an “extreme form of fiscal conservatism”? Would you say the same of Howard?

A better measure is how much they spend. It increased under Howard (in real terms), and will no doubt increase under Rudd.