THOSE who agree that government revenue and expenditure are seriously out of kilter were relatively sympathetic towards the recommendations of the Commission of Audit.
Most economists agree that budget deficits extending beyond a year or two are an unacceptable impost on future taxpayers, especially the young, and that returning the budget to surplus should occur rapidly.
Under the Commission of Audit’s plan, it would take at least five years to bring the deficit under control. My party and I (the Liberal Democrats) have produced our own version of the federal budget in which we show how we can return it to surplus within one year. It is published in today’s Financial Review and incorporates some of the Commission’s proposals.
Among the Commission’s recommendations are cuts to corporate welfare, currently totalling about $10 billion annually. That refers to the money paid by taxpayers to businesses. Proposals that affect the rural sector include abolishing ethanol production subsidies and the Rural Finance Counselling Service, and reducing funding for Landcare and the Murray-Darling Basin water recovery plan. From our perspective, this is all good.
But there are also recommendations for reductions in funding for research and development (R&D), currently worth around $9 billion a year. The Commission proposes rolling the system of Co-operative Research Councils (CRCs) into the Australian Research Council along with reducing government support for rural Research and Development Corporations.
While reducing funding for the CRCs is not a concern given their already close links to industry, the R&D Corporations are mostly funded by compulsory levies. The question arises as to whether this is a valid policy approach and whether additional government funding for them is warranted.
The levies are essentially special taxes imposed on farmers to fund R&D (and in some cases marketing). At least as far as the R&D is concerned, the beneficiaries are scientists, who are paid to discover things that will benefit the industry, and farmers, who benefit from the innovations.
It is undeniable that productivity growth requires innovation, and that R&D contributes significantly to innovation. At issue is who pays for it. At the most basic level, it comes down to whether ordinary taxpayers such as bus drivers and bricklayers should be helping to pay for research and development intended to increase the profitability of farmers.
Nobody should imagine that governments have money of their own. All the money collected by governments, amounting to hundreds of billions of dollars, comes from taxpayers. When the government hands out money as welfare, whether for individuals or businesses, it is merely acting as the intermediary. The same result would be achieved if a bus driver or bricklayer handed over cash to the recipients, except there would be no need for the public servants. Welfare is the distribution of other people’s money.
Claims that welfare for agriculture is justified because it produces our food, with the implied threat that production might cease if the funding is withdrawn, should also be discounted. The argument is patently false, and those who make it could reasonably be labelled liars since they know that full well. Australia has an enormous food surplus, none of which is attributable to public funding.
The Commission of Audit noted that in return for the government contribution, the R&D Corporations are expected to fund some research that has broader public good objectives. Much of this has been directed at issues relating to climate change, which is arguably of no benefit to anyone, but there has also been useful work into issues such as water quality, soil salinity, erosion and habitat preservation that have implications beyond agricultural production.
If there are benefits arising from the work of the R&D Corporations that cannot be captured by agricultural producers, a case can be made for some level of public funding. The Audit Commission was of that view when it recommended a reduction in funding rather than complete cessation.
But it could also be argued that such funding should occur case by case. If the government wants research undertaken from which the benefits will be largely public, it could instead pay for it on a project basis. Handing over a pot of money calculated by reference to levy income, as we have at present, will inevitably see it being used for research that overwhelmingly benefits producers.
As for whether compulsory levies are the right way to fund rural R&D, I recently had the benefit of discussing this with a very smart professor of economics. His view was that the inability of individual producers to fund R&D and retain the benefits for themselves amounted to a relatively rare example of market failure. He considered the pooling of resources to pay for the R&D, with the benefits accruing to all producers, is an appropriate policy approach.
I accept his argument, although I believe producers ought to have a collective right to vote on whether the levies should continue and at what level, as wool producers already have.
But as for using the taxes of bus drivers and bricklayers to pay for R&D, that’s another matter. The problem is, their money is already being spent on far too much.