Most Australians are proud of our public healthcare system. It faces virtually no opposition and any effort to shrink it is political suicide. Labor still runs scare campaigns claiming the Liberals plan to “scrap Medicare”, yet the Liberal Party would never even dream of it.

On face value, our public healthcare system does seem impressive: necessities are covered, you don’t need to be worried about a scary bill after a hospital visit, and you can be assured that life-saving care is always available.

But look below the surface and you will find many problems. Ambulance ramping is widespread across Australia. The cost of public healthcare is sending our country broke. And there is one issue that is never talked about: the weaponisation of public health.

THE WEAPONISATION OF PUBLIC HEALTH

Many saw this for the first time during COVID: the loyal foot-soldiers of public health were demanding that unvaccinated individuals should not have access to public healthcare. Those who failed to look after themselves should be given the lowest priority when they inevitably end up in the healthcare system due to COVID, or so proponents of vaccine mandates claimed. They were wrong, but they also promoted a dangerous idea: that public health should not be equally provided for everyone.

For those of us who have been following the erosion of our liberties under the guise of ‘public health’ for decades, we have seen this all play-out before. Smokers have been the canary in the coal mine. For decades, a public health war has been waged against smokers: endlessly raising taxes and pushing smokers further away from social settings. All of this has been justified by claiming that smokers are a burden on public health.

Forget the fact that tobacco tax covers the cost of smoking on the public purse over ten times and assume anti-smoking activists are correct. The fundamental basis of public health is that those who are generally healthy pay for the costs of those who generally are not, whether due to lifestyle choices or otherwise.

If we can justify taxing and ostracising smokers due to their over-representation in public hospitals, who else can we justify doing that too? Obese people? Motorcyclists? Consumers of alcohol? What about basing it on the suburb where you live? It is not hard to find out who lives in more unhealthy suburbs and extrapolate that to greater reliance on public health. Should we tax and ostracise them too? The revenue-raising and divisive possibilities are endless.

A WAR ON ALL FRONTS

Under the Rudd and Gillard Governments, we saw the cultural war machine push hard against smokers. Health Minister Nicola Roxon brought her own personal vendetta against smokers to her position. Roxon implemented annual tobacco tax increases, resulting in the price of a pack of cigarettes more than quadrupling from 2010 to 2020, and her pièce de rèsistance: plain packaging. Neither of these measures reduced the prevalence of smoking in Australia, but they disproportionately hurt low-income earners (the typical demographic of smokers) and fed a booming illicit tobacco market.

It seems the new Health Minister, Mark Butler, has picked up where Roxon left off – with a five per cent tobacco tax increase per year for four years. If we learnt anything from last time it will almost certainly go on longer than four years. On top of that there is a new war on vaping, a product 95 per cent safer than cigarettes.

As if the federal war on smoking was not enough, in South Australia, the Malinauskas Government wages its own, as do various local governments. Relegating smokers to outdoors is not enough – the SA Government wants to push smokers away from outdoor public settings. They also hope to prohibit cigarette vending machines, hurting an already struggling hospitality industry.

The boot will continue to press on our faces until there is nothing left.

WAKE UP AND SMELL THE TOBACCO SMOKE

This is not just about smoking. Smokers are the guinea pigs: fewer than one in seven Australian adults smoke and most already feel like junkies. Smokers are easy targets: taxes are increased and restrictions become more onerous with little public outcry.

Non-smokers should not only watch with concern but act! As Neil Gaiman said …

“If you don’t stand up for the stuff you don’t like,
when they come for the stuff you do like,
you’ve already lost.”

More than anything, this should serve as a warning of the dangers of socialised healthcare: it is a weapon ready to be fired at the latest dissident group. There is no such thing as a free lunch and the cost of this lunch not only threatens Australia’s back pocket. It threatens our individual liberties and, ultimately, our identity.

Real interest rates are negative at the moment.  By keeping them this way, the RBA is encouraging spending, facilitating the transfer of wealth from savers to borrowers and causing malinvestment.

That may seem to be a lot to unpack – but economics isn’t hard.  Yes, there are people who are paid to make it look hard but let me step you through negative real interest rates, what that means for consumers and investors, and why it means further rate rises are inevitable.

The real interest rate is the nominal rate of interest (the one you see on your bank statement or in the paper) less the rate of inflation. 

Right now, the RBA’s nominal cash rate is 3.5%.  Deduct CPI at 7.0% and the result is a real official interest rate of negative 3.5%.

Let’s clarify the key terms in this equation.

The “nominal interest rate” is the interest rate that you pay – the price of your money reported by banks and discussed by media. 

For the purposes of discussion, let’s assume we are lending to the Australian government and so we will use the “Cash Target Rate” as published by the RBA – 3.5%.

Now let’s consider inflation. In a previous article I explained the Austrian School of Economics definition of inflation:  an expansion in the supply of money through money printing, government debt and deficit spending.  Higher prices are the eventual consequence of inflation.

The commonly accepted measure of inflation in Australia is the Consumer Price Index (CPI) – which is currently 7.0% as most recently published by the RBA. 

But let’s make this “real world” – Westpac is offering 4.25% on term deposits. So that’s a real interest rate for savers of minus 2.75%.  Westpac is also offering home loans at 4.9% – a real interest rate for borrowers of minus 2.1%.

If the bank is offering to pay you -2.75% on your savings, or lend you money at -2.1% – what do you do?

Why are these numbers important?  Lenders set interest rates so that when they get paid back at some point in the future, the money they receive back includes a reward for taking the risk to lend PLUS compensation for any loss of spending power courtesy of inflation.

If I lend you $100 for 12 months today, I need at least $107 back in in 12 months to have the same spending power at that time – assuming you believe price inflation is only the published 7% (who does?). 

$107 will not be enough though!  I also need to be rewarded with a premium for taking a risk on you.  How much this “risk premium” is will depend on the circumstances. Lending to the newly established cafe on an unsecured basis is riskier than lending to the owner of the café secured by a mortgage on his or her house, which is still riskier than lending to BHP, which is riskier than lending to the Federal Government, and so the risk premium increases for each of these accordingly.

Where does the rubber hit the road on this? There are three things you can do with money.  You can spend it, you can invest it, or you can save it.

Would you save money
if the money you save
is going to be worth less in 12 months time?

You deposit your money and receive 4.25%, you get your $104.25 back in 12 months time but you can buy less with it then than you can today.

Do you spend it today? If you believe your money is losing spending power, then maybe you will.  So now you see, that with rates as high as they are, the current interest rate settings are in fact stimulatory!  If the current real interest rates encourage spending and discourage saving, do you think they will work to control inflation or fuel it?

You could invest your money instead of saving or spending it.  However, to counteract inflation and preserve the value of savings, investors face the challenge of finding suitable investment avenues. This can lead to the pursuit of high-yield high-risk investments, fostering speculation and malinvestment.

Understanding what interest rates are supposed to do (compensate for lost spending power and risk), the current levels of real interest rates (being negative) make absolutely no sense at all.  They punish savers and reward borrowers, effectively transferring wealth from the former to the latter.  And they encourage investors to jeopardise their wealth by seeking risk.

Where are interest rates headed then? Take a look at the chart below.  Historically the Cash Rate Target tracks above the CPI – for the reasons explained above.   And real interest rates are historically positive.

When observing this chart, can we really believe interest rates have peaked? That the RBA won’t be lifting interest rates again – if not tomorrow then certainly in coming months. And again and again?

Libertarians hate to pay tax, especially at current rates. Many subscribe to the view that “taxation is theft”, although most also acknowledge the government has a legitimate role in limited circumstances for which it requires funds.

With that off our chests, let’s get practical and talk about how the government’s debt collection activities in relation to small businesses interfere with the free market and create moral hazards. 

One of the most active ways the government intervenes in the free market at the SME level is through its debt collection activities.

SMEs accrue significant tax obligations, regardless of their profitability, because they are required to pay not only their own tax, but “other peoples” tax which they withhold on behalf of the ATO (commonly referred to as ‘withholding taxes’).

These withholding taxes include ‘Pay As You Go’ income tax they deduct from their employees’ wages and salaries, as well as the GST their customers pay on their purchases.   

A business turning over a modest $1m per annum and simply breaking even
can easily have upwards of a hundred thousand dollars in ATO obligations
for these withholding taxes.

Problems begin when businesses retain these monies to use as working capital instead of passing them on to the ATO as they are supposed to.

And this is where the moral hazard begins.  How tough should the ATO be when it comes to collecting these taxes from small businesses? 

The pro-small business observer might say the ATO should support small business by being lenient. 

And the ATO is extremely lenient. In fact, it has been extraordinarily lenient through Covid. In its last annual report, the ATO reported some $44.8b owing in overdue and uncontested (“collectable”) withholding taxes from small business. It also reported 13,000 small business tax arrangements entered into in FY 2022.

In its 2022 Annual Report the ATO stated:

As the economy recovers, one of our key priorities is to address the collectable debt that has accrued over the past 3 years. This has increased from $26.5 billion at 30 June 2019 to $44.8 billion at 30 June 2022 – up $18.3 billion or 69%. The increased debt is a result of disrupted economic activity due to lockdowns and cash flow impacts on small businesses and households. During the early stages of COVID-19 we deliberately shifted our focus away from firmer debt collection action to assist businesses and the community experiencing challenges because of the pandemic.

To put this $44.8b in context, according to the Reserve Bank of Australia, as of April 2021 the total outstanding credit to small businesses in Australia was around $291b, including loans from all types of lenders, not just the banks. Suffice to say the ATO is not a small player when it comes to extending credit to SMEs in Australia.

The moral hazards are as follows:

• The ATO gives a competitive advantage to a business which is either unable or unwilling to remit its taxes, allowing it to undercut a business that diligently pays its taxes and prices its goods and services accordingly.
• Many businesses that fail to pay their taxes ultimately fail. When that occurs, they take with them money they owe their suppliers, employees and sub-contractors, who might otherwise not have been exposed to the failed business but for the ATO keeping it in business.
• $44.8b in uncollected taxes is $44.8b our profligate governments will seek to gouge out of the rest of us one way or another elsewhere.

The Austrian economic principle of ‘creative destruction’ refers to the natural process of innovation and market competition, whereby new and more efficient ways of producing goods and services replace older, less efficient ones, and well-run firms outcompete poorly run firms. It is a Darwinian process where resources are re-allocated from losers to winners.  Creative destruction is essential for a prosperous free market as it encourages businesses to constantly innovate and improve, leading to greater efficiency, lower prices, and higher-quality goods and services for consumers.

The moral hazard created by the ATO in the form of leniency towards debt collection and granting unfair advantages to businesses that do not pay their taxes, compromise the process of creative destruction by propping up inefficient and unproductive businesses, inhibiting market competition, and ultimately hindering economic growth.

To promote a truly free market and ensure long-term economic prosperity,
it is necessary to hold businesses accountable for their tax obligations
and to allow the natural process of ‘creative destruction’ to take its course.

While the catch cry “taxation is theft” may be contentious, the practical implications of the government’s debt collection activities for small businesses cannot be ignored.  For those who favour a genuinely free market and long-term economic prosperity, we must hold businesses accountable for their tax obligations and question the role of the ATO in hindering the natural process of market competition.

“We contend that for a nation to try to tax itself into prosperity
is like a man standing in a bucket and trying to lift himself up by the handle.
It is impossible.” 

Those were not the words of an Australian Commonwealth Treasurer but rather of Winston Churchill addressing the House of Commons in 1925 arguing against a proposed increase in taxes.

Almost 100 years after Churchill’s comment, Treasurer Chalmers presented his second Budget, in May 2023.  It showed yet another record amount of tax collected and sums spent.  For the coming 2024 financial year, the Government expects to collect $668 billion (25.9% of GDP) to fund $684 billion of spending (26.6% of GDP). 

Of course, spending is higher than revenue so yet again
there is a deficit to add to the national debt pile
for our children and grandchildren to pay.

Of the $684 billion of spending, it is estimated that $356 billion or around 52% will be spent on health and welfare.

And within the social security and welfare line is the following:

From a standing start around ten years ago, assistance to people with disabilities, ostensibly NDIS, is now the second largest Commonwealth government program.

Over the life of the budget (FY23 to FY27), the average annual increase in spending on the aged pension increases by 6.5%, but the average annual increase in spending on the NDIS is 7.9%.  Both increases are faster than economic growth and the average annual increase in receipts (3.7%).

Like much of the developed world, Australia is experiencing an ageing population. It could be reasonably expected that spending on aged pensions might increase, but so much for superannuation. 

Yet given the rapid growth of NDIS spending, one might conclude that
Australia is also experiencing a dramatic increase in disability. 

Maybe there is something in the water.  Or perhaps the education system.

Parked near the back of the budget papers is an analysis of real per-capita spending and taxing: per-capita to adjust for government activity increasing due to population increases; real to adjust for inflation over time.  And in these numbers, the true state of budget disrepair is evident.

On a real per-capita basis, in the 2024 financial year:

• Commonwealth receipts are expected to be $18,102;
• Commonwealth payments are expected to be $18,479; and
• Commonwealth net debt is expected to be $15,574.

Impressive.  From an average four-person household, the Commonwealth expects to extract $72,408.

But here is the interesting part.  Thirty years ago, in per-capital real dollars:

• Commonwealth receipts were $8,866;
• Commonwealth payments were $10,110; and
• Commonwealth net debt was $11,364.

So basically, in the space of 30 years, on a per-capita basis, we are paying double the amount of tax, the Commonwealth is spending almost twice as much, and debt is 4.5 times larger in real terms.  And 30 years ago was 1983-84, when Bob Hawke came in inheriting a national economic basket case.

It is worth noting that the inclusion of historical real per-capita data in the budget papers is owed to the negotiation efforts of former Senator David Leyonhjelm.  Such important government finance transparency highlights the value of a strong classical liberal voice in Australian parliaments.

During the 1980 US Presidential election debate, Ronald Reagan asked the (rhetorical) question: “Are you better off than you were 4 years ago?” Here is a question for Australians.  Is Australian government better than it was 30 years ago?  Given the doubling of taxing and spending, are services better?  Is Australia safer?  Are we healthier or smarter?

Perhaps Churchill was only half right.  A nation can’t tax itself into prosperity, but Australia is trying to tax itself into welfare and disability.

Prior to 2020 I was an extremely proud Victorian. But what I’ve come to realise is that our human rights in Victoria are being limited or bypassed at the hands of the Dan Andrews’ State Government and are no longer adequately protected. It was also disappointing to discover from the results of our recent State election that a substantial percentage of our voting population seems to be content to accept that fate for the right price. That is, as long as they were still getting their salary or a decent welfare handout from the government.

The CFMEU protests in late 2021 made Victoria’s political landscape abundantly clear: the Dan Andrews’ Labor government with its heavy-handed police force, overpaid union boss and his “colleagues”, and their allies in the Liberal Party, joined forces against the people. In the end we saw unarmed protesters shot by Victoria Police with rubber bullets.

Although IBAC inquiry after IBAC inquiry digs up “grey corruption”, Dan’s “I can’t recall” line deflects any responsibility. $7.7million of taxpayers’ money was squandered defending the Andrews government’s disastrous decision to have night club bouncers run hotel quarantine. $5million plus residents’ legal fees will be paid to public housing residents in Flemington after the Victorian Ombudsman found the State government breached their human rights by detaining them without the support of health advice, and residents claim they were threatened with physical harm if they tried to leave.

The Premiers’ personal life is not void of colourful scandals either, including his “wife’s” collision with a teenage bike rider and the more recent falling down the steps saga. Dan’s track record is far worse than across the border in NSW where you lose your job over a bottle of wine, yet he remains untouchable. 

Transparency, integrity and accountability would be a good place to start.

Andrews has shamelessly run our State into an alarming level of debt. There is a serious mental health crisis caused by his response to Covid, and our current cost of living pain is real. Despite this, entertaining drag queens while they read books to children in Parliament seems to be his priority.

What are the remedies to all this? Transparency, integrity and accountability would be a good place to start. My suggestions to improve our current situation are as follow:

1. A Royal Commission
   Any government found to breach citizen’s human rights by the Victorian Ombudsman or in the Supreme Court should automatically trigger a Royal Commission. A Royal Commission into the Andrews government and its response to Covid is essential.
2. A Bill of Rights
   We need our human rights entrenched in our constitution, to protect the values of Australia that I once knew including freedom of assembly, freedom of association, and freedom of speech.
3. Strengthening IBAC
   As recommended by former Court of Appeal judge Stephen Charles KC, IBAC should adopt the broader international definition of corruption, “the abuse of trusted powers for personal or political gain”. As with ICAC (NSW’s equivalent), it is in the public interest for IBAC hearings to be made public and for it to publicise findings of corruption.
4. Full Transparency
   Taxpayer money should not be used to oppose Freedom of Information requests. Meeting notes, documents, emails and information used in support of important decisions having a major impact on our lives should be made publicly available.
5. Cut the Victorian Government’s political staff by 75%
   Andrews’ staff doubled from March 2020 to March 2021, costing taxpayers $49.2 million. The number of bureaucrats on $350,000 plus has increased by 142% since 2019. Ideally, his expanded public service should also be cut while we’re at it – the bigger the government, the bigger the problem.
6. Repeal Victoria’s political donation laws
   As an independent candidate at our most recent State election, I experienced firsthand the effect of the dodgy donation laws that saw the regime maintain an uneven playing field, winning government with just 36.6% of the vote. Any registered political party or independent candidate should be able to receive unlimited donations. Currently MPs receive more than $20m in public funding to cover administrative costs plus a communication budget. This money should be excluded from funding any expenses related to political campaigns.
7. Stop public funding for the Government’s political polling and consultants, and social media
   If Andrews wants to make decisions based on popularity or to buy fake followers to stroke his ego, he should pay for it himself.
8. No banning media
   Our media was hamstrung during Covid. If you didn’t ask favourable questions at Andrews’ press conferences, you weren’t allowed back. Despite my values of freedom of choice, when it comes to taxpayers’ money and journalism, all media should be allowed at any political press conferences. They work for us and shouldn’t need to ban certain press if they have nothing to hide.

We’re all familiar with the dictum, “In this world nothing is certain but death and taxes.” But Will Rogers also astutely observed, “Yes, and the only difference between death and taxes is that death doesn’t get worse every time parliament sits!”

The first thing to say about taxation is that we need less of it, not more.

Last week’s budget made it clear the government does not have a revenue problem – soaring iron ore, coal and natural gas prices are set to add $58 billion to tax revenue over the next four years. However, it does have a spending problem, with deficits predicted from here to eternity.

To address this, economists, businesspeople and, of course, State treasurers, kicked off the debate by proposing to raise and/or broaden the GST. Economic considerations aside, why the Commonwealth would even consider such a proposal is laughable. The Federal Government would bear all the pain and the States would enjoy all the gain – which they would no doubt spend as extravagantly as they do with existing GST proceeds.

Aside from the political reason, there is the simple economic reason:  a lift in the GST rate, or a base-broadening change, would simply give State governments more of our money.

Treasury officials, economists and business people will of course respond by saying they are not looking to raise more revenue, they just want to raise more from the GST and then offset that by reducing other taxes. But as occurred when the GST was originally introduced, by the time you have compensated everybody who says they will be worse off, you are left with only a portion of what the GST increase will raise. The result, as it was in 2001, would be a higher level of expenditure, a higher level of taxation, and no reduction in other taxes. This has been the experience with consumption taxes around the world.

It goes without saying that attempts at tax reform in Australia in the past have been disappointing.  The introduction of the Goods and Services Tax in 2000 resulted in a big increase in tax revenue – it will generate $80bn this year – a sum that was beyond the wildest imagination of even its most enthusiastic proponents back then. Getting the States to abolish many of their taxes, as they had promised to do as part of the GST introduction package, has, to say the very least, been problematic.  

One of the main problems is the fact that 70% of local, State and Federal taxes are spent on salaries.  It’s no wonder we haven’t seen a new reservoir built in 50 years.  And of that 70%, less than half is spent on essential services like nurses, teachers and police. As we know, whenever cuts in government spending are called for, politicians respond with “well how many nurses, teachers and police would you like us to cut?” They rarely ask how many media advisers you would like them to cut.

Presently, the Commonwealth raises around 80% of all taxation revenue in Australia, leaving the States with just 20% to fund their responsibilities. That 20% is less than half the revenue needed to fund State Government services. The balance comes from Commonwealth grants, many of which have conditions attached.

Fairly obviously, federal fiscal arrangements are dysfunctional.

As for tax law, the sheer quantity and ever-changing content of tax legislation has undermined its credibility.

One leading tax barrister described Australia’s tax laws as ‘unintelligible’.

It is practically impossible to know what the law is and what it means., and the High Court now seldom grants leave to appeal in federal tax cases, virtually giving up hope of ensuring the tax system remains subject to legal principles and normal adjudication methods.

Before the First Uniform Tax Case in 1942 the legislation occupied just 81 pages. It is now over 10,000 pages, (20,000 if you include fringe benefits tax, capital gains tax and superannuation provisions). If that’s not a recipe for dysfunction, it’s hard to know what is.

According to the market research company Roy Morgan, there are almost 2.8 million Australians who either want a job or would like more paid work.

Those 2.8 million people are all missing out on a better standard of living, and those who are unemployed are also missing out on the well-known benefits of having a job: self-esteem, purpose and support.

This is at a time of historically low unemployment. Employers are desperate for workers and many businesses have restricted their activities due to a lack of staff.

Two of the main contributors to this high number are the minimum wage and pension rules. Both are government policies and neither side of politics has any interest in changing them.

The minimum wage issue strikes hardest at those with low employment skills. People just out of school, just out of jail, low literacy, sole parents and refugees, for example. No matter how poor their resume or how willing they are to accept a job, they can only be employed if they are paid the minimum wage, currently $21.38 per hour (but considerably higher for irregular hours and casual positions).

It is against the law to offer them a job that pays less than the minimum wage, even if it is well above the $5 to $10 an hour they receive on welfare.  Yet paying them the minimum wage plus various on-costs makes no economic sense for most employers.

Before he entered Parliament and became a Minister in the Labor government, Dr Andrew Leigh was a professor specialising in labour economics. He found that reducing the minimum wage in Western Australia by ten percent would increase employment by around three percent within three months. 

In a separate study, Dr Leigh found that most people on the minimum wage are in middle income households.  By contrast, low-income households are typically in that position due to unemployment. A reduction in the minimum wage, by creating employment, would help them the most.

Other studies have shown that most people on low wages move on to higher wages after about a year.  In other words, low wage jobs are an opportunity for people to start at a bottom rung and work up. But with the minimum wage so high, many cannot even reach the bottom rung and begin to climb.

It is a peculiarly Australian problem: Australia’s minimum wage is now the second highest in the world. Australians start paying income tax once their annual income exceeds $18,200, but they are not allowed to get a full-time job unless it pays more than $39,000 a year. 

Another major barrier to both getting a job and working longer hours is the limit on earnings of those receiving age and disability support pensions or carer payments. The Institute of Public Affairs has recently done some research on this.

It found that whereas only 3 per cent of pensioners work in Australia, 25 per cent work in New Zealand. The reason for the difference is that in New Zealand, all income including the pension is taxed at normal income tax rates. There is no reduction in the pension.

In Australia, pensioners are only permitted to earn up to $190 a fortnight ($336 for couples) before their pensions are reduced by 50 cents for every dollar earned above that.  A pensioner with a job would not only pay income tax on their wages, but also lose a major chunk of their pension.

The effective tax rate can easily reach two-thirds.
Not surprisingly, most consider it not worth the effort.

And yet, pensioners who work would not only top up their income but also remain engaged in the community and pay tax on their wages.

At a time when the country is desperate for workers, this is a genuine tragedy. Instead of making it easier for those 2.8 million Australians to fill the vacancies, the government is opening the immigration floodgates. For some people, low incomes are compulsory.

Reform of the Reserve Bank of Australia (RBA) has been in the headlines. The problem with the RBA however is not structural.  It is a failure by the members of the board to be able to adequately define “inflation”.

At the heart of all the angst is the statement made by the RBA Governor, Philip Lowe, in 2020 that he did not think interest rates would rise until 2024.  Interest rates have risen, of course, and mortgage payments have exploded as a consequence. It’s therefore not hard to see how this stokes anger in voter land.

The Governor was not alone in making such forecasts. Most of the chief economists at Australia’s big four banks were making the same predictions. However, anyone with a basic understanding of what the word “inflation” really means knew these predictions were nonsense.

Inflation is simply the expansion of the money supply as a consequence of government debt and money-printing deficit-spending.

Think of the money supply as a balloon. When you fill it with hot air, the balloon expands. That’s inflation.

The result for you and I? Higher prices! 

For example, interest rates – which is a fancy way of saying ‘the price of money’ – go up. So it becomes necessary for lenders to ensure the money they lend today and receive in the future does not lose its spending power along the way.

Why are higher prices an inevitable consequence of the expansion of the money supply? Because the money fabricated by the government bids-up prices by competing with the money earned through wages and profits in the private sector.

When there is more money in the system,
but not more goods and services,
prices inevitably go up. 

Consider the fish market for example. There is only so much fish at the market on any given day. If the government stands at the gate and hands $100 to everyone who enters the market, demand goes up, as people are willing to pay more with that extra cash in their hands.

During covid, the government stood at the gate dispensing money freshly minted for it by the RBA in exchange for government bonds. We’ll get to government bonds in a moment. 

So did the RBA board not know about the nexus between the expansion of the money supply, price inflation and higher interest rates?  Or did they simply lie about the future of interest rates?

Inflation is toxic because it distorts price signals in the otherwise free market, creates malinvestment, enables “crowding out” (a topic for another day) and destabilises the economy.

It’s a favourite party trick of mine to show people the graph below from the RBA’s monthly chart pack. Note the alarming expansion in government bonds (see the grey area on the graph) the RBA accumulated on its balance sheet when the government issued bonds like crazy to fund its reckless spending during covid. There’s your inflation right there, Governor. It’s in your own data!

Anyone with a simple grasp of basic economics takes one look at that chart and draws the obvious conclusion that higher prices were coming soon.

“Global supply chains”, “the war in the Ukraine”, “yadda yadda”.  No! It was all the reckless debt-funded spending. They inflated the money supply and should have known that higher prices (and by extension higher interest rates) were inevitable in the short term, not way off in the future.

And just by the way, unions demanding wage rises are no more to blame for inflation as “greedy companies price gouging”. Pinning inflation on unions or businesses misses the point entirely.

Restructuring the RBA board will not solve the problem of economic ignorance. De-program aspiring board members of ‘Modern Monetary Theory’, ‘Keynesian Economics’ and other such nonsense. School them in microeconomics and Austrian school economics. Then RBA governance would not be in the news at all.

If smuggling isn’t the world’s oldest profession, it’s likely a smuggler was one of its first customers. The moment a tax or restriction is imposed on any trade, an incentive for smuggling is created.

Smuggling has also influenced world affairs. Britain’s heavy-handed attempts to prevent its US colonies from trading with the Spanish empire, which were circumvented by smuggling, stirred the desire for independence.

The Chinese government’s efforts to stop opium smuggling in the 1840s led to the opium wars, two outcomes of which were Britain’s acquisition of Hong Kong and China’s distaste for foreigners. And of course, smuggling of alcohol in America during Prohibition gave a huge boost to organised crime and led to the creation of the FBI.

In the twentieth century, the prohibition of recreational drugs led to smuggling becoming a vast international industry, funding organised crime and corrupting entire countries.  Moreover, laws passed to suppress it were often fundamentally at odds with a free society.

Given this history you might expect the Australian government to be wary of creating another opportunity for smugglers. As the saying goes, those who fail to learn from history are doomed to repeat it. Yet that is exactly what Australia is doing; a large and growing smuggling industry has developed as a direct result of its massive increases in tobacco excise.

Tobacco excise is increased in March and September each year by average weekly ordinary time earnings (AWOTE) plus whatever the government decides. The big jumps began in 2010 under Labor with a 25% increase followed by yearly increases of 12.5%. This continued until 2020 under the Coalition.

In July 2006 tobacco excise was 23 cents per stick, or $291 per kg. By February 2023 it was $1.14 per stick or $1,629 per kg, an increase of 490% and 560% respectively. Over the same period the CPI increased by 152%.  In other words, tobacco excise increased about 3.5 times as fast as inflation.

Cigarettes in Australia are now the most expensive in the world at about $2 per stick at retail level. This has contributed significantly to government revenue: three or four years ago tobacco excise raised around $18 billion dollars a year. For reasons that will become obvious, it is now around $14 billion.  

With the price of an entire pack of cigarettes costing less than $2 in some countries, there is an enormous incentive to smuggle tobacco products into Australia. It is said that even if nine out of ten containers of illicit tobacco products are intercepted, the profits on the tenth are sufficient to not only cover the losses but also reward the smugglers handsomely.

Smokers, a large proportion of whom have low incomes, at first responded to the increase in excise by reducing consumption, prompting health bureaucrats and anti-tobacco activists to pat themselves on the back. But, unlike in the rest of the world, the decline virtually ceased a few years ago. Many just switched to smuggled cigarettes and tobacco.

The periodic survey of tobacco consumption by KPMG found illicit tobacco increased from 14% of the market in 2018 to over 20% in 2019. A total of 3.1 million kilograms of tobacco, loose and packaged, was smuggled into the country, avoiding $3.4 billion in excise. 

The response of the federal government has been to boost deterrence and interdiction efforts. Penalties have been increased and, in 2018, it established an Illicit Tobacco Taskforce to “proactively detect, disrupt and dismantle serious organised crime syndicates that deal in illicit tobacco”.

The Australian Tax Office, which is responsible for stopping local tobacco production, also ramped up its efforts. It uses satellite surveillance to detect crops based on their biological signature, the same technology used to identify cannabis, and boasts loudly whenever it detects and destroys a tobacco crop.  

The availability of smuggled cigarettes and loose tobacco has not faltered.

To some extent this is of no great concern to anyone except the federal government. Cheap smokes are no more dangerous than the legal kind and the smugglers are merely evading taxes, not something most of us would seriously criticise.  The smokers who consume illicit tobacco products can hardly be blamed for wanting to save money.

The real problem is that the people smuggling tobacco are also smuggling other things. They are organised, sophisticated, dangerous criminals. Profits from tobacco smuggling are funding these other activities, including human trafficking. According to the US Department of State, traffickers are denying nearly 25 million people “their fundamental right to freedom, forcing them to live enslaved and toil for their exploiter’s profit.”

Whether the government should even expect to make a difference, given smuggling’s history, is a good question.

You would have to search long and hard to find where
smuggling has been substantially suppressed through law enforcement,
particularly in a country that respects legal rights and due process.

If the enormous resources devoted to the control of drugs have failed to limit their availability, why should it succeed with tobacco?The alternative of removing the incentive to smuggle tobacco into Australia by reducing the excise is never considered. Yet smokers would gladly buy their favourite legal brands if they were cheaper, legitimate tobacco suppliers and retailers would not be competing against illicit suppliers, and much less money would be spent on law enforcement.

The simple fact is there is no prospect of controlling the illicit tobacco market through enforcement, just as it was not possible to enforce alcohol prohibition in America or prohibition of drugs anywhere in the world. As the police would say, this is not a problem you can arrest your way out of.