Frank Stilwell on Turnbull’s Economic Plan
Q: When is an economic plan not an economic plan?
A: When it's a mixture of wishful thinking, class bias and trickle-down economics.
Malcolm Turnbull's election pitch was that his government would produce more jobs and growth in the Australian economy, while eventually eliminating the budget deficit. It was the central message in his party's massive TV advertising during the last week (substantially funded by his own money, it has been alleged and not denied). The Coalition's narrow election victory has put it in a position where it needs to deliver. What can we expect?
An actual 'economic plan' would involve setting specific targets and identifying an array of policy instruments for achieving those targets. This is not what is currently on offer. Indeed, it is anathema to the political right, fearful that real economic planning smacks of socialism.
What we have instead is some fragments of policies that are being touted as potential contributors to 'jobs and growth'. Specifically, five elements of the Coalition government's policy agenda are said to have this economic character: business tax cuts, building submarines, a business innovation policy, international trade agreements and cutting weekend penalty wage rates. While not forming a coherent economic plan, they deserve our attention.
Cutting Business Taxes
The proposal to cut company taxes has been the central plank of the Coalition's claim to be able to generate 'jobs and growth'. The proposed policy is a huge gamble that would see the government collecting about $50 billion less revenue over the next 10 years, as the ALP and Greens emphasised during the election campaign. Now that the government has scraped back in with only the most tenuous majority and a troublesome Senate, the horizon has effectively shrunk to just the next three years. The government will seek to cut taxes for what is calls 'small businesses', while substantially expanding that category to include firms with annual revenue up to $10 million (rather than the current $2 million limit). Estimates of tax revenue foregone suggest a figure of about $17 billion.
Can this reduction in much-needed revenue be justified by its potential contribution to creating jobs and growth? The government asserts it will do so by giving more incentive for business investment, but careful analysis reveals fundamentally flawed reasoning. The policy rests on five shaky propositions.
First is the belief that capital investment by businesses depends on their after-tax profits. On this reasoning, if the government allows businesses to keep more of their profit each year, they will spend it on capital goods such as new offices or factories, computers or whatever other equipment will help them to expand their outputs. However, as every economics student learns, what drives business investment is not the amount of internally-generated funds: rather it is the expectation of increased demand for their products relative to the cost of raising capital (which is already minimal because interest rates are at record lows). 'Tis wisely said, "you can take a horse to water but you cannot make it drink". In the absence of growing demand for their products, there is no reason to expect that business will respond to a tax cut by investing in expanded productive capacity. Any additional after-tax profit is just as likely to be used for buying residential real estate - precisely what an already speculation-prone economy and society does not need!
Second, even if some of the increased after-tax profits went into productive investment, the economic boost would likely be tiny. A careful look at the Treasury's economic modelling confirms this. Even with substantial pro-growth biases embedded in the assumptions on which the modelling is based, the projections of additional economic growth are remarkably small. The predicted boost to GDP over the ten-year period is only 0.6 per cent, which is within the margin of error of macroeconomic modelling exercises of this kind. In the real world, future events such as global financial crashes, recessions, and the economic fall-out from climate change, are likely to blow any such projections wildly off-course anyway.
Third, even if there were some small boost to the output of goods and services, this might not lead to any increase in employment. It is just as likely that the additional investment would be capital-intensive and job-displacing. The rapid technological change occurring in the current era, and which the government's 'innovation policies' are supposed to accelerate, understandably raises anxiety about 'jobless growth'. At best, a small number of hi-tech jobs and a larger number of insecure service-sector jobs for 'the precariat' seems to be the prospect. 'Jobs and growth' go nicely together in the slogan, but they don’t necessarily go together in the real world. Jobless growth is at least as likely as jobs and growth.
Fourth, even in the unlikely event that the policy of cutting business tax were to create employment growth, it would not necessarily create jobs that are sustainable for the future. The proposed cut in business taxes would apply equally to coal-mining companies and to renewable energy providers, to sunset industries and to potential sunrise industries. What Australia needs is to transition to a more ecologically sustainable future: that means creating a wide array of 'green jobs' and work directly geared to producing for social needs. There is nothing in an across-the-board cut in company taxes that would help bring this vision to fruition. Malcolm Turnbull has recurrently talked of the need for our economy to 'transition' to a different future that is less dependent on extractive industries, but the business tax cut policy makes no contribution to achieving this. A more selective approach to industry development is needed, which could include embedding environmental criteria in taxation policies, among other policies. Yet this is evidently quite beyond anything that the Coalition can contemplate.
Fifth, the government would get 'more bang for the buck' by putting the same expenditure - whether $17 billion over three years or $50 million over ten - into infrastructure rather than business tax cuts. Infrastructure spending would improve our transport systems, education and health facilities and the quality of urban and regional environments. It would directly create more jobs linked to areas of social need, rather than relying on a more indirect policy that might not bear any fruit at all.
Meanwhile, the Federal government has committed to spending over $70 billion on new submarines. Of this, at least it can be said at least there is a direct link to jobs, particularly in a South Australian economy coping with the unemployment consequences of car plant closure. Cynics might say that saving Christopher Pyne's job in Canberra has been the more immediate goal. The Xenophon team's electoral success shows that not all South Australians were impressed. Buying the subs 'off the shelf' would be much cheaper.
The long-term national expense, taking account of maintenance and running costs, has been estimated at about triple the initial outlay. So, while there is no doubt that it is employment focussed, the policy is sadly lacking fiscal rationale. The defence rationale is similarly opaque: from whom are the submarines supposed to be defending us? These toys for the boys are phenomenally expensive and the opportunity costs are prodigious.
Moreover, it is pertinent to ask: what if the policy were actually successful in creating some spin-offs for further military industrial development? This is an ambition asserted by the Prime Minister; but is it the kind of economic development we really want as a nation? Many people would think creating a minor 'military-industrial complex' down-under, no matter how unlikely a prospect, would be an unwelcome prospect. It would lock the nation economically into the perpetuation and intensification of sabre-rattling and warfare.
The so-called 'innovation policy' is a third element. This was one of Turnbull's 'signature' initiatives on becoming Prime Minister. Initially welcomed by some business organisations, it has since dropped out of sight. It did not play out well in the election campaign, apparently because many workers are apprehensive about policies that seek to accelerate job-displacing technological change, fearing that they will be the losers. Understandably, such insecurities are most strongly felt in the regions away from the capital cities. Also quite understandably, they pervade a society in which government seems to pay little attention to the casualties of change.
Only a comprehensive industry policy, linked to labour training and regional policies, could really claim to be managing these industry development processes to the advantage of all. Meanwhile, it is hard to take seriously the Turnbull government's claim to be leading the way to a more innovative society. Meagre funding for Australia's premier scientific institution, the CSIRO, is not consistent with a serious concern for science and its applications. Nor should we forget Turnbull's personal role in saddling the nation with a second-rate National Broadband Network. These policies make a mockery of the claim that this government is good at innovation and technology.
Well, what about the boost given to the economy by international trade agreements? This is potentially a long story, but it is one without a happy ending. There is a continuity between the Abbott and Turnbull regimes in terms of the claims made about so-called 'free trade' agreements - with China, with Thailand and with the Pacific Rim nations – but the evidence on their effects is spotty, at best. Interestingly, the government's rhetoric has changed to calling them 'export' agreements: but the reality is that they often lead to more increase in imports than exports. In the case of Australia's trade deal with Thailand, for example, the increased Australian imports from that country have outweighed the additional Australian exports by an estimated ratio of 9:1. The effect is deterioration in Australia's national current account.
Even the government's own economic modelling, based on pro-trade assumptions about market adjustments, shows that the potential economic benefits from trade deals are quite tiny. The long-term costs, however, are potentially enormous, particularly in relation to national sovereignty, the costs of pharmaceutical products, intellectual property rights and environmental quality. The trade deals are really as much about investment as trade: they give greater rights to investors, particularly multinational corporations who are enabled to sue governments if national policies go against their interests. The Trans Pacific Partnership is teetering on the brink of collapse, because of widespread public concerns in many of the nations that have been involved in negotiations. The sooner the TPP is stopped the better. The ALP would be wise to now withdraw its already wavering support for it.
Weekend Penalty Rates
The long-simmering wish among right-wing politicians for reduction in workers’ weekend wages could perhaps be added to the list of the Coalition's economic policies. Actually, it smacks of class vindictiveness rather than economic policy. To the extent that warrants any place at all in this discussion of an ‘economic plan’, it rests on the simplistic belief that cutting wages would increase output and employment. But would that really be the case with weekend penalty rates? As Keynes famously taught, cutting wages also cuts the total domestic demand for goods and services, thereby tending to lower national income and employment levels. Offsetting this, it might be conceded that, if the wage cuts occurred in export-oriented industries, there could well be some gains in sales and profits. But that is not the case here. Most of the workers getting weekend penalty rates are in industries such as retail and hospitality which serve primarily local customers. Reducing the wages of these workers will create more hardship and increase economic inequality while adding nothing to national productivity.
Looking across these five aspects of the Coalition's policy agenda, it is hard to see any basis for thinking they will deliver macroeconomic improvement. Rather, we could expect more economic inequality, more instability and more uncertainty about jobs. These concerns should certainly get a good airing during the processes by which the government has get its proposed policy changes through a troublesome Parliament in which the Government does not reliably have the numbers.
Opposition to the policies could well hinge on concerns about inequality. The proposed policy of business tax cuts is particularly problematic in this respect, but so too is the push for cutting penalty rates for wages. The declining share of wages in national income, relative to the profit share, is one of the factors already causing widening economic inequality in Australia.
Increasing the inequality further will undermine the demand for goods and services, and therefore reduce the incentive for investment and job-creation. It can also be expected to intensify an array of social problems, including homelessness, mental and physical ill-heath, violence and crime. There is reputable social science research showing that inequality exacerbates these problems. The need for government expenditure to deal with the resulting social stresses could have the effect of blowing out the budgetary deficit even further in the long term. A new report by the Evatt Foundation (called 'The Wealth of the Nation') carefully documents the already pronounced inequalities in wealth in Australian society: half of the total household wealth is held by just ten percent of households, the other half being shared (very unequally) among the other ninety per cent.
A side-effect of cutting business tax would be to exacerbate these wealth inequalities. This is because a lowered rate of business tax increases the scope for tax minimisation by the wealthy. When he was Federal Treasurer, Paul Keating used to make much of the need to equate the business tax rate with the top rate of income tax, so that incentives for disguising one form of income as the other would disappear (although he did little to achieve that outcome during his own period as Treasurer). The Turnbull government's policy would increase the capacity of wealthy individuals to reduce their tax by representing personal income as business income for which the tax rate is lower.
Of course, it is also pertinent that companies do not generally pay the standard rate of tax on their profits anyway. Some pay negligible amounts, relative to their profits. According to research by the Tax Justice Network, the average payment is around 23 per cent, not the standard 30 per cent tax rate. Many large businesses employ tax minimisation specialists who use every available loophole for this purpose. Tax havens are commonly used by businesses and the wealthy to escape tax liabilities. Malcolm Turnbull is personally acquainted with this. Yet his current tax policy - couched in terms of rhetoric about helping innovative yet struggling 'small' businesses - seems oblivious to what payment of business taxes actually involves for many companies.
Meanwhile, we may anticipate a steady growth in the government's budget deficit. This is not inherently a major economic problem, because deficit budgeting is appropriate during periods of macroeconomic difficulty. Nevertheless, it does become a problem when it is based on a long-term structural imbalance between expenditure commitments and revenue sources, and when it becomes cumulative. It is certainly 'not a good look' for a Coalition government that first came to office and was then re-elected promising 'budget repair'. Of course, there is a solution – to increase taxation on wealth and to eliminate tax loopholes that mainly benefit the wealthy. The ALP's proposals for increasing capital gains tax and limiting negative gearing to only new housing are consistent with that, as are the proposed tighter rules for superannuation that the Liberals took into the election campaign - about which they are now in such internal strife! With the Turnbull leadership increasingly under the thumb of the right wing within the Coalition parties, progressive tax reform evidently cannot get on the agenda.
The other way that budget repair might be achieved is by slashing public spending on health, education and social services. Turnbull’s Treasurer, Scott 'there's no revenue problem' Morrison, frequently makes public statements signalling this intention, although usually couched in more neutral language about 'cutting waste' and 'making savings'. But, to really go through with this would be like trying to implement Joe Hockey's 2014 budget Mark II: would they really dare to bring it on? And how could major cuts to social spending be justified at a time when the government would also be cutting business taxes and spending lavishly on submarines?
The government's so-called 'economic plan' does not stand up to critical scrutiny. It looks particularly ill-suited to the economic conditions that the nation faces in the aftermath of the local mining boom and the continuing financial instability on a global scale. There is little 'on the table' that provides an affective antidote or alternative. Rather, we are being offered continuity in the form of 'trickle-down economics'. This is the belief that giving wealthy people even more income will eventually benefit everyone. It is a self-serving elite ideology, rather than sound economics. It was deeply embedded in the policies of US President Ronald Reagan, for example, emphasising tax cuts for the wealthy as a means of creating more incentives for wealth-creating private enterprise. Reaganomics caused both economic inequality and the budget deficit to surge. Are we doomed to re-run this failed policy?
The Coalition's oft-restated commitment to 'jobs and growth' is an Abbott-style three word slogan, hitched to a give-away to the big end of town in the form of business tax cuts and some assorted policies that intensify economic inequalities. When the promised surge in ‘jobs and growth’ fails to materialise, the government will have three options: (1) abandon any claims about its capacity to undertake 'budget repair', (2) engage in big cuts to social services, health and education in the attempt to get the government budget back into surplus, and/or (3) raise the rate of taxation on goods and services (GST).
No-one knows for sure what the future will bring, but it is hard to take the government's 'economic plan' seriously without also mentioning the tooth fairy or the prospect that pigs might fly...