The domestic economy seems to be ticking along with strong jobs growth, fuelled by public infrastructure spending, on the back of far-sighted asset recycling efforts, the NDIS roll-out and record low interest rates.
But possible systemic risks flowing from declining Sydney and Melbourne house prices are creating some uncertainty. These fissures may be magnified in coming months as the residential apartment construction boom reaches its crescendo, and a looming China slowdown crimps domestic incomes via falling terms of trade.
The new Prime Minister’s 2018-19 Federal Budget will be remembered for its rosy projections.
It assumes productivity growth of 1.6 per cent from 2019‑20 (the recent trend is closer to 0.8 per cent). This is the secret sauce which fuels wages growth to rise over 18 months to 3.5 per cent (currently at 1.9 per cent). This enables the nation to sustain the fastest population growth rate of any advanced economy (1.5 per cent infinitum) whilst achieving rising per capita living standards over the outlook for the first time since 2013. Wow!
It ignores the possibility of a significant correction in China. The terms of trade are set well above the long-term average (at least 40 per cent above the pre-mining boom level). It also ignores the risks associated with a small proportion of Australian households drowning in a sea of debt.
The budget will also be remembered for big fiscal promises to be delivered by the middle of next decade.
The $144 billion personal income tax cuts (addressing bracket creep by flattening the tax schedule by 2024‑25) and a $75 billion decade-long infrastructure spending program were the most striking. These were on top of the government's now abandoned company tax cut, which would have cost a further $80 billion over the next decade.
Are these three commitments fiscally prudent? They’re a long shot. In my view, the central forecast of the Treasurer (and of the Treasury) is what risk analyst Nasim Taleb might describe as a "tail event" - an occurrence that deviates beyond what is normally expected. This is fair as the Prime Minister is assuming seven consecutive "salad" years of trend growth to fund his policy commitments.
Addressing bracket creep might be good policy, if only the proposed mechanism of flattening personal income tax rates wasn’t so regressive. To restore progressivity they must be accompanied by broadening the income tax base. This would require disallowing tax deductions and tax expenditures that disproportionately benefit high wealth individuals. But this is not the government’s plan.
On the infrastructure spend, the Treasurer must ensure the dollars are well spent on projects that solve bottlenecks rather than on electoral calculus.
The case for further company tax cuts depends on whether foreign-owned multinational firms will use these to fund significant new investments because dividend imputation neutralises the impact of company tax on domestic enterprises. Given the multinationals here are already invested, we could be handing out $6 billion each year with no strings attached.
If the government enacts all of these reforms we may well face a soft economy and a sea of budget red ink.
So what might real reform look like in taxation and infrastructure spending?
Economist Ross Garnaut used the Melbourne Economic Forum recently to remind us how important it is to tax "economic rents". Right now these rents (often accruing to foreigner investors) are just not being taxed. Garnaut says rent-heavy industries dominate the corporate landscape in Australia - the banks, the miners and those who rely on the value of urban land.
On taxation, the ideal tax base is on an entity’s consumption, which is the difference between cash outflows (purchases) and inflows (sales) but excluding labour remuneration and interest. The Henry Tax Review called this a cash flow tax. The idea is to capture those who are avoiding tax (for example, IKEA, Google, IBM, Uber and Apple) through the skillful determination of international accounting firms.
On infrastructure, a project priority pipeline should be established and overseen by a fully independent "Parliamentary Infrastructure Office". It should be tasked with generating an apolitical ranked list of projects based on careful cost benefit studies. Australian governments could select options from the league table and private investors would have all the information and approval they need to originate these projects.
Piecemeal policy-making is simply a straitjacket for more meaningful reform. It misses the opportunity for grand bargains which give with one hand and take with another; allowing all to benefit from efficiency gains whilst quarantining the disadvantaged from the adjustment process.
Stephen Anthony is Industry Super Australia’s chief economist.