By Joe Montero
Treasurer Scott Morrison is calling for the company tax rate cut to be fast tracked, claiming that this is the only way to get the Australian economy moving.
Scott Morrison is dead wrong about this.
It is important to get past the hype that this tax will encourage investment and that Australia needs to follow company tax cuts in the United states and Great Britain to be competitive.
While it is true that the amount of investment in Australia is currently going down and that this is important, this should not blind one from realising that the forms that this investment takes is just as important, if not more so. Failure of the government to take this into account, can only lead to improper policy. And this is exactly what is happening.
The best explanation for the failure is that sectional interests of some of the biggest backers of the Coalition parties are writing the policy and the politicians are following the script.
Jim Miinifie, in his report for the Grattan Institute, Stagnation Nation: Australian investment in a low growth world (2017), suggests that a major factor is that investment in mining has fallen 15 percent since 2015 and 12 percent in the last year alone, and occurring within the context of a sluggish global economy and changing demand and price patterns. It makes intuitive sense and is also backed up with evidence.
Past over-investment in the industry is also a problem, because sooner or later, later a crunch was bound to come to pull down the excess.
Even more important. is that the structure of investment is changing, and this change is already pronounced. According to information from the Reserve Bank of Australia (RBA), non-mining investment has risen 5 percent in the last year. This is not as much as it looks, because it has risen from a low base. Nevertheless, it is a rise.
Much of it has been taken by investment in telecommunications and most of what is left over is accounted for by the growth in the selling of goods and services, continuing the shift away from traditional industries.
A marked characteristic of the services sector, in the periods following the introduction of computerisation, is that it is much less capital intensive than mining and manufacturing. What this means is that starting up, operating and expanding economic activity requires less investment in technology and processes and is much more labour intensive. A higher labour intensity is a big reason why this is the major growth area for new jobs, whether full time or casualised and from where the biggest pressure for cutting the cost of labour is coming from.
A consequence of the fall in capital intensity is that less investment is required and a large part of what is available goes somewhere else.
The fall in foreign investment into Australia is substantial, for a mix of the reasons just mentioned and the state of the global economy, including the condition of the economies from where this investment originates.
Given that foreign investment into Australia makes up about a third of the total and is concentrated in the biggest enterprises and most important parts of the economy, what happens with this is very important. There is a difficulty in being very precise about the amount and its trends, because Australia no longer publishes clear data. Rule of thumb estimates must be made by other means.
What we do know is that the balance on the Current Account, which includes trade in goods and services and the international interest and dividend payments, shows that foreign investment coming in has slowed. Nevertheless, a large amount is still coming in.
Much of it is being attracted to the magnet of government and non-government bond markets. Both are growing despite a longer-term decline in yields, suggesting that a depressed rate of return is being experienced over both the whole of the Australian economy and the global economy, which serious enough to still make this option an attractive enough proposition for major investors.
Government bonds, those of the federal and state governments together, are now accounting a little above than $600 billion. The money raised goes to meet government expenses, in a climate where government revenues from other sources is declining. The sting is in that when the bonds maturate, this money needs to be paid back with an added premium.
Non-government bonds are soaking up much more investment and is standing at around $1,750 billion, which is drawn away from direct investment in other areas.
Most worrying is that over the last 10 years, the proportion being re-invested in asset backed securities has been steadily falling. The implication is that most of this huge amount of money is going into the banks and other financial institutions. They are the real growth story in Australia.
A shift on this scale must cause repercussions for the rest of the economy, in the form of distortions in investment patterns, causing over investment in some areas and under investment in others.
In the light of all this, the intended cut of company tax can only make matters worse. It will not correct the structural change, the distortions of investment, or the influencing factors that are outside Australia. Government will become even more reliant on selling bonds to pay its way. Private investment, especially foreign investment, will continue to be drawn into a bloated financial sector.
the reality existence of many ways out that allow big business pays very little tax anyway, must be considered. A reduced rate will have little practical application in terms of dollars paid.
The main difference is that it provides multinational corporations with lower risk of scrutiny and helps to legitimise tax avoidance.
A cut to company tax rate, provides greater freedom to move financial resources around the world and improves capacity to take better advantage of shifts in the global economy, whether this is in Australia’s interests or not. The reduction in company tax is therefore another means of financial deregulation.
Even in this scenario, a case can be made for reducing the company tax burden, so long as it is not across the board.
Selective application can be used to target growth into specific areas where growth is needed and away from where investment is excessive. For instance, relief can be provided to manufacturing enterprises starting up or trying to continue in difficult circumstances. Taxation relief can be used to encourage the growth of new sustainable technologies that are the way of the future. And it can be sued to assist small business.
Conversely, company tax can be raised where investment is excessive and causing problems and on enterprises in industries that do not fit in with Australia’s future needs.
Part of the mix must be to ensure that government can raise enough funds to be less reliant on the sale of bonds and become a bigger positive player in the Australian economy.
This is a conversation that Australia needs to have.