Opinion: Treasurer’s tax tinkering not enough to crank up growth

THE most significant economic news this week wasn’t the Budget but the lowering of official interest rates. The RBA is worried global growth is stalling and we are following suit.

THE most significant economic news on Tuesday had little to do with the federal Budget.

It came from the Reserve Bank, which took the highly unusual step of lowering official interest rates on the day Treasurer Scott Morrison delivered his fiscal blueprint for the nation.

The prognosis from RBA governor Glen Stevens was not good.

BUDGET: Job creation, tax cuts centrepiece of ‘economic plan’

“Inflation has been quite low for some time and recent data were unexpectedly low.” he said. “While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

In short the RBA – which would have got a shock last week when CPI data came in at -0.2 per cent, putting Australia in deflationary territory – is worried global growth is stalling and we are following suit.

The problem our central bank faces though is that at these levels, where it is not so much the cost of borrowing but the demand for it that is holding credit growth back, monetary policy is losing its potency as a stimulant.

So in an environment where Australia is idling along at below trend growth levels, the key to cranking up growth lies with fiscal policy. This can be applied in two basic ways – either the government opens the purse strings and spends to replace flagging private sector activity, or it tries to kickstart investment and employment growth via tax cuts.

The first option costs the budget in direct outlays, which can be applied to anything from nation building projects such as the NBN to the sort of emergency cash drops we saw during the worst of the Global Financial Crisis. The hope here is that the stimulus will get the economy through a rough patch and eventually pay for itself through lower unemployment, increased confidence and consumption.

Option two involves the government foregoing revenue and passing the baton to the private sector in the hope that the animal spirits unleashed by tax cuts will do the job of expanding the economy and, ultimately, Treasury’s tax take.

This latter strategy, in the incarnation of the Enterprise Tax Plan, is the centrepiece of the Turnbull Government’s Budget, which will result in the company tax rate being lowered from 30 per cent to 25 per cent over 10 years, and the threshold at which this applies gradually raised, meaning at the end of the process, all companies will be taxed at 25 per cent.

This comes at a cost, reported as being close to $50 billion.

The growth dividend, however, is minimal, with Treasury’s own modelling suggesting the long-run benefit will be to increase GDP by about 1.1 per cent, or only 0.22 per cent in growth dividend for every 1 per cent tax reduction.

The benefits are there, with Morgans economist Michael Knox arguing that “what is smart about this program is that it provides extra investment at exactly the location in the economy at small to medium-sized business where most jobs are created”.

That’s true in that lightening the tax burden on productive effort is desirable, but the cuts – especially in the early years – are hardly of the magnitude that will have a profound impact on employment growth, particularly when government is trying to tighten in other areas.

More disappointing than what some observers have labelled a “trickle-down” approach to economic management is the fact the Enterprise Tax Plan comes in isolation rather than as an element of a wider reform plan.

It may be saleable in an election environment, but it is the sort of tinkering that could hardly be described as the sort of structural shift our taxation system needs.