RBA’s Lowe rejects Labor line on company tax cuts

The RBA Governor has rejected Labor’s line on corporate tax cuts, saying Australia needs to attract foreign investment.

Reserve Bank Governor Philip Lowe has rejected Labor’s argument that cuts in the company tax rate aren’t affordable, stressing the need to keep Australia’s tax system internationally competitive at the same time as the budget is brought back to surplus.

In his first speech of the year Dr Lowe said Australia risked losing the valuable insurance it enjoyed before the financial crisis unless it rebuilt its “fiscal buffers”.

“Looking forward we need to make sure that we continue to have this insurance,” he said, noting that the government’s net debt “was still low” but had increased dramatically.

“Simultaneously we need to make sure that our tax system is internationally competitive,” he added, singling out the corporate tax, “where there is a form of international tax competition going on in an effort to attract foreign investment”.

The government will welcome the Governor’s remarks, which came in the midst of a tense week in federal parliament, which saw the prime minister deliver a fiery attack on Opposition Leader Bill Shorten’s credibility.

At the same time Labor confirmed it would keep blocking the government’s plan, first announced in last year’s May budget, to cut the company tax rate to 25 per cent over a decade, claiming it isn’t affordable.

The Opposition has also blocked more than $40 billion in savings over ten years, which will make it harder for the government to achieve its goal of returning the budget to surplus by 2021.

Donald Trump’s election as US president has intensified debate about company tax rates, with House Republicans promising to boost the country’s competitiveness by reducing corporate taxes to 15 per cent, which is half Australia’s rate.

The UK has already cut its company tax rate to 20 per cent and it is due to fall to 17 per cent by 2021.

The governor also weighed into the contentious housing affordability debate, suggesting more spending on transport infrastructure could help make homes more affordable, “which is an increasingly important issue”.

“Good transport infrastructure opens up opportunities for people and opens markets. It also improves communities,” he said, at the speech in Sydney before an audience of CEOs and investors.

The governor also reiterated Australians’ high levels of debt, which politicians tend not to talk about. “Overall households are coping reasonable well with this but there are clearly risks,” he said. Australian households’ debt as a share of GDP is the highest in the OECD.

The Reserve Bank will release its quarterly economic statement tomorrow, which is expected to include healthy growth forecasts of 3 per cent over the next few years. The RBA expects inflation, which has been below 2 per cent for more than two years, to begin rising.

The governor brushed off the possibility of a recession. “Unexpectedly GDP did fall in the September quarter last year, but this largely reflected a confluence of temporary factors,” he said, expecting “reasonable growth” in the last three months of 2016.