Focus on stimulus ignores need for long-term reform

According to the Australian Taxation Office, 650,000 people have already lodged 2018-19 tax returns, exceeding the lodgement rate of previous years. The Morrison government claims this is a sign of the eagerness of taxpayers to reap the benefits of the passage of its $158 billion personal income tax package on Thursday evening, after securing crossbench support in the Senate. The first tier of the three-stage plan, costing $15bn over the budget’s forward years, offers lower and middle-income earners a tax offset of up to $1080. The measure will help about 10 million workers, with about 4.5 million — those with taxable incomes between $48,000 and $90,000 — receiving the full amount. That boost to household disposable income will help consumer spending, which the Reserve Bank identified as the “main domestic uncertainty” after it cut interest rates a week ago to a record-low 1 per cent.

In a speech in Darwin last week, RBA governor Philip Lowe argued monetary policy alone could not soak up the spare capacity in the economy to lift wages and prices growth. Yet some observers interpreted this as a call for more fiscal stimulus. This furphy was ventilated by federal Labor MPs as they staggered through the post-election tax debate in a losers’ fugue. Having lost on May 18, a dazed opposition thought it had a duty to modify the Coalition’s entire tax program, claiming tax cuts needed to be brought forward to boost the economy pronto, while medium-term reforms to simplify and flatten the tax structure were biased to top earners. Thanks for the advice, Labor, but follow the play and watch the scoreboard.

The economy is growing at an annual rate of 1.8 per cent, below trend. But as the RBA noted in its monetary policy decision, “the central scenario for the Australian economy remains reasonable”, due to more investment in infrastructure and a pick-up in activity in the resources sector off the back of higher export prices, especially iron ore. Employment growth is strong and rates of participation are at record levels, the central bank noted. Wages growth in the private sector is up, but there is still a deal of slack in the labour market. A jump in auction clearance rates over the weekend — especially strong in the Sydney market — suggests greater confidence among home buyers may feed into stronger consumer spending.

The economy is not languishing. Perhaps Deloitte Access Economics partner Chris Richardson put it best in our Inquirer section last weekend, arguing the RBA rate cuts had been “badly misunderstood”. He drew an analogy about our economy: it’s like a car that has slowed down a bit, and the RBA has realised it was driving in a 60km/h zone when they’ve got to be in the 80km/h zone. Even Labor-aligned economists are arguing that further fiscal stimulus is not warranted and could, in fact, jeopardise a return to surplus. As we report today, experts believe the tax and interest-rate cuts should be allowed to do their job and the prospective surplus left alone.

Of course, the surplus is not an end in itself but insurance against global shocks. The Morrison government’s overall fiscal strategy has several goals, not least of which is to run surpluses, on average, over the course of the economic cycle and to cap the tax-to-GDP ratio at 23.9 per cent (which serves as a restraint on spending). Part of the plan is to reduce net debt to zero over the coming decade. Eleven budget deficits — although the just-ended financial year may throw up a sneaky surplus — has left us with a net debt of 19 per cent of GDP, with net interest payments of around $10bn a year. The personal income tax cuts — hefty as they are for the two political tribes, for different reasons — are really only the return of bracket creep to taxpayers. Indexation of the tax scales would impose proper discipline on Canberra.

What must not be lost in the fiscal argy-bargy is the need for economic reform. Infrastructure spending is the main game in NSW and Victoria. It’s a tantalising prospect to do more in this space as it stimulates the economy and adds productive capacity. But projects need a solid business case and sound financing. As Dr Lowe has said in his past four speeches, the best way forward is through structural policies that support firms expanding, investing, innovating and employing people. We need a strong, dynamic and competitive business sector. “It can deliver the productivity growth that is the main source of sustainable increases in our wages and income,” he told his Darwin audience. “As a country, we need to keep focused on this.” We agree.

Raising productivity growth has to be the main game of economic policy. Legislating the tax cuts is a milestone of sorts in our narky political culture, but Scott Morrison and Josh Frydenberg must aim higher — even if that means leaving behind Coalition naysayers and the timid big business lobby, distracted by second-order social and cultural issues. Some CEOs may be post-materialist; most of their shareholders and customers are not. The Prime Minister and Treasurer are superior marketers. They should use political capital in an ambitious agenda that includes, but is not limited to, taxation, industrial relations and reducing red tape. We need fresh policies that make our economy flexible and encourage investment in skills, infrastructure, plant and equipment. The nation needs a more dynamic operating system, to better compete in areas such as tourism and medical technology and to grow our economy — not fight over meagre spoils. The policy class, especially business, must focus beyond the next fiscal sugar hit or identity action plan.