Incentives would help us invest our way to wealth

With Australia’s already slowing economy savaged by bushfires, the government should act immediately to get private sector investment moving to stimulate the broader economy, reignite jobs growth and lift flatlining productivity.

We can see that from well before the onset of the devastating bushfires Australia’s economy has been decelerating. Gross domestic product growth in the three months to the end of September came in at a mere 0.4 per cent. This signalled a reversing of the gentlest of gains in growth rates in the March and June quarters and sees us heading back towards the tepid levels of the second half of 2018.

Jobs growth has slowed from its stellar pace of recent years and in the 12 months to the end of November failed to keep pace with workforce growth, the workforce comprising those working and those wishing to. In the year to the end of November, unemployment and underemployment have trended higher. There are more than 700,000 unemployed Australians and a further 1.1 million wanting to work more hours.

This is far from crisis territory, but signs of an upturn are few and far between and risks of a more severe downturn are plain to see.

The disruptions wrought by the bushfires on local communities, rural and regional businesses and an array of supply chains will detract from the December quarter growth performance and, for the current period, may well overwhelm the impact of the welcome cash injections announced by federal and state governments.

Quite apart from the bushfires, foreboding signs have been evident for a while. The Reserve Bank and the Treasury have both rolled back their forecasts. According to the Australian Bureau of Statistics, the important construction sector shrank across the 12 months to the end of September. National Australia Bank’s latest business survey (released early last month) pointed to deteriorating business confidence and falling new orders. And earlier this month the Australian Industry Group’s industry performance indices showed manufacturing, construction and significant swaths of the large services sector all heading south as last year drew to a close.

The Reserve Bank already has the cash rate at the historical low level of 0.75 per cent and, while it would not be surprising to see a reduction to 0.5 per cent perhaps as early as next month or March, it is very clear that cuts from these sorts of low levels are not delivering the increases in investment or household spending that would spark a turnaround in economic activity and lift the jobs market.

It is true there is scope to experiment with less conventional monetary stimulus, but it seems these sorts of measures are better suited to stemming the risk of declining performance rather than having any track record in lifting activity.

In light of the now-diminished returns from monetary policy, a range of advocates has come out of the woodwork proposing policy actions to improve the efficiency or the supply side of the economy.

AI Group has been advocating for many years the need for action to better develop our workforce skills, our business capabilities, the pace of investment, our innovation performance and the importance of removing workplace-based constraints to employment growth.

While these sorts of measures deserve full support because they are so fundamental to longer-term advances in competitiveness and living standards, they typically yield benefits over years rather than months. Our reading is that the economy needs to be revived now.

The time has come for fast-acting fiscal policy to be pushed to the forefront. Bringing forward the infrastructure spending announced last year by the government is welcome but most of this is still years away.

We are not advocating a cash splash. For one, we are not facing the sort of crisis scenario we faced when “go early, go households” captured a forceful argument.

In any case, the evidence of the recent past is that with households in their present cautious mood, additional cash in hand is more likely to find its way into mortgage offset accounts, reducing credit card balances and the like rather than into high street or online sales. That was certainly the experience with last year’s personal income tax cuts.

Instead, we propose the introduction of a generous investment allowance to bring forward and increase business investment. It would allow businesses to deduct for tax purposes a larger proportion of their expenditure on capital equipment in the year of purchase rather than wait until later years to claw back the expenditure.

This simple measure would supercharge the engine room of the economy. It would help address our stagnant productivity growth, it would provide a welcome boost to job creation and it would stimulate a large cross-section of suppliers of machinery, equipment, materials and associated service industries.

Of course, it would have a budgetary cost — at least at first. However, in later years there would be fewer deductions remaining to be claimed and that would boost the bottom line of future budgets. And, critically, the measure would add to employment, income, activity and sales. And all of these would boost future revenue collections.

For maximum effect, the measure should be announced as soon as possible and should be effective from the date it is announced. The government should not wait until the May budget, otherwise there would be a strong likelihood that investment — including investment already in the pipeline — would be deferred until after the budget.

The government should be bold. It makes sense to cop the initial fiscal hit on the chin for the longer-term national benefits of boosting the economy rather than sitting by and watching as the economy and the jobs market grind slower.

Innes Willox is chief executive of the Australian Industry Group.