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Fortune favours the brave

David Bassanese
Wednesday, September 30, 2015

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By David Bassanese

Here’s hoping that newly installed Prime Minister Malcolm Turnbull and Treasurer Scott Morrison can breathe new life into Australia’s economic reform effort. That said, I have several concerns over how this may play out over coming months.

For starters, the risk remains that any surge higher in business confidence – such as in the widely watched National Australia Bank monthly business survey – proves just a one month wonder, as the reality of Australia’s near-term economic challenges and likely only long-term payoffs from economic reform again weigh on corporate minds. Indeed, as with the coming to power of Kevin Rudd in 2007, there is a risk of inflated expectations being quickly dashed.

We’ve already seen a hint of this with the consumer sentiment. After surging in week one of Malcolm Turnbull’s clinical power take-over, the ANZ Roy Morgan index of consumer sentiment slipped back by 3.4% the week after – to be back a little below its long-run average. Given an upsurge in financial market volatility, chances are the consumer sentiment will sink further over the next few weeks.

ANZ Roy Morgan Index of Consumer Sentiment

Prime Minister Turnbull would clearly like to shake things up to be sure, but we should not forget the political hurdles involved in getting much done. For starters, Turnbull has promised to be more “consultative” with his cabinet colleagues, meaning any economic reform is likely to require some compromise and drawn out negotiations. Then there’s the fractious Senate to consider, with the gaggle of independents that hold the balance of power proving to be quite populist, and seemingly unlikely to agree to tough reforms that produce some real losers. Sadly for those in or near retirement, however, one area of potential agreement could be the scaling back of superannuation tax incentives for high income earners.

As regards other areas of tax reform, any changes to the goods and services tax will require cooperation with the States. The States are unlikely to take kindly to reform measures that involve broadening the GST – or raising the rate – which then only serve to cut Federal income taxes. Meanwhile, Canberra is unlikely to be enthused about taking the political heat for raising GST revenue, only to then pass this onto the States for higher health or education spending.

To be fair, former Treasurer Joe Hockey did try to pursue high tech companies for siphoning off so much of their otherwise taxable profits to offshore tax havens (such as Ireland and Singapore). Whether Morrison and Turnbull demonstrate as much determination remains to be seen – after all getting the likes of Google, Ebay, Facebook and Amazon to pay more tax locally seems to fly in the face of promoting Australia as a new high tech hub for Asia.

As regards tax reform I continue to believe the boldest thing Turnbull could do would be to devise a new tax system that drastically – but fairly – slashed corporate and personal income taxes, so that we might try to become a tax haven ourselves. If we can’t beat’em, we might as well join them.

Tinkering around the edges of tax reform is likely to involve considerable political pain for very little real economic pay-off. Most critically, moreover, it remains the case that with the Budget still mired in red ink, Turnbull does not have much revenue to sugar-coat tax reforms. Any reform would likely need to be revenue neutral, meaning there will be as many vocal losers to contend with.

 Of course, there are other reforms to pursue – such as encouraging a more entrepreneurial “start-up” culture, and further streamline our still overly bureaucratic industrial relations system. But any reforms to the latter – however desirable – would then open up the Government to Labor/Union scare mongering about a return to the dreaded “Work Choices” environment. Turnbull is unlikely to take that risk.

As for encouraging start-ups, Canberra has precious little new money to offer – though one risk is potentially flaky proposals (as from Assistant Minister for Innovation Wyatt Roy) to tap into Australia’s superannuation honey pot. That would add to the long list of special interests with their own schemes to siphon off super funds.

At the end of the day, moreover, the reality remains that any “economic reforms” are likely to have only long-term economic pay-offs. Meanwhile, the most pressing issue remains the fact that the economy is mired in a low growth rut, with the non-mining sectors struggling to take up the slack left in the wake of the mining sector bust. By my estimates, for example, at least around one-half of the current Federal Budget deficit reflects low growth and spare capacity in the economy – so stronger economic growth is probably the single best solution to solving our lingering budget problem.

Ironically, therefore, perhaps the politically easiest way the Government might save money over the long-run is by spending more money today – such as through a more stimulatory March 2016 Budget or even mini-Budget before year-end. That said, I would not hold my breath, as Scott Morrison appears, at face value, to be quite fiscally conservative.

That means it will left to the weakening Australian dollar and – most likely – even lower official interest rates from the Reserve Bank – to give the economy the extra boost it needs over the coming year. 

Published: Wednesday, September 30, 2015

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