The Turnbull government’s survival depends on a far more serious internal battle than whether Barnaby should keep his fly done up. It’s between its two key economic advisers, Treasury and the Reserve Bank, over Turnbull’s centrepiece policy initiative to boost the lack-lustre economy – cutting company tax to 25 per cent. The Sydney-based Reserve Bank under new governor Philip Lowe has gone public in its disagreement with the Canberra-based Treasury Department under Secretary John Fraser, about the economic benefits of the government’s hotly-contested tax cuts. Last weekend’s effective repudiation by the RB governor of the Treasury mantra that corporate tax cuts are good for us was yet another unexpected (and undeserved) gift to Labor leader Bill Shorten. By insisting that any corporate tax cuts must not come at the expense of higher budget deficits, Lowe was effectively killing them off by providing the rag-tag collection of economically illiterate or nakedly biased opponents a cloak of respectability – although nothing could make respectable the ABC’s Economic Editor, left-leaning Emma Alberici, whose ‘egregious piece of Labor campaigning’ (AFR) on tax last week was removed from the ABC website for failing to meet the ABC’s editorial standards.
The RB’s warning that it would be a ‘big mistake’ to follow the ‘problematic’ Trump tax cuts (‘exactly the reverse of what was needed’) if it meant increasing the budget deficit is clearly in conflict with the Treasury projections that show a short term worsening of the deficit (a $4 billion hit to revenue) for a longer term economic gain. The Treasury’s advice for years has been that, as Australia’s income tax (corporate and personal) is still among the world’s highest as a proportion of total revenue, ‘a more competitive business tax environment would encourage higher levels of investment in Australia and benefit all Australians through increased employment and wages in the long run’. This has become more of an imperative as the Trump-led international competition to reduce corporate tax rates threatens to leave Australia behind – and uncompetitive. Lowe reluctantly admits that comparative international corporate tax rates are important; a recent IMF report noted their effect on the sort of international investment on which Australia depends so heavily. ‘We mightn’t like it but we can’t ignore it’, he laments – but still insists that the priority must be to protect the deficit.
Division between the government’s economic advisers is, unhelpfully, reflected within the business community, adding further weaponry to opponents. While most business leaders are united in calling for the Senate to pass the corporate cuts, some are not convinced tax cuts would bring in new investment and, in spruiking their own book at the cost of undermining the private sector campaign, prefer investment allowances, accelerated depreciation and incentives for technological investments. Naturally, no two economists agree although UNSW Prof. Holden extends the conclusion of a recent OECD study that corporate tax cuts benefit all income levels and do not unfairly favour the rich, by noting studies that show cutting company tax helps redress economic inequality; benefits to business and workers are shared in fairly equal measure, correcting a situation where high company tax rates have the worst wage impact on the low skilled, women and younger workers.
Getting its corporate tax cuts into law could be the only way the government could maintain its incredible success in creating new jobs – more than 400,000 in the last 12 months, or more than double the rate of growth of the working age population. Both its economic advisers, the Treasury and the Reserve Bank, reckon that there is a need to end the years of stagnant wage growth in order to stimulate consumer spending and economic activity. But stagnant wage growth has been one of the reasons for the record increase in people with jobs; employers can afford to take more of them on. And jobs growth is not because of more part timers; their proportion of employment has been around 25 per cent for the past 20 years. So increased numbers at work provided three-quarters of the 3.3 per cent rise in total employee pay last year. Turnbull must get either more jobs or higher pay in the run-up to next year’s federal election. Good luck!
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