THE STATE OF THE ECONOMY
A moment of insight into the big picture of our economy may 'trickle down' the pages somewhere and grab a voters attention. It is this stuff that determines the boundaries within which voters aspirational goals like buying a home, a new car, or putting a decent meal on the table for the family will or will not be met. Voters have control of life, but not all of it.
Background 2016 – 2017
Economic catch phrases and mantras
Repeated ‘catch phrases’ that will haunt Parliament transcript recorders, the media, advertising slogan designers and electors (yet again) in Coalition election mode semantics when speaking about themselves will include fiscally responsible, net improvement, credible-fully costed, jobs growth, economic growth, securing our future, consumer confidence, business confidence, sustainable budget, lower taxes and improved wages. [So too the Coalition struggle to find credible evidence for the last catch phrase on this list].
When speaking about the Labor Party and their ‘economic plan’, expect the polar-opposite ‘catch phrases’ to underline Coalition rhetoric: fiscally irresponsible, net economic decline, un-costed policy promises, jobs stagnation, economic collapse, threatening our future, declining consumer confidence, attacks on business confidence, unsustainable budgets, higher taxes, higher debt.
There is no catch phrase that is opposite to ‘improved wages’ in Coalition economic statements in 2016.
This ‘Achilles heel’ of ‘trickle-down economics’ was exposed by the Treasury in 2016, yet the issue hardly set a ripple in pre-election campaigning or media coverage that year. Real wage growth that keeps up with the growing cost of living [the consumer price index] hit a twenty year low in 2016, according to Treasury. So much for the long discredited ‘trickle-down economics’ mantra which has been the foundation of Coalition economic policy since the 1980s.
A rising tide lifts all ships?
In raw economics terms, neo liberal, free market ‘trickle down economics’ gives priority to structuring the economy and tax system so that it improves the disposable revenue of the corporate business owner and shareholders sitting on his yacht and the small business owner sitting on his tourist catamaran.
By cutting corporate business tax and small business tax, the economic tide of the whole economy rises and, hey presto, Jane Bloggs sitting in her dinghy fishing for her next meal finds herself being offered a full-time job or getting her first pay rise in ten years.
Evidence of the priority given to big and small business interests in this ‘trickle down economics’ approach in Coalition policy is not hard to find. The three most obvious and significant of these have been
(a) the failed attempt to introduce significant tax cuts to Australian big business companies on the grounds that doing so would make them more competitive in a global economy
(b) the successful introduction of tax cuts to small business [up to $50M] operators in Australia and
(c) the new Treasurer’s November 2018 announcement of the Australian Business Securitisation Fund for small business operators.
The 2016 Pre-Election Fiscal and Economic Outlook (PEFO)
The PEFO reflects economic facts released by officers of the Treasury and the Department of Finance. It is released independently from the Government as early as 10 days after a Federal election is called.
Australian Governments seek to spruik their economic credentials and the success of their economic plan by selectively drawing our attention to key economic indicators provided by Treasury, the ABS and other credible sources.
The Opposition will, often also selectively, draw on the same sources in an attempt to discredit the economic credentials of the incumbent government and under-write the credibility to their claims of a better plan for the Australian economy.
The key economic indicators of the 2016 PEFO highlighted by the Coalition for the 2016 election campaign were
- A net budget deficit improvement of $1.1 billion over the next four years.
- The Australia’s economy growing at more than 3 per cent;
- An economy growing faster than the US, UK, Canada well above the OECD average;
- Improved export volumes and trade balance;
- Solid household consumption growing at 3 per cent over the year;
- Employment increases of 225,000 over the year to May 2016;
- An unemployment rate at 5.7 per cent, down from its peak of 6.3 per cent in July 2015;
- Consumer confidence 7 points above the confidence level a year prior;
- Business conditions and confidence remaining positive and
- A stable international credit rating at the top level of Triple-A.
What about Wages?
The practical impact of PEFO reported information.
2016 pre-election indicators of wages growth, stagnation or decline in the PEFO report were not mentioned by the Coalition.
Nor was there anything to see on this critical issue for ‘hardworking families’ in the Coalition’s 2016 claims about the pragmatic impact on their economic management.
The Coalition claimed it would be able to
• ensure jobs and growth, particularly in regional areas;
• guarantee increased funding for hospitals, schools and roads;
• increase funding for mental health, medical research and finding cures for cancer;
• boost infrastructure investment;
• revitalise cities and urban areas;
• invest in our environment, including the Great Barrier Reef;
• promote business investment and innovation;
• ensure safer communities and
• guarantee the protection of Medicare and funding for health, education and infrastructure.
2016 PEFO findings on Wages Growth, Inflation and GDP
Gross Domestic Product [GDP] equates to how much wealth the entire country creates over the course of a financial year.
In the Treasury report, nominal GDP growth was “forecast to be 2.50 per cent in 2015-16 before rising to 4.25 per cent in 2016-17 and 5.0 per cent in 2017-18”, a big tick to Turnbull’s persistent 2016 election mantra of ‘jobs and growth’, both of which were achieved leading up to his dismissal as Prime Minister in August 2018.
However, a twenty year low in the paid workers share of that growing national wealth [GDP] reflected in wages growth was of no comfort to ‘hard working Australians’ who could find the pre-election Treasury report and read this paragraph on page 14-
“Wage growth has also been subdued, with the most recent result indicating wage growth of 2.1 per cent through the year to the March quarter of 2016, the lowest it has been since the series began in 1997. The risks to inflation and wages remain on the downside and, if inflation and wages remain persistently weak, they would detract from nominal GDP growth with negative consequences for tax receipts”.
Source: Page 14. Pre-election Economic and Fiscal Outlook 2016. A report by The Secretary to the Treasury and The Secretary of the Department of Finance May 2016 https://www.finance.gov.au/sites/default/files/PEFO_2016_consolidated.pdf.
What did that Treasury statement mean for people reliant on wages as their main source of income?
It means that employees share of the growing Australian economic pie had hit a twenty year low ahead of the 2016 election and wages growth was at risk of ‘remaining persistently weak’.
This was not the kind of message a Government wants to take to an election. It was buried under more palatable catch phrases like ‘low unemployment’ and ‘consumer confidence’. The Turnbull Government won the 2016 election with a one seat majority.
In February 2018, Martin Farrer at The Guardian warned that
"If corporate profits keep rising while wages stagnate, voters will know who to blame".
The justification for tax cuts – the trickle-down theory that they are good for everyone because more profitable companies invest more and create more jobs – is heavily contested and might not give the economy the boost the Coalition is hoping for.
Forty years ago the percentage of gross domestic product that went on workers’ pay was 54.0 percent compared with 15.0 percent on what the ABS calls the ‘gross operating surplus’ of corporations. The quarterly figures from the Australian Bureau of Statistics in September 2017 showed workers’ share of the Australian generated wealth cake had fallen to 47.3 precent. The slice of the Australian wealth cake taken by companies had risen substantially to 24.4 percent.
Farrer concludes, unlike the 2016 election, “One of the biggest issues at the next federal election will be why it is that the corporate share of Australia’s economic cake is growing at the expense of the workforce”.
Source: Martin Farrer Trickle-down trouble: Coalition risks backlash in enlisting Qantas to spruik tax cuts. The Guardian 24 Feb 2018. https://www.theguardian.com/business/2018/feb/24/trickle-down-trouble-coalition-risks-backlash-in-enlisting-qantas-to-spruik-tax-cuts
In March 2018, Peter Lewis at The Guardian noted that total wages costs grew by 4.4% over the past year – the strongest growth for six years.
That growth was mostly due to the strong increase in employment. It wasn’t so much wages growing as it was more people getting a wage and/or longer paid working hours that underpinned the rising wage cost growth.
Then treasurer, Scott Morrison, tried to paint a positive picture, pointing out that “one third of the through-the-year increase was driven by average wages”.
However, this was a poor result, given average wage increases typically would be expected to account for around 60% of total wage cost growth, not “one third”.
Source: Peter Lewis. The public doesn't buy the economic theory the government is selling. The Guardian, 8 March 2018. www.theguardian.com/australia-news/commentisfree/2018/feb/21/the-public-doesnt-buy-the-economic-theory-the-government-is-selling
March 2018, [the latest broad update]
The Coalition economic plan responded to those ‘subdued’ wage growth prospects by putting them at the front of their economic policy suite.
The Coalition policy for ‘a stronger economy and a balanced budget’ began with “A stronger economy is the key to creating more and better paying jobs”.
How would the Government support the development of ‘better paying jobs’? Well, through ‘trickle down economics’.
“We are working to build a stronger economy, with more and better paying jobs by:
• Backing small businesses. For businesses with an annual turnover up to $50 million (that’s 3.2 million businesses, employing 6.7 million Australians), we have reduced company tax to 27.5% - the lowest level in 50 years.
• Record infrastructure investment. A record $75 billion investment over the next decade;
• Affordable, reliable electricity [and dispatchable energy investments] to generate more electricity and take pressure off prices which experts predict will fall by around $120 per year;
• Fixing the Budget. The Coalition has reduced growth in debt by two-thirds. We are on track to balance the Budget by 2020-21;
• Fairer taxes. We’ve cut company taxes for 3.2 million small businesses and income taxes for 500,000 middle income Australians. New laws have closed loopholes for multinationals – with an additional $4 billion raised from multinationals last year. A new major bank levy will ensure the big banks pay their fair share.
• Welfare to work. Introducing significant reforms to ensure welfare recipients comply with their obligations to look for work.
• Tackling union lawlessness. We’ve banned secret and corrupting payments between businesses and unions, restored the Australian Building and Construction Commission (a tough building industry watchdog to tackle CFMEU thuggery) and created a new Registered Organisations Commission to make unions as transparent as companies.
• Boosting exports. In the past year, exports have increased by 4%, while rural exports have increased by 19%. Our landmark export agreements with China, Japan and South Korea - and recently, Peru - will generate more export opportunities for Australian agriculture, mining, manufacturing and service industries.
• Ideas and innovation. Our National Innovation and Science Agenda has already seen over 3,000 new investments in over 300 early stage innovation companies.
• Boosting our Defence Industry. We have made a commitment to build up to 54 new ships. This will boost Australia’s Defence Force, while creating thousands of new skilled jobs,
• Putting Aussie jobs first. The Coalition Government has replaced 457 visas with improved temporary skilled visas to ensure Australians get priority for jobs. Employers that sponsor migrants under the new temporary skill shortage visa and certain permanent skilled visas will be required to pay a levy which will go to the new Skilling Australians Fund. This will provide $1.5 billion to support up to 300,000 more apprentices and trainees to fill skills gaps.
“The Coalition Government understands small businesses are the backbone of our economy. We are backing small businesses to help them get ahead. For small businesses, company tax has been cut to its lowest rate in 50 years – to 27.5 percent for businesses with a turnover up to $25 million this year and for businesses with a turnover up to $50 million in 2018-19”.
The Coalition would also challenge the ‘higher taxing, big spending’ Labor Party
“We will fight Labor’s plan for $200 billion in new and increased taxes – on electricity, small and family businesses, incomes, homes, savings, investments and retirement”.
Source: https://www.liberal.org.au/our-plan. Information current as at March 2018
The last statement offered in the 2018 Coalition policy document cited above is misleading in at three ways.
The Labor Party had repeatedly confirmed publicly that Labor would not reverse the Coalition’s successful legislation of tax cuts to small businesses or reintroduce a carbon tax, despite the Prime Minister and Treasurer insisting regularly that Labor would do so if elected to government. Labor also flagged the introduction of new income tax cuts for paid wage earners.
The demise the Corporate Tax Cut Proposal
In January 2018, a Sydney Morning Herald headline screeched
“Trump tax cuts: Scott Morrison warns business will abandon Australia while we are at the beach”
The SMH was reporting on the Coalition Government’s scare tactics to press through its tax cuts to Australian corporate businesses.
The Australia Institute responded by publishing a paper,
Scare Tactics for Corporate Tax Cuts Do Not Stand Fact Checks.
The paper was written by Dr. Anis Chowdhury, Associate of the Centre for Future Work.
Dr. Chowdhury found the U.S. experience shows no statistical evidence of any "trickle-down" growth dividend from company tax cuts:
Fact 1: Australia is not a high tax country.
Our overall tax take is one of the lowest among the 35 OECD countries. If Mr. Morrison was correct, then by now there should have been a tsunami of investment flowing here from 27 OECD countries with higher tax-GDP ratios than that of Australia’s 28.2% in 2016. Australia's overall tax ratio is well below the OECD average of 34%, and also below neighbouring New Zealand’s tax take of 32.1% of GDP.
Fact 2: Australia’s effective corporate tax is far below its statutory 30% rate.
Australian companies may seem to face a higher statutory corporate tax rate, but once they go through all their deductions and credits they don’t end up paying an unusually high amount compared to companies in other nations. The average effective rate (10.4%) is barely one-third the statutory rate. In fact, more than a third of large companies did not pay any corporate taxes in 2016 according to the recently released ATO data.
Fact 3: Tax is low on companies' lists of factors influencing investment location decisions
For example, the OECD noted, “it is not always clear that a tax reduction is required (or is able) to attract FDI. Where a higher corporate tax burden is matched by well-developed infrastructure, public services and other host country attributes attractive to business… tax competition from relatively low-tax countries not offering similar advantages may not seriously affect location choice. Indeed, a number of large OECD countries with relatively high effective tax rates are very successful in attracting FDI.”
This is corroborated by the most recent World Bank survey of enterprises, which found that tax incentives are not high on the list of critical factors affecting inflows of foreign direct investment. The IMF’s recent research also reports that the net impact of corporate tax cuts to incentivise private investment is quite often negative on government revenues. The pre-tax profitability of Australian businesses has also tended to exceed that in other countries, and this is surely more important in motivating investment flows.
Fact 4: Rigorous studies of past US tax cuts did not find a positive link between tax cuts and economic or employment growth.
The 2001 and 2003 Bush tax cuts failed to spur growth. Between 2001 and 2007 the economy grew at a lacklustre pace—real per-capita income rose by 1.5% annually, compared to 2.3% over the 1950-2001 period. Interestingly, the two sectors that grew most rapidly in this period were housing and finance, which were not affected by the 2001 and 2003 tax cuts.
Moreover, by 2006, prime-age males were working the same hours as in 2000 (before the tax cuts), and women were working less – both facts inconsistent with the view that lower tax rates raise labour supply.
Fact 5: The most infamous case of tax cuts in the US State of Kansas was a colossal failure.
Governor Sam Brownback promised that a moderate tax cut for individuals and a big tax cut for businesses would be “like a shot of adrenaline into the heart of the Kansas economy.”
Unfortunately, however, despite his 2012 tax cuts, the Kansas economy remained moribund, while neighbouring states surged ahead. In the process, the Kansas state budget was left in tatters.
Dr. Chowdhury concluded
“If Mr. Morrison is serious about repairing the budget or stimulating growth and employment then he should be concentrating on raising more revenues (not less) and investing in the nation instead of resorting to scare tactics”.
March 2018 saw the demise of controversial and much debated Coalition Corporate tax cut proposal.
Then Prime Minister, Malcolm Turnbull, was not deterred by the fact that policy to cut the corporate tax rate from 30% to 25% had not received enough crossbench support in the Senate to pass the legislation. He announced in the Parliament that the government was committed to it today and at the next election”.
The government persuaded seven of nine crossbenchers to support the change, including the new Tasmanian senator Steve Martin, and the One Nation bloc of three senators.
However, South Australian independent Tim Storer and Victorian Senator Derryn Hinch could not be persuaded.
Hinch wanted the big banks excluded from the proposed tax cuts, whilst Storer told the Senate he
“remain[ed] to be convinced that I should support this bill in its current form, in isolation from a broader discussion and initiatives on enhancing the overall sustainability of our taxation system and with alternative uses of government revenue that can generate prosperity and enhance fairness for the Australian people”.
Labor used question time to ask a series of questions to the government about apparent the lack of commitment by business to pass through the benefits of the proposed company tax cut to their workers. The government deflected these questions by raising previous statements of support for a company tax cut from ALP pollies
Source: Katharine Murphy. Malcolm Turnbull defiantly sticks to big business tax cut. The Guardian. Wed March 28 2018.
The Coalition 2018 Budget
This budget statement added more personal tax cuts to the mix.
“Our seven-year personal income tax plan will make personal income tax lower, fairer and simpler. More working Australians will be paying lower rates of tax”.
The plan has three parts:
Step one – provide tax relief for low and middle income earners worth up to $530 to help with cost of living pressures.
Step two – help protect what Australians earn from the impact of bracket creep.
Step three – simplify and flatten the system by removing the 37 per cent bracket completely.
“This will mean that by 2024-25, around 94 per cent of Australian taxpayers are projected to face a marginal tax rate of no more than 32.5 per cent. That compares with 63 per cent if we leave the system unchanged”.
For those struggling with the cost of living courtesy of poor or no wage increases, power, fuel and food bills going ‘through the roof’ and empty or subdued personal savings, these promised income tax cuts may bring some welcome cost-of-living pressure relief.
There is, however a long gap between s $1 tax cut and income tax relief and “up to $530” – the devil will be in the detail to come closer to the election.
Both the Coalition and Labor would be waiting for the other to ‘blink first’ and declare their hand on income tax cut promises in detail so the one second past the post can up the ante and win this layer of the cost of living election battle.
It would be surprising that either called their hand before the 2019 Treasury Pre-Election Financial Outlook statement is published.
In August 2018, Carol Johnson, professor of Politics at the University of Adelaide, told The Conversation
"Whoever ends up the Liberal prime minister will need to address deeper issues of inequality and weak wage growth in the Australian economy. Those issues, not just the banking royal commission, are why cost-of-living concerns are so important and why the proposed big business tax cuts proved so toxic. Furthermore, it will arguably take more than a change of leader to convince Australian voters that the Liberal party is prepared to tackle voters’ everyday economic concerns. It may take a move away from the trickle-down, free-market, neo-liberalism that has dominated Liberal economic policy".
Source: Carol Johnson. Shifting to Peter Dutton, or anyone else, will not cure what ails the Liberal Party. The Conversation 23 August 2018 https://theconversation.com/shifting-to-peter-dutton-or-anyone-else-will-not-cure-what-ails-the-liberal-party-101890.
Two months later, the Treasurer gave a clear indication that the Government had not taken Professor Johnson’s free advise on board. The Government would soldier on with ‘trickle down economics’ policy in relation to the prospects of wage increases for Australian workers. The question “But when are my wages going up?” remained a mystery.
However, the Government would add to the Government controlled tax reduction levers for big and small businesses with a direct Government intervention into the smaller bank and non-banking loan sectors of the ‘free market’ for small business operators.
The Australian Business Securitisation Fund [circa November 2018]
The future growth of Australia’s small businesses were by this time threatened by the banks tightening access to credit in response to the banking royal commission.
To address this ‘unintended consequence’ of the banking royal commission, Treasurer Josh Frydenberg announced a two-billion-dollar Australian Business Securitisation Fund which will lower the cost of borrowing for small businesses and improve their access to capital growth “funding”.
The fund would be administered by the Australian Office of Financial Management.
The “fund” allows smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms than big banks and allow small business owners to access cheaper funding more easily
“..so they can expand and contribute to economic growth. With more than three million small businesses employing around seven million Australians, enhancing small business access to funding is part of the Coalition government’s plan for a stronger economy.”
The National Farmers’ Federation (NFF) welcomed the government’s proposal, saying both funds could play a positive role supporting the growth of the farm sector.
“In our recent 2030 Roadmap, we set a target of achieving $100bn in farm gate output by 2030. A central building block of that growth will be finding innovative solutions to the sector’s $159.5bn capital shortfall.”
The chief executive of the Council of Small Business Australia said Frydenberg’s announcement had come at the perfect time.
“It’s a well-needed game-changer for financing of small businesses. In more recent days securing access to affordable capital has become the number one challenge for small business owners in Australia. Small business owners often tell me that the only time they can get a loan is when they no longer need it. Others have told me that they have had to travel overseas to get finance and, using the same business plan as they used in Australia, they got their loan. This was a crazy and damaging situation.”
Ironically, Greens treasury spokesman, Peter Whish-Wilson, claimed credit for the Treasurer’s policy. That is, the government’s proposal to establish a
“people’s fund” for small business lending was the first step towards a People’s Bank – “Once again, we are flattered that the government is following our lead on banking policy. Earlier this year we announced a detailed plan to re-establish a government-owned bank to provide more competition and to tackle the issue of profit gouging on interest rate margins. When we announced our plan, the then-treasurer, Scott Morrison, said he was ‘shocked’ at the suggestion that there would be a government-owned bank again. We are glad that the government has got past this knee-jerk reaction and sees the need for a greater role for government in banking,”.
Source: Gareth Hutchen. Farmers welcome Coalition's $2bn plan to help small businesses secure loans, The Guardian Nov 14th 2018. https://www.theguardian.com/australia-news/2018/nov/14/farmers-welcome-coalitions-2bn-plan-to-help-small-businesses-secure-loans
First home buyers struggling to get a home loan and other wage earners struggling to secure a loan to replace an ageing family car in tightened bank loan conditions [also at least in part an ‘unintended consequence’ of the banking royal commission] would be left to their own devices and the vain hope that the ‘trickle down economics’ of the Coalition would someday ‘trickle down’ to them, and a lot faster than it had in six years of Coalition government.
2019 UPDATES including LABOR POLICY TO FOLLOW