Articles – The Centre for Independent Studies

MYEFO is a symptom of Australia's investment drought caused by high taxes

Michael Potter

20 December 2016 | Australian Financial Review

drought-2It seems the fiscal tanks are going to be being bone dry for another year, as the budget surplus drought continues. Yesterday’s budget update, MYEFO, yet again shows the government’s budget rain dance has been foiled by the dry hot winds of a relentless deficit.

MYEFO joins a number of recent budgetary documents displaying the intractability of Australia’s deficit problem. Despite the government passing over $22 billion in savings, the deficit is worse in coming years than it was before the election. A small reduction in this year’s deficit has been swamped by a total writedown of $10.3 billion over the next four years.

The chief culprit for the worsening of the budget position is overly optimistic revenue predictions once again being found wanting. Revenue writedowns of more than $30 billion across the forward estimates have overwhelmed the modest attempts at budget repair the government has found possible in this fractured political environment.

MYEFO has a number of sobering projections, expected economic growth has a taken a hit this year, down from 2.5% to 2% — unsurprising given the poor growth results for the September quarter. Expected growth in wages and employment, already languishing at low level have also been revised down. Real wages growth is set to be an almost invisible 0.5% in both this year and next.

Private sector investment is the ‘rain’ that makes our economy grow and fill the government’s fiscal tanks. The continuing fall in business investment is at the heart of many of the problems revealed in the budget update.

Mining investment fell by 27.5% in 2015-16 and is projected to fall by 21% this year and 12% next year. However non-mining investment, which government hoped would pick up the slack, remains slow — increasing by just 1.2% last year and forecast to grow just 1.5% this year. Total investment is shrinking as a share of GDP, and will soon be at recessionary levels.

It will shortly be worse than both the 1970s and 1980s recession and only just better than the 1990s recession, based on budget forecasts. This is where our alarm should be focussed.

While much of the uncertainty in the budget comes from global economic weakness, on investment Australia’ performance is much worse than most other developed countries. Over the 7 years from 2009, Australia’s non-mining investment fell as a share of the economy by 2.4 percentage points, while the OECD averaged an increase of 1.1 percentage points.

The only substantial developed economies with a worse investment performance over that period are Portugal, Italy, Greece and Spain. Not exactly economies we wish to be compared to.

How can we seed the clouds that will break this investment drought?

Well like a river, global investment flows where the path of doing business is easiest and higher taxes and more regulations are like building a dam. While the rest of world cuts company tax rates, Australia is putting up a wall.

There are only three other countries in the OECD with a higher corporate rate at the national level: Belgium, France and the US, and the incoming US President Donald Trump has already promised a game-changing cut in the US corporate tax rate from 35% to 15%.

Many other OECD countries are debating cutting corporate taxes further, including France which may elect a tax cutting President shortly. Australia will face an even worse investment situation if this occurs. It may be that the proposed cut in our company tax rate to 25% is actually too small.

It is the warnings about private investment that should be the main focus of discussion about yesterday’s budget update. The budget needs significant repair but in ways that increase the health and performance of the economy, not damage it further.

Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies and author of the CIS research report Fix it or fail: Why we must cut company tax now and the feature article The looming crisis in business investment in the Summer 2016 edition of Policy journal.

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