Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Forget measly tax cuts - businesses need reform

11 May 2012

The Gillard government has reneged on its promise to reduce the corporate tax rate by 1% – a cut that was part of the package to secure the Minerals Resource Rent Tax (MRRT). Although this backflip will surely anger the business community, there are far bigger problems affecting the bottom lines of Australian businesses.

Many small business owners cite a strong dollar, growing regulatory burden, and inflexible labour laws as major impediments to their competitiveness. There is not much the government can do about the strength of the dollar, since strong demand for minerals at home and weak financial markets abroad have caused large capital inflows.

But the government can help ease the regulatory burden and increase labour market flexibility.

On regulation, the Productivity Commission has published some meaningful proposals. In last year’s Review of Regulatory Burdens on Business, the commission drew attention to promising developments in the states. Victoria, NSW, South Australia, and Queensland have all implemented Red Tape Reduction Targets.

These targets require departments and agencies to reduce existing compliance costs by a certain value within a specific time period. Most refer to the costs related to paperwork, but in some cases (Victoria, for example), this includes the costs created by delays.

There has been a degree of success with this approach. Victoria set a reduction target of $500 million by 2012. The state estimated that reductions had reached $401 million by July 2010. Perhaps the federal government could implement some ambitious reduction targets of its own.

On labour market flexibility, the fact that the passage of the Fair Work Act did not include an accompanying Regulatory Impact Statement (as is common with many large reforms) has been a major cause for concern.

Though some headway has been made in the simplification of awards, much rigidity still remains.

The retail sector could benefit from a loosening of penalty rate rules and minimum hours for shifts. This would provide some breathing space from the pressures of declining consumer confidence, increased saving, and online competition. Unfair dismissal provisions can be scrapped, or at least tightened, to reduce both the costs arising from claims and the employment risk that new workers now pose.

All these measures are concrete changes the federal government can make to yield significant cost savings for businesses across the board.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.

Remember the Henry tax review?

11 May 2012

It is just a little more than two years since the review of Australia’s Future Tax System (AFTS, better known as the Henry review) was released to the public, with its 138 recommendations.

The Gillard government, notwithstanding its enthusiastic embrace of an audacious 40% resources super profits tax at that time, was lukewarm about the Henry package as a whole. Eager to burnish its economic reform credentials, the government now likes to make out that it is following what the 2012 Budget papers describe as a tax reform ‘road map’ consistent in many ways with the Henry recommendations.

This week’s federal budget, however, provides further evidence of just how much of the Henry review is not being implemented. The road map lists no fewer than 40 tax and transfer policy initiatives, 32 of which the government claims to be ‘consistent with’ the Henry recommendations. This is a generous interpretation. Many of the 40 measures are small adjustments, and many of the 32 only partly implement the relevant Henry recommendation.

The strongest claim to consistency is that the government is substantially increasing the tax-free threshold and eliminating most of the low-income tax offset (LITO). That’s a step in Henry’s direction, but otherwise the personal income tax scale bears little resemblance to what Henry recommended.

Likewise, we are to have a Minerals Resource Rent Tax (MRRT) that bears little resemblance to the one recommended by Henry. The company tax cut that was supposed to accompany the resource tax – a cut of five percentage points as recommended by Henry – was whittled down to a puny one percentage point and has now been abandoned altogether.

The government’s approach to superannuation policy is also fundamentally different from Henry’s. Even the government’s acceptance of a standard personal tax deduction and a discount for interest income – both proposed by Henry – has been abandoned in the latest budget. And almost everything the government does makes the tax/transfer system more complex, in contrast to Henry’s big push for simplification.

The point is not that everything in the Henry report is good and should be implemented, but that what Kevin Rudd called ‘root and branch tax reform’ – reform that is comprehensive and balances all legitimate objectives of the tax/transfer system – remains as elusive as ever. What we are seeing now is an opportunistic cherry-picking of the Henry recommendations driven by the government’s hunger for revenue and redistribution.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.

Good and bad reasons for a budget surplus

11 May 2012

The federal government’s stated motivation for returning the budget to surplus next financial year is to give the Reserve Bank of Australia (RBA) ‘maximum room to move’ on interest rates.

Yet a fiscal contraction is no more effective in restraining the economy than a fiscal expansion is effective in stimulating it. In an open economy with a floating exchange rate and an inflation-targeting central bank, changes in fiscal policy do not have significant macroeconomic implications. That is why the reaction of financial markets to budget statements is so negligible. The RBA’s statements also make clear that fiscal policy is a very minor consideration in its decision-making.

During the financial crisis, the government tried to have it both ways, arguing that its fiscal stimulus saved us from recession but had no implications for interest rates. The second part of the argument was correct, but not the first. If the first part had any truth, then monetary policy must have been much tighter during the financial crisis as a result of the government’s stimulus spending.

The government should have no concern over the macroeconomic implications of changes in the budget balance, so long as it is balancing its budget over time and conducting fiscal policy in a sustainable manner. This should free the government to focus on what fiscal policy can do effectively, namely, changing microeconomic incentives to work, save and invest. The government and opposition’s mistaken belief in a trade-off between fiscal and monetary policy is dangerous, because it leads to fiscal policy decisions that are more about window-dressing the budget balance and claiming credit for reductions in official interest rates that would have happened anyway, rather than improving incentives. Similarly, the fiscal stimulus of 2008–09 was bad primarily because it misallocated resources. Take away the macroeconomic rationale and the stimulus measures look indefensible on microeconomic grounds, even if the spending had been administered perfectly (which it was not).

A budget surplus target can be defended as a fiscal rule designed to impose additional discipline on government decision-making that might otherwise be absent. But there is no reason to subordinate fiscal policy to monetary policy, and fiscal targets should not be pursued at the expense of the microeconomic incentives that are the ultimate source of both economic growth and long-term fiscal sustainability.

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and a Senior Lecturer in Economics at the University of Technology Sydney Business School.