Posts in "Budget 2016/17"

Budget 2016: Company Tax Cuts – Catalyst for Growth or Waste of Money?

One of the “centrepieces” of the Federal Government’s 2016 Budget is a 10-year plan to lower the company tax rate. Unfortunately, partly due to a gaffe by Mr Turnbull on Sky News, much of the commentary has focused on the  cost rather than the merits of the policy.

The plan is as follows. From July 1st this year there will be an immediate cut from the current rate of 30% to 27.5% for firms turning over between $2 million and $10 million. Over the next four years the upper threshold will progressively rise to $100 million. It will eventually apply to all firms by 2023-24, and then finally in 2026-27 it will drop to 25% for all firms.

A cut in the company tax rate has long been anticipated—the Henry Tax Review recommended it way back in 2010, and both sides of government have previously said they were committed to it. Like the villagers in the Aesop fable, The Boy Who Cried Wolf, a lot of us had stopped believing it would ever happen. Indeed, if the Coalition government is not re-elected, it probably won’t happen, since both Labor and the Greens have apparently decided to launch a ‘class warfare’ campaign in response to the Budget.

It is the job of the opposition and the media to hold the government to account on issues such as transparency and fiscal responsibility, but as one commentator has pointed out, requesting the forecasted cost of a policy over 10 years is quite absurd. There is so much uncertainty involved, particularly in regards to this policy, that such a forecast is unlikely to be worth the paper it’s printed on. And Treasury does not have a good track record with even 6-month forecasts in recent times.

But cost aside, we need to ask: is a company tax rate cut a good idea?

The unapologetically left-wing think tank, the Australia Institute recently released a report that argues the answer is no.

The report’s conclusion is based on a number of findings.

First, there is no correlation between company tax rates and economic growth rates of OECD countries (and in fact, there is a positive relationship between living standards and company tax rates).

Second, time-series analysis of Australian macroeconomic indicators shows that the gradual increase of the company tax rate between 1960 and the late 1980s—from 40% to just under 50%—and the gradual reduction to the current rate of 30% both seemed to have no effect on the economy. Indeed, the economy performed better when the high tax regime was in place.

However, the conclusion that a cut would not improve the economy based on these findings is problematic. As the report notes, there are many other variables that must be considered when comparing countries, and the existence of a correlation in Australia between high tax rates and good economic performance does not mean high tax rates lead to good economic performance.

Further, these findings still provide no evidence against the argument that a company tax cut will lead to “jobs and growth,” as the Treasurer claims. Indeed, an argument such as this, which needs to take so many factors into account, is difficult to provide evidence for or against.

A recent, peer-reviewed journal article has provided some evidence.

The article first discusses the two empirical challenges involved: changes in tax policy are not random—they are influenced by many factors, including economic conditions—and even if they were random, it is not possible to observe counterfactual outcomes, as is necessary for a true scientific experiment.

One way that economists attempt to overcome these challenges is by seeking out what are called ‘natural experiments’—occurrences that by chance happen to resemble random assignment of some ‘treatment’. In the case of this article, the authors were able to exploit the fact that US states who share borders tend to have similar economic conditions. Provided that a tax change doesn’t lead to firms shifting operations interstate—which can be tested—then bordering states could be used to observe counterfactual outcomes.

The study looked at 140 increases and 131 cuts in 45 states going back to 1969. Its main findings are that, historically, increases in corporate tax rates have a negative impact on employment and wages, while cuts have fairly little impact unless they occur during a recession. A 1% reduction in corporate tax during a recession was found to cause around a 1% increase in wages, and a 0.6% increase in employment.

These findings make intuitive sense. Investment decisions are unlikely to be significantly altered unless tax changes or economic conditions make the investment more risky or less profitable. A tax increase reduces potential profit, and while a tax cut increases potential profit, it is unlikely to be a large enough increase that the business would not have gone ahead with the investment anyway—unless economic conditions also made it less attractive. A tax cut during a recession works as a nudge to businesses to go ahead despite their trepidations.

Again, a word of caution is in order. The authors note they are hesitant to extrapolate their findings to the potential effects of corporate tax changes at a federal level, since their study only looked at the effect of tax changes on employment and wages. However, this means that the positive effect of a tax cut on the economy is probably understated, since the observed increase in wages and employment is likely caused by increased investment, which also affects economic growth through other avenues, such as increased capital income.

Their findings are also fairly consistent with studies on the effect of federal-level corporate tax cuts, which generally find a moderate-to-high positive effect on GDP, implying a positive effect on wages and employment, as well.

Other favourable evidence comes from Ireland.

A government report examining the economic impact of Ireland’s famously low tax rate looked at data from 26 European countries and found that corporate tax has a ‘strong negative effect’ on where multinational firms decide to invest. The report argues that their highly competitive tax rate has been necessary for Ireland to address the economic limitations of their ‘peripheral geographical location’.

It also cites research by the OECD which used data on 21 OECD countries over the period 1971-2004 and found corporate income taxes to be the ‘most growth-damaging form of tax’, when compared to taxes on personal income, consumption and property.

Each of these studies are relevant to Australia’s current situation, for the following reasons.

First, much of the recent tax debate in Australia has rightly focused on how to address an increased need for funding of services that are predominantly the responsibility of state governments, such as health and education. Many argue that an increase in the GST is crucial to deal with this issue, while others convincingly argue that an increase in property tax would also be effective.

If we need more tax revenue to fund health and education, we should be looking at these taxes, since they are more efficient and less damaging to growth. And if a lower company tax rate leads to higher growth, then it will also increase the revenue take from these taxes, as well as from personal income tax.

Second, while our growth rate is currently keeping its head above water, some economists are predicting a recession by 2017. Evidence suggests that cutting company tax at a time of limited growth leads to more enhanced results, and is therefore an effective way to help the economy out of a hole.

Third, one of the Government’s arguments for cutting the rate is that it’s too high relative to the rates of our Asian neighbours. As the rest of Asia grows, we need to look at ways to make ourselves unique in the region, besides the fact that we have a lot of iron ore in the ground.

Australia has no choice but to transition away from being a resource-based economy. To do this we must begin to rely on new areas of the economy for growth, and generating growth in new areas requires investment and job growth in those areas. The evidence suggests that cutting company tax may be one way to do this, but the extent to which the results will be positive is not clear. This is perhaps why the Government’s plan is such a cautious one—the uncertainty may have them worried that a lack of results will leave them with too much of a revenue hit.

However, the evidence also suggests that less of a delay may mean the cut will have a greater effect, due to the relatively poor state of the economy.

Further, if the government is banking on attracting foreign investment, then they may want to consider a greater cut in company tax, and a greater reliance on revenue from more efficient sources of tax, such as property and consumption.

Budget 2016: Securitization Discourse and the Defence Budget

The morning after the release of the 2016 Budget, opposition leader Bill Shorten was interviewed by a commercial radio breakfast team. He was given an opportunity to say what was right about the budget. His first, brief response before continued political rhetoric about how the budget is good for big business and high income earners was succinct and telling:

“Defence spending is good.”

We are living in a new world order and face new warfare. We have new enemies and new allies. Our troops are in battlefields fighting with new tactics, new intelligence and new weapons (Kaldor, 2013). We honour the old alliances and build new ones to fight new common enemies. Since 1938 when defence spending was at the same level, we have seen a rise in defence force personnel from 10,000 to 58,000, with 18,000 public servants “looking at threats, guiding policy and planning for security” from the mere 57 in 1938 (Baldino & Carr, 2016).

So what do our governments do? They talk about it. Securitization is the theory that given the right context, issues progress outside the realm of “normal politics” and into a matter of security (Balzacq et al., 2015).  The advantages of using such rhetoric to convince an audience that an issue will impact national security gives politicians, military and law enforcement more justification in their actions and in their policy changes. Take for example, airport screening: we are happy to take longer to get through airport security with comprehensive bag and personal checks under the proviso that these measures will reduce the risk of terrorist attacks or airplane hijacking.

At the end of the day, do we question the recent increase in defence spending in the same way we question funding cuts to education and tax breaks for big business? Rarely. National security concerns stands outside of realms of normal politics, so it needn’t follow the same scrutiny. A state that cannot protect its citizens and sovereignty is rightfully considered a failed state.

We allow this to happen because of innate ideas that trained and experienced military advisors and governments know what is best for national security. The general public is not privy to all government intelligence regarding Australia’s national security as it can be informed about all areas of education funding debates, so we cannot expect to be able to make clear judgement as normal, everyday citizens on defence policy.  We are expected to trust in the choices made by our military in return for the reassurance that out sovereignty and individual freedoms are held safe. If waiting in line at the airport takes longer than it did before to ensure our safety, so be it.

In this new world order, what do we need to know about the budget and defence?

“Defence spending is good.”

Bibliography

Baldino, D. & Carr, A., 2016. The end of 2%: Australia gets serious about its defence budget. [Online] (1) Available at: http://theconversation.com/the-end-of-2-australia-gets-serious-about-its-defence-budget-53554 [Accessed 10 May 2016].

Balzacq, T., Léonard, S. & Ruzicka, J., 2015. ‘Securitization’ revisited: Theory and cases. International Relations, pp.1-38.

Kaldor, M., 2013. In Defence of New Wars. Stability, 2(1), pp.1-16.

Budget 2016: Why It Fails Australia 

The Coalition’s “election budget” of 2016 has in essence failed to deviate from Australia’s destructive trajectory set out by previous governments. While the budget offers little changes to spending and revenue, those it does alter function in the private interests at the expense of the wider public.

The 2016 budget removes a further $6 billion from welfare, Medicare, Universities and the public service, sectors which are already stretched to breaking point. For universities in particular, despite the fact that deregulation plans have been scuttled by the senate, the loss of funding in this year’s budget represents a 20% reduction in their funding. Unemployment benefits, while removing their “work for the dole” requirements, are replaced with mandatory privatise training similar to those deemed to be in violation of human rights in the UK.

In contrast defence spending has been increased in an attempt to move closer to the arbitrary 2% of GDP figure. Such increases in spending, in the face of white anting of public services, raise serious questions about the government’s priorities if it cannot effectively serve the basic needs of the society it is so desperate to protect.

Howard style hip pocket incentives are also being extended to sections of society from which the government is likely to garner support. The competitive advantage given to small business through tax breaks will be nullified with the extension of such cuts to medium and large business. In a similar fashion the $20,000 instant asset write off for small businesses has been increased to those with a turnover of up to $10 million. High income earners can also expect to receive an effective tax cut in mid-2017, through the scheduled end to the Budget Repair Levy. In a similar vein, changes that counter the impact of “bracket creep” only apply to those in the upper quartile of average earnings.

The 2016 budget maintains Australia’s national reduction in foreign aid spending, while maintaining the billions spent breaking the asylum seekers, or as they are better known in the mayor parties “political capital”, in offshore detention canters.

Finally it blatantly ignores the environmental challenges facing Australia and the world, by maintaining subsidies for big polluters through fossil fuel subsidies. Similarly the budget outlines $1.3 billion of cuts from the Australian Renewable Energy Agency, a move which for a nation banking its future on “innovation” is laughable. The $170 million of extra funding to protect the Great Barrier Reef are in fact funds that have been shifted across from similarly environmentally important Landcare programs.

The Government, in its desire to produce an electorally palatable budget, has produced a document that fails to meet the needs of Australia moving forward. It can be assessed as a politically motivated document working to serve the interests of the Coalition and its benefactors.

 

Budget 2016: A Good PaTH for Tackling Entrenched Disadvantage

A surprising thing happened in the 2016 budget. The Coalition included a youth unemployment policy that targeted the most disadvantage people and also got a tick of approval from the opposition.

There were no vestiges of the punitive policy announced in 2014 that punished young people for being unemployed. Instead, the government has come up with a policy that recognises the socioeconomic dimension to youth unemployment.

The new program is called the Youth Jobs PaTH (Prepare-Trial-Hire) and consists of the following stages:

1. Young job seekers (between the ages of 15-24) will be given training in what are called ‘employability skills’. These are the foundational skills needed to get and maintain a job, such; ability to work in a team, suitable presentation, workplace etiquette, and IT skills.

2. 120,000 internship places will be set up over four years for young job seekers after six months in the system. The job seeker will receive an additional $100 a week on top of their regular income support, and the business taking on the intern will receive an up-front payment of $1000.

3. Businesses will be incentivised to employ young job seekers through a wage subsidy between $6,500 and $10,000.

The government has also committed to greater investment in actuarial analyses that better target people at risk of long term welfare dependency.

But it did not take long before the policy was publicly derided. Unions believe it will result in job losses and young workers will be exploited. No doubt this is a possibility, and this will rest on the finer details of the policy when they are drafted into a Bill, but currently there is little evidence to suggest this outcome is inevitable.

Others, such as the journalist Tim Dunlop, believe PaTH is just another policy designed to discipline and punish young people for not finding jobs that don’t exist. Dunlop argues that technology is changing the nature of work, so that in the future there will be far less jobs for people to do. His policy to deal with this, which has now become quite trendy, is for the establishment of a guaranteed basic income.

The basic income idea has plenty of merit, yet Dunlop’s analysis misses an important aspect of the PaTH policy – this program is designed to help young people at risk of long term unemployment get jobs. It is not the same blunt instrument as ‘work for the dole’.

Disadvantaged young people are one of the groups most at risk of long-term welfare dependency. People with lower levels of education are more likely to be welfare dependent, and the longer a person is unemployed the more at risk they are of long-term unemployment. Longitudinal analysis by Francisco Azpitarte and Eve Bodsworth from the Brotherhood of St Laurence Research and Policy Centre, shows that disadvantaged groups are more likely to be unemployed for longer.

There is an alarming number of young Australians between the age of 15 and 24 that are not engaged in employment, education or training, often referred to by the acronym ‘NEET’. In 2015 over 90 thousand 15-19 year olds and 217 thousand 20-24 year olds were identified as NEET in Australian Bureau of Statistics (ABS) Education and Work survey. While this did not vary greatly by gender, when broken down into socioeconomic status (SES) deciles, the proportion of young people that are NEET is heavily skewed toward the lower SES deciles.

There are two ways to look at this.

The first, shown in Figure 1, is to look at all people identified as NEET in the each age group and then find out what the different shares are for each SES decile.

In a state of perfect equality, the proportion will be equal among SES deciles. That is, the lowest and the highest SES decile would each make up 10 per cent of people identified as NEET.

The actual shares are heavily skewed. The share of NEET people for the most disadvantaged young Australians represent more than triple that of the advantaged. The bottom three SES deciles make up over 45 per cent of all NEET 15-24 year olds.

Figure 1: People from disadvantaged backgrounds make up the largest share of NEET between the ages of 15 and 24 years old
Y-axis: SES decile share of all people aged 15-19 and 20-24 that are identified as NEETBeni_Fig1_PaTHSource: ABS (2015) Education and Work, 2015

Second, we can look at what proportion of each SES decile is identified as NEET, as has been done in Figure 2. A high proportion of the most disadvantaged 15 to 19 year olds are identified as NEET, but what is really striking is the 20-24 age bracket. Almost a third of the most disadvantaged 20-24 year olds, 40 thousand young people, are identified as NEET. More than a fifth of 20-24 year olds in the three lowest SES deciles are identified as NEET – more than 100 thousand young people.

This large jump occurs after the common school leaving age, suggesting that a substantial group of young people finish school ill equipped to take the next step into work or study.

Figure 2: People from disadvantaged backgrounds are much more likely to be NEET after school leaving age
Y-axis: Proportion of SES decile identified as NEETBeni_Fig_2Source: ABS (2015) Education and Work, 2015

By focussing on young people unemployed for more than 6 months, PaTH targets the most disadvantaged young people. The strength of the program is that it provides these young people with work experience, and makes it less risky for businesses to give them a chance.

Job training has been available for a long time now, but employability and targeted work experience programs are rare. For some young people from areas of entrenched disadvantage, this policy will give them chances they otherwise would not have. There are likely important debates to be had around the detail of the policy, but it cannot be said to be punitive, and it is certainly not punishing.

Budget 2016: Infrastructure

So the federal budget was released a little over a week ago, and you want to know what effects it will have on infrastructure. Fortunately for you, I have compiled a short summary of where Australians (and in particular, Victorians) stand. It’s not looking great, but there are some silver linings.

Commitment to the East-West Link continues on, with another $300 million in expenses from 2015-16 and then $600 million the following year. The Victorian government has ceased development on the project, and so the federal budget intends to account for a $1.5 billion withdrawal from unspent state funds. We are also left with this comment “…the Commonwealth remains willing to consider investing in other major infrastructure… in Victoria should the Victorian Government come forward with options.” Ouch.

While investment in roads and highways gets huge budget attention, our public transport system does not. A small $10 million seems to indicate the Government is far more open to dealing with traffic woes by changing the roads, instead of incentivising travel by public transport. The environment once again draws the short straw in this regard. A pleasant exception is the $857 million to be dedicated to the Metro Rail Project

The government is looking for savings of $105 million in the next 5 years by reducing expected costs of contingent projects in Queensland, and reductions in the funding towards Victorian and New South Wales projects. In particular, savings will occur in programmes such as Black Spot Programme (aimed at reducing high risk collision areas) and the National Highway Upgrade Programme.

Notable is a lack of attention to anything NBN. A $8.83 billion dollar final payment confirms the end of the investment in nbn.co, a project which has experienced huge budget blowouts. Australia continues to fall further and further behind in tech-infrastructure as major parties consistently fail to come to agreement.

Critics have noted that the budget is tough on Victoria. Despite population growth rate being the highest in Australia and the population being second only to New South Wales (ABS, 2015), less than 10% of the infrastructure budget will be given to Victorians.

So, the things to take away here is that funding for roads has increased significantly, air & sea benefit (although not quite as much) and rail loses out by a small amount: 1.4% less than last budget. Total dedication to transport and communication is overall up though, at $11.13 billion. Estimates indicate the total budget commitment to infrastructure is expected to fall over the next 4 years. Don’t expect great things from the National Broadband Network- but that’s nothing new. Congratulations – you’re now ready to talk budget at the pub.