Scotty from Marketing paves Australia’s post-COVID road to hell

The conversation has started with lot’s of scuttlebutt and hints but nothing concrete coming out of Scotty from Marketing (SFM) about what reforms we can expect to boost growth after COVID-19. 

Leading us off is the hopeful John Kehoe at the AFR describing a project of bold structural reform:

Reserve Bank of Australia governor Philip Lowe warned the national cabinet on Thursday the status quo economic policies of the past two decades will not be enough to support employment, investment, productivity and people’s living standards in the years ahead.

So Morrison, Treasurer Josh Frydenberg and state leaders must develop a ruthless national economic blueprint in coming months.

Sacred cows that were deemed political no-go zones must be on the table.

…Top of the list should be a taxation overhaul, permanent industrial relations changes to make it easier for struggling firms to take a chance on new employees, a coherent energy and climate framework and cutting red tape that is strangling small business.

The 10 per cent GST rate is about half the average rate of consumption taxes overseas.

The 125 recommendations in former Treasury secretary Ken Henry’s 2010 landmark tax review are an obvious starting point.

…Australia has the second-highest tax impost on business profits and personal income combined out of 34 of the world’s leading economies, the Organisation for Economic Co-operation and Development says. It raises 58.8 per cent of total federal and state government revenue from these sources, well above the OECD average of 34 per cent.

…revenue raising offsets and alternatives must be considered, such as reducing the generosity of tax breaks for capital gains, curtailing franking credits and cutting the roughly $40 billion in superannuation tax breaks.

…Labor’s 2019 election policy to half the capital gains tax discount to 25 per cent seems sensible.

…A bolder revenue neutral company tax reform would be to adopt a corporate cash flow tax proposed by Ross Garnaut. economic adviser to the great reforming prime minister Bob Hawke.

This is exactly what is required. Lift the tax burden on productive activity and increase it on unproductive. This would massively increase Australian competitiveness as well through a structurally lower Australian dollar as capital imports fall dramatically.

Alas, I put the odds of this at near zero.

SFM is already reverting to form with supply-side platitudes, via Paul Kelly:

Any business reopening must be conducted on a social-distancing basis. “We should get very used to it for the foreseeable future,” Morrison says about keeping one’s distance.

As for reopening the international borders, he is not even thinking about it with, as he says, COVID-19 “rampant” in much of the world. Here is a future problem: Australia having to manage a successful outcome at home in a world still badly infected.

Morrison flags a revived economy based around three core principles — a recovery that prioritises business, not government; new policies, separate from last year’s election agenda, for a growth economy; and an economy that balances efficiency with greater security self-reliance. Morrison’s political strategy is for national cabinet (himself and the premiers) to co-ordinate economic recovery.

…“Our government sees business at the centre of the economy,” Morrison says. “We do not see government at the centre of the economy. Going forward, we need to see a revitalisation of the private sector.”

“There was a very clear message from the economic advisers this morning, particularly Dr Lowe,” Morrison said on Thursday. “And that is, if we thought we can just grow the economy under the old settings, then we need to think again.”

But Morrison is cautious, declining to speculate on specifics. He doesn’t need that debate just yet. There are, however, some certainties: he won’t be rolling out Labor’s tax increase agenda from the last election and he won’t be running on a higher GST courting a political brawl on this issue.

So, there’ll be no broad structural tax reform that scraps the tax giveaways on unproductive investment. A point confirmed by Phil Coorey at the AFR:

On tax, Morrison, Treasurer Josh Frydenberg and Finance Minister Mathias Cormann say there will be no increase to the tax burden and possibly no tax increases at all.

The government has ruled out raising the rate or broadening the base of the GST, or introducing any coronavirus levy.

Indeed, the government intends to proceed with almost $200 billion in legislated income tax cuts – stage two to begin on July 1, 2022, and stage three to begin two years later.

Moreover, Cormann said the government needed to disabuse the public of the notion that there were higher taxes to come because that would only further deflate confidence.

“We’re not considering increases in taxes. That would be the wrong thing to do at a time we want to ensure a strong rebound on the other side,” he said.

No policy decisions have been made, but tax options include cutting the company tax rate (which would be an election promise breach) and maintaining or boosting the turbocharged accelerated depreciation scheme announced in the initial $17.6 billion stimulus package.

A corporate tax cut by itself is meaningless to growth. Tax rates are already low when we add imputation credits. As well, this would make the fairness questions plaguing globalization very much worse, especially after youth have sacrificed so much for the elderly during the plague.

Accelerated depreciation could be useful. But in the absence of broader productivity reform it won’t do much over the long run, either. There’s no vision for structural change in any of this. 

It also skirts what will shape as the most contentious problem, nicely captured by immigration booster, George Megalopolis, at Domain:

…More than half the nation’s population growth since 2005 has come from overseas migration, and the skilled program has been the dominant driver of the economy for the past decade.

Even a single year without migration could unleash an economic and social catastrophe, as country towns see their populations decline in absolute terms and the growth rates of capital cities are reduced to near zero. For a conservative government this poses both a practical and ideological challenge. The absence of new arrivals this year will deny them a valuable tool of intervention to reinforce the health systems of regional Australia. A second year without new arrivals would thwart any plans to promote decentralisation in recovery. Fire-ravaged communities, who have had their reconstructions paused during the lockdown, would be particularly vulnerable because they would be competing for scarce resources with recession-hit capitals.

The view across the Morrison government is that overseas travel and mass migration will be the very last things to be restored to our way of life, long after public infrastructure projects resume in our cities and regions, workers return to their factories and offices, restaurants reopen, students are back in the classroom, and adoring crowds once again fill the theatres and sporting stadiums.

…Some skilled migrants and international students could feasibly be allowed into Australia during an extended period of national self-isolation. However, they would first have to undergo a 14-day quarantine. That might not matter if the final destination was Sydney or Melbourne. But if they moved to another state, they might need to isolate for a further 14 days.

…Either way, Australia faces the prospect of two, or even three years without the stimulus of mass migration.

A nightmare scenario for Australia during the health crisis is that the property bubble bursts in one or more of the big cities. No amount of federal government intervention in the economy would restore confidence at that point. And the states would not have back-up finance to deploy because their budgets would have been stripped of stamp duty revenue.

But our ultimate exit from the health crisis depends on the ability of allies and trading partners to contain their outbreaks. There is sinking feeling within Australian governments that we have not seen the worst of the pandemic. The list of countries that worry our officials at the moment is headed by India, our single largest source of migrants over the past decade, and Indonesia, the neighbour whose political stability we cherish but can never take for granted.

Megalopolis doesn’t mention unemployment. Nor does he recall that immigration-led growth delivered a period of intractable output gaps, smashed wages, falling living standards via an interminable income depression and destroyed productivity via crush-loading, the ruin of universities and the promotion of the services fluff economy.

In short, the absense of mass immigration will be a major upside positive for the economy. I sincerely hope that the press is right that SFM will not open the borders until last. But, somehow, I doubt it given his only previous plan for economic growth was more people to drive higher house prices.

Even so, I am beginning to wonder if COVID-19 is the end of the consumer era. At best, it has delivered it a very serious blow. With the nascent household deleveraging likely to deepen for some time and probably never return to full form. So, there isn’t much point in aiming for the old asset inflation model anyway given the spillovers will be materially diminished. 

That brings us back to the beginning and the question of how will we grow? Drs Lowe and Kennedy will have delivered two major messages above all else. The first will be ‘do not run surpluses’ and get on with nation-building infrastructure. The second will be to deliver ‘productivity reform’ to drive income growth in the private sector. 

These two fit with the basic identities of GDP. There are only three ways to grow an economy:

• run private deficits larger than public surpluses;
• run public deficits larger than private surpluses, or
• run external balances in surplus or deficit to offset whatever the balance of both.

It sounds to me like SFM wants the private sector to lead the recovery by running structural public deficits that are based largely on tax cuts for corporations and the rich. He is also talking a little about boosting the external sector for sovereignty purposes but without broad reform this is a niche play. 

In short, that SFM has already re-branded the Kennedy/Lowe message of ‘public deficits’ and ‘private productivity’ as a green light to push ‘businessomics’ is a damaging twisting of the truth that will lead to low growth, weak income and class inequality on steroids.