Mirabile dictu: An economist that sees the Depressionberg Unstimulus

At the AFR there is one sane man still standing. Paul Brennan is an independent economist and has worked at Citigroup Global Markets as well as the RBA, federal Treasury and the OECD:

The instant asset write-off on all depreciable assets, costing $27 billion over the forward estimates, is central to driving business investment and boosting employment, while the $4 billion new hiring credit and $1.2 billion scheme for apprentices will create jobs.

…With significant spare capacity in the economy and heightened uncertainty, many businesses will be cautious about making new investments.

Instead, they may initially focus on working their existing capital stock harder by taking on more workers, given the large downsizing that followed the onset of the virus and related restrictions.

…This raises the question of whether there is the right balance between the large expenditures directed at business investment and the lesser amounts allocated for direct employment subsidies.

That’s it, in a nutshell. It is certain that businesses will turn to working existing assets harder. Most have been shut down to some extent over the past year. That experience has generated an infinite number of new ideas of how to promote efficiencies. Many, many folks are going to shift from JobKeeper not to their old jobs but onto JobSeeker.

The employment incentives do nothing to stop this. In fact, they will exacerbate it by promoting publically subsidised part-time employees. Likewise the investment write-offs. JobKeeper is rightly gone but JobSeeker is to be gutted.

In short, the budget is encouraging businesses to shed labour beyond belief and it has nowhere to go but straight below the poverty line.

In normal circumstances, this would be terrific. There’s a huge productivity dividend in it that, if demand and supply were more balanced, would result in higher profits and wages. But these are not normal times. We already have a huge output gap with excess capacity across the entire structure of the mass immigration ponzi economy, made much worse again by the structural shift to work from home:

What the economy needed from the budget was demand-side deficit spending to support activity and jobs while the supply-side goes through this wrenching adjustment. Without that, labour and taxpayers are going to wear the entire cost of the rationalisation. That will not help capital, either, because topline growth will be savaged by the demand deficit.

Basically, the budget examined Australia’s COVID-19 and long-term economic wounds and decided to rip off not just the bandaids but an entire limb.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Lower interest rates stimulate the economy.
    Tax cuts stimulate the economy.
    Deficit spending stimulates the economy.
    Any spending will stimulate the economy.

    I have learnt all those things diligently from the media experts.

    I have a dream that Australia could become the most stimulated economy in the whole wide world.
    How’s this for a plan:
    * Set all interest rates to 0% – including credit cards
    * Set all taxes to 0%
    * Now ALL govt spending will be deficit spending
    * Give ALL citizens money to spend on the economy

    And since some of these things might be difficult to do I have an even simpler plan to stimulate the economy;
    Imagine if every Australian dollar was recalled and was replaced with two Australian ollars. (The name change would help avoid confusion.) Every price would then be set in ollars to twice what it was previously in dollars.

    Under my scheme, just think how many more ollars would be floating around to timulate the economy. Just think about how many more GDP ollars there would be. Imagine how much more ousing ealth we all would have. And our orking mums and dads would finally get that hard-earned pay rise they have been aiting for.

    What’s not to ike about that?

  2. happy valleyMEMBER

    I have to get on to my tax accountant to ask whether if I buy a Ferrari through the business, to lift the profile from a 15 year old Astra will it be 100% immediately tax deductible?

  3. I had this discussion with an “accountants son” on reddit. He has a whole raft of beliefs about why this is great stimulus. I appeared to manage to get him to accept that most of his reasoning were mere wishful thinking at best.

    After all the discussion he is still utterly convinced it will lead to a mass of businesses increasing investment because they can bring forward the depreciation, and having that extra dollar today can be reinvested again.

    He could not grasp the concept that people dont act rationally when they sense risk is high. Could not understand that while it may be rational to think a business will invest in new equipment because they can get a better economic outcome when times are uncertain they will err on the side of caution.

    Why invest in new equipment if your revenue has no sign of increasing? spending $150K on new equipment in order to get $50K tax deduction from it requires you to have profit to deduct against.

    • SnappedUpSavvyMEMBER

      yes you need the profits to deduct against and for most companies that profit is mainly coming from job keeper šŸ™‚

    • This is the nub of it. Businesses only invest when they have a clear sense of stronger future demand for their products and services. This is what was originally meant by the term “animal spirits”. Businesses know as well as we do that demand is buggered as far as the eye can see and that the Budget will do nothing to lift it. Ergo, there will be no investment.

    • On the contrary, I think people do act rationally when risk is high – they pull their horns in and hunker down. The instant asset write off will only be utilized to buy the owner a new vehicle or boat Or some new equipment if the business is really going ahead. Only idiot would invest in the business if it was struggling and there was a lot of uncertainty IMO.

      • if by rational, you mean assess the potential downsides into the future as higher than acceptable so therefore withdraw and protect, then yes I agree.

        His version of rational is if I invest $X today, the tax deduction will leave me in a better position later. a purely rational calculation of the value of doing something now is greater than the value of doing it over time.

        My premise that under that “economically rational” model people dont act rationally at all. No one looks at the financial outcomes and nothing else. They assess risks in their decisions, and they dont assess risk rationally either.

        Most people dont even know how to assess and evaluate risk, and inherently always give a much higher weighting to uncertainty.

        • Yeah, I guess there’s an element of rationalising the world through my own eyes here — as in, if it were me I would do the following.

    • Doesn’t everyone need a $100,000 sandwich press? Or, perhaps it was a toaster…either way, it was definitely something to do with bread.

      • I asked my accountant if the legislation around the instant tax write off meant I could buy 4 $20K cars, write them off each year, get the tax deduction, sell the cars to other family member privately for $18K a few days after purchase.

        He said the only risk is that the ATO would probably audit me……

        • You then do a deal with ATO telling them you cannot afford to pay and they reduce the tax bill by over 50%. Still a good win….Tech giants have been doing custom deals with the ATO forever.

          • Just on the phone with robodebt, they suddenly decided I owe $57K because my ex didnt lodge a tax returns… they cant be bothered to chase her for them so decided I have to pay back the FTB we received while together. 2011-2013

            ATO obviously cant be bothered chasing tax returns so maybe I shoudnt be worried about following tax law…

  4. 0% super for two years

    0% GST for one year, bring forward heaps of purchases and work

    No stamp duty for two years to help people relocate and resize. There will be no transactions anyway so just embrace it.

    Finally bring in 500,000 women from East Asia, Eastern Europe, South America to breed with local lads and produce a baby boom and house price boom. Call it a ‘global women’s visa’, that sounds progressive enough. Charge $1,000 admission fee, two years work rights, 500,000 annual limit, must be under 30, make it clear that if you marry and get knocked up you can stay forever.

    Come on, this is basic stuff.

    • Bring in 500,000 women from East Asia, Eastern Europe, South America to breed with local lads

      Your comment is R***cist, s***ist, and ag***ist. Where do I sign up?

        • Mandatory ABC iview and SBS on Demand App install once they hit immigration gates….Greens will rubber stamp it straight through both houses.