A major recession looms for Australia. Daily, we are reminded of this.
As I write this, the newly elected Coalition Government is having its taxation package passed into Law and is arguing that the tax relief, so prescribed, will encourage spending and lead to increased employment and to wage growth. The Government is in a self-congratulatory mood and the media has joined the party. I cannot share this ebullience. All this seems fine but all is not as it seems.
The inter-linkages between wages, taxes, income and wealth distribution and the general economy are complex. Unfortunately, the debate in the media and in the political messaging is dis-satisfyingly simplistic. There are several key considerations that tend to be overlooked in this debate.
Firstly, wages are not moving in sync with profits. There are major “structural” factors, decades in the making, but now impacting society with force. These include the decline in well-paid secure manufacturing, public service and other jobs and increasing low paying service industry jobs, declining unionisation, increased casual and contract employment, technological changes and immigration.
Secondly, whilst unemployment is low, both under-employment and under-utilisation are very high and the total labour market capacity is well in excess of actual needs. The Australian Industry Group (AiGroup), quoting ABS figures, propose that:
In 2018, Australia has one of the highest rates of part-time work globally, at around 31% of the total workforce (47% of working women and 18% of working men).
This suggests a larger effect on wages is being exerted by the incidence of underemployment in Australia, as was found to be the case internationally by the IMF.
Thirdly, for those in full-time employment, many have very high debt. On average, this debt approaches 200% of annual income. These heavily indebted households are highly constrained and, understandably, see mortgage reduction as the highest priority objective, well over consumption.
Fourthly, our key exports of coal and iron ore are at record high prices. We have been lucky, momentarily, because the Brazilians appear not to be very good at building tailings dams and the Chinese are, for the moment, constructing plenty of infrastructure. However, for both coal and iron, the most likely direction now is down given China’s future direction and the propensity of the United States to start tariffs and trade wars. What is the Government’s plan for this less resource determined future? Also, don’t forget that likelihood of recession.
Adding to this complexity is the matter of Australian investment policy. It heavily favours non-productive “rent seeking” investment, particularly in existing property. These are subsidies or discounts for the wealthy that are resulting in few jobs but rather growing society inequality and dysfunction.
So, what is the likely outcome of the newly elected Government’s tax package? Will it result in increased consumer spending and therefore greater production of goods and services and thus lead to more jobs and higher paying jobs? The short answer is no!
The Grattan Institute has reviewed the tax package and, whilst endorsing the initial two stages, is highly critical of the third and biggest stage. To quote them:
The Federal Government has taken the highly unusual step of seeking to lock in a series of income tax cuts over the next six years. The three waves of cuts are packaged together, but each stage is different in terms of its cost, economic rationale and distributional effects. ……
…. And there are big question marks over whether the Stage 3 cuts are affordable. Unless the Government maintains unprecedented discipline on spending, it will struggle to reconcile tax cuts with its fiscal objective of balancing the budget on average over the economic cycle. There is also a real risk that the size of the package — unmoored from other structural changes to the system — will ‘crowd out’ the chance to make more meaningful tax reforms for another decade.
For many, the following comment from the Grattan Institute, whilst to-date little heralded, will ring loudest:
The tax cuts as proposed will make Australia’s tax system less progressive: the top 15 per cent of income earners would pay a lower share of their income in tax than they do now, while middle-income earners would pay a higher share of their income in tax.
In summary, the major change in taxation, the third stage, is too large, too unequal, too constraining to the economic management by any future government and fails to consider any of the structural factors influencing wage growth and income inequality. This is just more of the same where the result in ever increasing inequality that over the long term results in lower national productivity and increasing social dysfunction.
In 1983, I was on a train from Shanghai to Beijing and I struck up a conversation in the corridor with a French professor of history, who remarked of the Australian ethos — “you Australians are defined by your geography of broad spaces — you are open, friendly and you treat everyone the same”. At the time, I agreed with him. Now, if I was to meet this good professor again, I would not be so sure about this. Also, I wonder if he might have changed his mind too.