December 19th 2015

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Articles from this issue:

COVER STORY The first Christmas: a birth that set fire to men's hearts

CANBERRA OBSERVED A Nationals welcome no sure thing for Macfarlane

CLIMATE CHANGE $100bn a year climate fund the rub in Paris deadlock

FAMILY AND SOCIETY Free speech petition: appeal all 'right not to be offended' clauses

WATER POLICY Review tells of destruction of farms in Goulburn Valley

CULTURE AND POLITICS Liberalism's disappearing act on human freedom

TAX REVIEW Rise in GST a no go when the need is for jobs

HISTORY Taiwan's first people have survived waves of settlers

FREEDOM OF RELIGION Law not broad enough to contain freedom's flow

SPEECH IN PARLIAMENT Credit where credit is long overdue: B.A. Santamaria

FAMILY AND SOCIETY Swedish daycare part II: problems of weak parenting

CINEMA No life is lived as an island: It's a Wonderful Life

BOOK REVIEW A contribution to Pope Francis' call for a conversation on conservation


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Rise in GST a no go when the need is for jobs

News Weekly, December 19, 2015

If the polls are any guide the Australian people seem satisfied that they now have a better Prime Minister – or at least a more appealing one.

The peculiarity of the change in leadership is that Malcolm Turnbull appears to enjoy roughly the same level of preference over the leader of the Opposition as Bill Shorten had over Tony Abbott.

Mr Turnbull is nothing if not clever. He has managed to achieve all of this while apparently persuading most of his parliamentary colleagues that Coalition policies remain the same as under Mr Abbott.

So far so good. But sooner or later the electorate will want to see changes they believe necessary for a better life. No less important is how the Prime Minister will justify the necessary changes in direction to his parliamentary colleagues. Achieving all that is the political challenge Mr Turnbull has still to meet.

Early indications are not encouraging. What we have so far is the promise of a debate (yet again) on tax policy; which means all the usual suspects pushing as vigorously as ever for narrow special positions, as if these coincided with the national interest. This the Prime Minister counters with a promise that whatever emerges will be “fair”.

Unfortunately for Mr Turnbull, the preferred option of the commentariat is some kind of increase in the consumption tax; which cannot be made “fair” unless some kind of other tax is imposed on higher-income groups – an outcome unlikely to gain support within the Liberal/Nationals Coalition. In these circumstances, Mr Turnbull will have to ignore pressure for an increase in consumption taxes, or redefine fairness.

This is not a comfortable position to be in.

Meanwhile, we are able to observe the Australian economy slowing visibly – in important part though not entirely – driven by the collapse in commodity prices. While the boom was in place the government complacently sat back and watched, confident in the expectation that, after the boom ended, other sections of the economy, thus far remaining dormant, would wake from their slumber and take up the slack.

This was never a plausible expectation. (Is there any economy with dormant sectors waiting patiently in the wings to take over when the main driver of growth falters?) Some more perceptive commentators have warned the government to this effect. Some even made the absolutely valid point that the boom itself was unbalancing the economy and its collapse would continue the process. The lack of wisdom of shaping an economy heavily dependent on commodity exports is now fully exposed.

The fact is that Australia’s minerals exporters inhabit the most dangerous of economic territory; worse still for Australia, given that our export profile is also heavily dependent on agriculture. That kind of economy commits its main exporters to be price takers. In other words, buyers of our commodity exports hold all the bargaining chips.

No less important, a commodities boom adversely affects other sectors of the economy. This will remain so for as long as our government allows the Aussie dollar exchange rate to float; that is to say, it does not maintain any fixed relationship with the value of the currencies of our trading partners.

With a floating currency a boom in commodity exports pushes up the value of our dollar relative to the currencies of those partners. While all this is good for our mining sector, its impact on the other sectors of our economy is quite the reverse. For example, the consequences for the prospects of the local manufacturing and services sectors of our economy have been devastating. Both these sectors are sensitive to offshore price competition. When a commodity boom in minerals pushes up the relative value of our dollar, Australian-made goods and services are faced with cheaper offshore competition in both export and domestic markets.

And remember, these are the sectors of our economy supposed to be waiting in the wings to take up the slack when the commodities boom collapses. Quite how is never made clear.

While all this was happening, the government chooses to ignore the fact that a surge in commodity exports pushes up the value of our dollar to the disadvantage of other sectors of our economy. These sectors are, as it were, left dangling in the breeze, totally exposed while offshore competitors eat into their market shares – both foreign and domestic.

Sadly for Australia, many of our trading partners are much more sensitive to the fate of their domestic industries. Japan, Germany, Brazil and Korea, among others, took steps to manage their exchange rates and so retain the competitive advantage their industries have in both domestic and export markets.

Free-market ideology

Why did the Australian government not follow the example of our trading partners and manage our exchange rate to protect Australian businesses? Very little has been said publicly about this by recent governments, but we may assume blind commitment to free-market ideology has certainly been a factor.

Which leaves unanswered the question: what kind of government follows ideology to the point of harming to its own economy?

After the crash of commodity prices, our overvalued dollar did, at first, correct significantly. It fell from almost parity with the US dollar to about US65¢. That correction, however, was short lived, despite the fall in our commodity export returns; our dollar is on the rise again – already up to US72¢-US73¢.

Since the beginning of the commodities boom and the rise in our exchange rate the Australian economy has taken a big hit. The most important impact, at least as the government sees it, has been on the budget deficit. There are several reasons why this need not be the most compelling problem, but let us assume for the purpose of this article that the government is right.

Though the government remains somewhat coy about it, there is no doubt that the revenue stream from tax collections has slumped – for two reasons. Tax collections from mining exporters have fallen in line with the crash in prices and volumes of exports. Revenue from company taxes on businesses in the manufacturing and services sector have also declined. And, as some had warned, they have not immediately bounced back to take up the slack now that the mining boom has ended.

A further complication is that unemployment has increased. Whatever might be said to the contrary, unemployment is up, and, additionally, wage growth is rising at the slowest pace on record. More unemployment and slower wage growth impact on the economy in a number of ways. First, lower revenue collections from fewer people in work, and those in work on lower wages. And for the unemployed, an increase in unemployment benefits means the government needs to spend more on welfare even as the revenue stream decreases.

Contrary to what many believe, unemployment and low wages are a big drag on the economy. Both act to slow economic growth.

No doubt the government is worried. But focusing on the wrong solution won’t help. In the face of rising unemployment and lower wages, any assumption that the revenue stream can be improved by further taxing consumption is bound to fail. In a consumption-based economy increasing tax on consumers – in any form – will not promote growth. Nor will it help solve what the government sees as its deficit problem.

What the government needs is a strategy to restore growth; and the key to that is reducing unemployment.

That having been said, there is a problem with tax of which the government is aware and which is ripe for reform. Governments have known about it for years. It relates to tax avoidance – notably by foreign-owned companies. Billions of dollars in revenue is being lost every year while this area of tax is not reformed. We should be concentrating our efforts here, rather than agonising over how to squeeze a little more from those who are probably already paying too much tax. Yet, neither side of politics has been prepared to tackle it.

Foreign investment overhaul

Fundamental change is needed. In fact, to do it properly means having a fresh look at how we evaluate foreign investment. Not so much in terms of who wants to invest here and from what country. But in terms of what are the benefits and risks of foreign investment here in Australia.

Back in the 1950s we needed foreign capital to develop industrial capacity and create jobs at good wages for a planned flow of migrants. These new industries would be protected against import competition with tariffs.

Today’s world is different. The world is awash with capital. The problem is finding a home for it. The kind of capital we are attracting today is more likely to acquire existing Australian businesses – including public utilities – not necessarily with any long-term consideration for the business. In particular, they will be looking for ways to avoid paying tax here.

The recent New South Wales power sale was concluded at a favourable price but to a consortium that conducts its affairs in the Cayman Islands. A notorious tax haven. If the consortium pays no tax in Australia, will we have made such a good deal for Australia?

Perhaps what our government should be doing is creating a new mandate for the Foreign Investment Review Board, with tough rules about paying tax in Australia. Don’t hold your breath, though.

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