Budget is not a zero-sum game

08 April 2019

This opinion article by Business Council chief economist Adam Boyton was published in the Financial Review on Monday 8 April 2019.

Given the importance of fairness, it's probably not surprising that each year the budget conversation tends to focus on who gets what, and the question of whether someone else's gain means someone, or something, loses out.

But rather than solely focus on dividing what we have in front of us, why don't we also focus on providing more for all?

So when it comes to budgets - either last week's, or any budget for that matter - that means asking how it adds to growth, rather than just reallocating the spoils of growth.

The more rapidly the economy grows the more tax revenue is generated. The more revenue, the more services we can fund. The more rapidly the economy grows, the more rapidly debt can be paid down. The more rapidly we get debt down, the more firepower we have to respond to a negative economic shock.

And, the faster Australia can grow the economy the more we can shift our conversations around budgets from a zero-sum view - namely that one person's gain in a budget comes at the expense of someone else, or something else.

Putting some numbers around that makes it clear.

Let's take two scenarios. One where the economy grows over the next decade at 2.5 per cent each year - which is about what growth has averaged for the past decade - versus an economy that grows at 3.25 per cent.

What's the difference in tax revenue between the two? After all, a three quarter of a percentage point difference in growth might not sound like much.

But the difference between the two growth rates gives Australia an extra $250 billion in tax revenue over the decade (with a tax-to-GDP cap of 23.9 per cent, the current government's cap).

That's $250 billion more in tax over a 10-year period just from faster real GDP growth.

So, with that lens, how well did last week's budget deal with the question of growth?

The tax cuts are a positive for growth, especially with their focus on low- and middle-income earners. With GDP growth relatively soft and household consumption growth having slowed, the first stage of the tax cuts should provide a modest and welcome lift to the economy.

Over the longer term the elimination of a tax bracket and the simplification of the income tax system will improve incentives to work and get ahead. They'll also return money to Australians that bracket creep has progressively taken.

Delivering tax cuts now while also bringing the budget back into surplus not only supports growth today by putting money back in people's pockets, but - on the basis the government actually does pay down the debt - can also protect growth in the future.

The infrastructure spending contained in the budget should also be positive for growth. The challenge is, of course, funding the right infrastructure at the right price. But if we can deliver on that, it can help set up the economy for growth, not just during the construction phase but also by boosting productivity, efficiency and competitiveness once projects are up and running.

This is important, because the best way to drive growth over the long term isn't by short-term sugar hits, but putting in place the pre-conditions to sustainably lift productivity.

Given what we know drives productivity that means asking what a budget has done to encourage investment.

After all, new business investment fell over the year to the December quarter 2018 and investment as a share of GDP remains at levels not seen since the economy emerged from the early 1990s recession.

Here the increase in the amount of the instant asset write-off for small businesses and also its expanded coverage to medium size business will help send a signal to those firms about investment.

However, the missing link on growth is the lack of an economy-wide signal about the need to get investment growing more rapidly.

While the Senate may have made a decision last year to leave Australia with a globally uncompetitive two-tier company tax rate, that does not mean the investment challenge in front of Australia has gone away.

Indeed, the persistent weakness in investment, productivity growth and the associated weakness in real wages growth makes that challenge even more front and centre.

Rising to that challenge, lifting productivity and lifting growth would go a long way towards delivering "more for all".

More broadly, it suggests our thinking around budgets should not just focus on reallocating the spoils of growth, but adding to growth.


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