In the absence of tax cuts, investment allowance is key

13 August 2019

This opinion article by Business Council chief executive Jennifer Westacott was published in the Financial Review on Tuesday 13 August 2019.

The growth discussion is back. And in light of ongoing global trade tensions it’s unlikely to go away anytime soon.

As the Reserve Bank Governor noted on Friday, productivity growth has slowed noticeably. He went on to say that “If this slowing is maintained, it will become a serious issue and as a society we will have to make some difficult adjustments.”

Lifting productivity is often easier said than done.

But there are some quick wins.

In the first instance we need to understand what it is that drives productivity.

Both the Treasury and Productivity Commission have noted the importance of investment for long-run growth. They also point to capital deepening – investment – as the single biggest driver of labour productivity growth.  And labour productivity has been the key driver of real per capita incomes growth for decades.

Which is to say that investment has been the key long term driver of incomes growth.

In the absence of a company tax cut for all companies, the Business Council is proposing a broad-based investment allowance.

It would apply to investment such as machinery and equipment, buildings and structures and, the increasingly important intangible assets.

In practice an investment allowance it would work as an extra deduction, and ‘mimic’ the impact of a company tax cut on investment rates of return.

If the parliament delivers an investment allowance, businesses will be able to unleash the new investment needed to build a more productive and innovative economy. That will help drive stronger wages growth and deliver the new jobs Australians need.

Consider a banana grower in Cairns looking to invest in a few sheds for packing, packaging and grading bananas. The whole fit out could come to $1 million. While this can be depreciated, with a 10 per cent investment allowance they would also get a $100,000 extra deduction this year.

That’s money they could reinvest into growing their business or employing more people.

New business investment is down 1.3 per cent over the year, and as a share of GDP it is at its lowest level in 25 years.

It is almost a year to the day the Senate said no to single company tax rate – a tax cut for all companies over the decade.

The tax cut was about putting in place the settings to ensure we get the investment we need to drive future wages and jobs growth.

Of course, the Business Council has never said that having the second highest effective marginal company tax rate in the advanced world is the only reason for our investment woes. But it certainly doesn’t help.

The politicisation of investment projects, delayed project approvals, moratoriums on gas exploration, and red tape are just some of the impediments confronting and deterring businesses.

The government has led on tackling some of these issues, with the Prime Minister calling on business to help identify the regulations and bureaucratic barriers that impose “the largest costs on key sectors of the economy’’ and serve as a hurdle to investment.

And there is also the welcome announcement of the Productivity Commission’s review into streamlining regulation in the resources sector.

But we need to pull all the levers if we really want to get a sustained rise in investment to lock in future productivity growth and incomes growth.

This means more investment in sectors such as mining, agribusiness, energy and advanced manufacturing, as well as encouraging new investment in the digital economy so we can compete on the global stage.

So how can we make Australia a more attractive investment destination?

Along with removing the barriers to investment we should also look at how we improve after tax rates of return on investment.

A better rate of return will encourage investment.

This is what a more competitive company tax system and more vibrant business environment is all about.

More investment helps grow our economy by innovating, exporting, expanding existing businesses, starting new businesses, creating new jobs and delivering higher incomes.

We know this link is understood by all sides of politics. A more competitive tax system sends a signal to encourage more investment

An investment allowance is no substitute for a company tax cut. But if that tax cut is off the agenda for now, it doesn’t mean we can just stop thinking about how to boost investment.

So let’s take that first step to getting business investment back on track and introduce an investment allowance.


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