We need an investment booster

This opinion article by Business Council chief executive Jennifer Westacott was published in the Financial Review on Thursday 5 September 2019.

A carefully designed investment allowance, calibrated as part of the budget, would help address Australia’s flagging productivity without risking the return to surplus.

There’s no reason good policy and a return to the black need to be mutually exclusive.

As the government has shown with the welcome introduction of personal income tax cuts, policy can be sensible and fiscally responsible.

The Business Council of Australia believes an investment allowance, in the absence of company tax cuts, is the best way to encourage the business investment needed to build a more productive and innovative economy.

This will drive stronger wages growth and higher living standards, and deliver the new jobs Australians need.

We are proposing a broad-based investment allowance to encourage investment in the type of projects that are currently at the margin and otherwise wouldn’t get up because they fail to stack up in terms of investment rates of return.

We need look no further than Wednesday’s national accounts for proof of why Australia needs concerted action to lift productivity and accelerate growth.

The national accounts underscore the softness in Australia’s private sector economy and the need to kick-start investment.

New business investment fell in the June quarter and is lower than a year ago. Household consumption growth is running at its softest pace in six years.

The government’s income tax cuts will help household sector cash flows; they are an important signal about the future and will improve consumer confidence.

Stability in property prices across our major capitals is another positive.

With the labour market still strong, real wages showing modest growth, tax cuts flowing to households and house prices stabilising, the pre-conditions should be there for the household sector to be through the worst.

But what about investment?

Business investment as a share of GDP remains at depressed levels. Hopes for a sustained pick-up in non-mining investment remain unrealised, actually falling in the June quarter.

Given the falls in business conditions over the past 12 months, the ongoing softness in business investment should probably not come as a surprise.

This is why we need an investment allowance. We suggest it be broad enough to apply to machinery and equipment, buildings and structures, and the increasingly important intangible assets. It would work as an extra deduction and mimic the impact of a more competitive company tax rate on investment rates of return.

By being broad-based, the allowance doesn’t favour one type of asset over another and would not distort investment decisions the way a narrower and more limited allowance might. The drivers of productivity over the long run are about investment and innovation, and we cannot forget that in a global world investment is mobile.

Australia can either be a competitive investment destination and attract investment, or not.

OECD estimates show that Australia’s company tax system has a larger impact on investment hurdle rates than our competitors. We need to do something to reverse this.

It doesn’t mean we need to be the lowest taxing economy in the world, but we need to stop making it harder for investment decisions to stack up.

An economy with greater productivity means the benefits can be shared by all Australians through lower prices, higher wages, higher profits and better shareholder returns. Better shareholder returns and higher profits also benefit the more than 15 million Australians with superannuation accounts.

Our experience through the 1990s and early 2000s shows that when we have strong productivity growth we see faster real wages growth, faster GDP growth and improved living standards.

To build on the foundations of Australia’s success, our economy must be able to compete for investment.

The national accounts underscore just how urgent this has become.