Vital signs: we need those tax cuts now, all of them. The surplus can wait



If you’re going to stimulate the economy, it’s wise not to wait.
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Richard Holden, UNSW

In an enormous week for economic news at the start of the month, parliament passed the government’s three-stage personal income tax plan, and the Reserve Bank cut official interest rates to an unprecedented low of 1%.

It happened against the backdrop of a flagging economy in dire need of stimulus.

As the bank cut rates to a record low, its governor Philip Lowe again warned about the waning power of rates (monetary policy) to lift the economy.

At the Darwin community dinner after the board meeting he said:

Monetary policy does have a significant role to play and our decisions are helping support the Australian economy. But, we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.

Lowe and many others – including yours truly – have repeatedly pointed out that spending on physical and social infrastructure can do what lower rates can’t do well – boost the economy while lifting its productivity. So, too would other productivity-enhancing reforms, particularly in the labour market.

And, of course, the government’s tax cuts will also stimulate the economy when they come into effect.

With tax cuts, timing’s the thing…

The obvious problem is that much of stimulus from those tax cuts will happen years from now, rather than today.

What the government should have done was insist on enacting all three stages of their tax plan immediately. Not staggered over several years, not in 2024-25. Now.

That would have, of course, pushed the budget into deficit in the short run, and that would would have run counter to the government’s narrative about being responsible economic managers.

But how responsible is it to prioritise one’s own political brand over the economic health of the nation?




Read more:
Ultra-low unemployment is in our grasp. How Philip Lowe became the governor who lifted our ambition


Let’s not forget where the timing of the government’s tax plan came from. 2024-25 is outside the budget’s so-called “forward estimate” period and thus the impact on the deficit or surplus projections is not apparent.

It was the same rationale that underpinned the glacial, decade-long pace at which the government’s “enterprise tax plan” was to move to a 25% company tax rate. And it is the same set of dodgy accounting tricks that Wayne Swan was a master of for everything from health to education spending commitments.

…and the timing could be immediate

Productive infrastructure spending is hard to enact quickly. Spending on social infrastructure like education and training has a long lead time.

And structural reform of the industrial relations system might is probably the hardest and longest of all to put in place.

They are real constraints.

The Reserve Bank faces another, the so-called “zero lower bound” of conventional monetary policy and the complexities and uncertainties of unconventional policies such as quantitative easing.




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Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work


But a government which won a mandate for its tax policies, and who frankly has the Labor opposition in a tailspin, could have insisted on all three stages of the tax cuts immediately.

The only thing standing between the economy and the aggressive fiscal stimulus it needs is the government’s obsession with balancing the budget regardless of the circumstances.

We’re not in the best of times

Don’t get me wrong, I think debt and deficits most certainly do matter. The government deserves credit for chipping away at the structural budget deficit, and we shouldn’t be running deficits in good economic times.

But we’re not in good economic times. We’re standing on the precipice of the first recession in nearly three decades. We’re looking at highly uncertain global conditions, domestic economic growth that has slowed to a trickle, sluggish wages growth, persistently high underemployment, and even the possibility of Japanese-style deflation.

The irony is that if, with the failure to enact sufficiently bold stimulus, we do tip into a recession, the red ink will flow all through the budget. Unemployment benefits and welfare payments will rise, personal and corporate income receipts will fall, GST revenue will drop. And young people who enter the labour market during a recession will suffer for years to come.

The downsides of not enacting sufficient fiscal stimulus far outweigh whatever benefits there are of a glide to path to budget balance while avoiding a recession.

It’s certainly not the time for hand-wringing

Coming back to Lowe’s admonition that we need the “various arms of public policy…pointing in the same direction”, here’s where we currently stand: The bank has acted, but far too late. For years it told us that 5% unemployment was as good as it could get long-term, to be patient and to wait for higher wage growth and inflation.

It’s been a mere five weeks since Lowe stopped impersonating Charles Dickens’ character Wilkins Micawber, who was fond of saying “something will turn up”.




Read more:
Buckle up. 2019-20 survey finds the economy weak and heading down, and that’s ahead of surprises


Now the treasurer Josh Frydenberg is giving us his version of the same routine. On one hand he says personal income tax cuts are crucial to boosting employment and spending. On the other hand, he says we’d better wait.

The Australian economy can’t afford to wait for aggressive stimulus. The government has shown more concern for its political brand than for our economic health.

It isn’t what a responsible steward would do.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Hung Parliament Likely in Australian Federal Election


Greens and Independents to Hold Balance of Power in Both Houses

It would seem that the likely outcome of the 2010 federal election in Australia is that of a hung parliament, with government going to the party that gains the support of one or two possible Greens members of parliament in the lower house, and three other independent members of parliament in the lower house. It seems likely that the Greens will hold the balance of power in the Senate.

The Greens have now clearly become the third major political party behind the Australian Labor Party (ALP) and the Liberal Party (Lib) – National Party (Nat) coalition. They have now gained a representative in the lower house with the seat of Melbourne in Victoria falling to Adam Bandt. It is possible that the seat of Grayndler in New South wales (NSW) could also fall to the Greens, with ALP member Anthony Albanese in a close fight with Sam Byrne of the Greens.

The three other certain independents, all former National Party members, are Bob Katter (Kennedy – Queensland, Tony Windsor (New England – NSW) and Rob Oakeshott (Lyne – NSW)

The ALP has also lost large numbers of seats in Queensland ( QLD – Flynn, Leichhardt, Forde, Bonner, Dickson, Herbert, Longman, Brisbane and Dawson) and seats in NSW (Bennelong, Macarthur, Macquarie and Gilmore), one in the Northern Territory (Solomon), one in Western Australia (Hasluck) and possibly one in Tasmania (Denison) to independent Andrew Wilkie. It would seem that a total of 18 or 19 seats have been lost by the ALP. They have gained two in Victoria, winning La Trobe and McEwan.

The ALP’s greatest hope would seem to be the seat of Boothby in South Australia, which still appears too close too call. At this stage Denison in Tasmania remains an ALP seat, but it also remains too close to call.

It seems to me that there will be 73 seats to the ALP (possibly 72 if Grayndler falls to the Greens in NSW), 73 seats to the Coalition, one seat to the Greens (possibly 2 if they pick up Grayndler in NSW – who would lean to the ALP) and 3 to the Independents (all formerly National Party members who would likely lean to the Coalition). If these predictions prove to be true, it would seem that the Coalition will be able to form a minority government with the support of the Independents.

After the promise of the ALP in the previous election and the result that occured, the ALP should have held office for at least two terms. However, the ALP has failed to deliver and instead gave Australia a very lazy, poor and mediocre government. Under Kevin Rudd the ALP successfully steered Australia through the financial crisis, for which Australians should be very thankful. However, there has also been poor management of ecomomic stimulus projects, environmental issues and other projects, which have left many Australians disillusioned with the government. This of course led to the downfall of Kevin Rudd prior to the election and the elevation of Julia Gillard to the Prime Ministership of the country. This was too little too late to save the ALP from electoral disaster and the Australian people have delivered swift punishment for their failure to deliver what we had hoped for under the Kevin Rudd led ALP government.

Perhaps the experience of a hung parliament and a minority government, from whichever side of politics, will result in someone or some party standing up with a real commitment to governance and leadership in Australia. At the moment there seems little of both and the Australian people are largely disillusioned with both major parties. The ALP should prepare itself for major defeats in state elections over the next couple of years, especially in New South Wales and Queensland, where voters are fed up with poor government – not that the alternatives are much better.