By Denis Bright

The NSW’s Government’s Draft Report on Federal State Relations (NSW Review) offers a preview of Australia’s future directions within the limitations of those familiar neoliberal policy levers that are so attractive to the LNP at all levels of government. The Morrison Government is indeed polling well after its own 2020 Budget with the support of a smooth communications agenda that focuses on the benefits of a lower state.

NSW will take the plunge on 17 November 2020 with the release of its delayed 2020-21 budget.

Ahead, lies the possibility of an early federal election in the second half of 2021 while remnants of LNP’s popular income and business support measures are still in place before that promised Return to Normalcy.

Hardly in the progressive traditions of the Menzies Government’s Vernon Report on the Australian economy in 1965 or Paul Keating’s Working Nation, the NSW Review offers more tinkering with existing and proposed reduced progressive taxation schedules.

Interested readers should look at the wordy Terms of Reference of the NSW Review on the NSW Treasury site and the background to the five assisting panelists assisting David Thodey.

Unlike the Vernon Inquiry, the NSW Review is silent about the big issues affecting Australia’s future including capital deficits and regional inequalities. Current tinkering with Australian tax systems and more largesse for the upper middle-income support base of the federal and state LNPs across Australia are unlikely avoid the turbulent times ahead in the mid-2020s as income and business support measures are wound back.

Long before the current COVID-19 public health crisis, economic conditions were already deteriorating when the NSW Review commenced its work in mid-2019. It is a long time since the Australian economy could offer a 4 per cent annual growth rate in the post-GFC recovery under the Gillard-Rudd Governments.

Since the release of the NSW Review, the latest national accounts show the deterioration in Australia’s national economy in the June Quarter data released on 27 August 2020:

Indicators like these, demand more than tinkering with taxation structures and ongoing rewards for the business and income support bases of the LNP at state and federal levels.

Fortunately, the NSW Review admits that Australia is not overtaxed by world standards when compared with those thirty-six other OECD countries:

The NSW Review rightly recommends a timely readjustment to national and state taxation.

The proposed prescriptions involve less overall emphasis on progressive taxation. There is support for more GST taxation which is blended with an evaluation of some expanded land and property taxes. Australian taxes on land and property taxes at all levels of government are the third lowest in the thirty-seven members states of the OECD. Most sections of the LNP at all levels of government will not wear any systematic reform of land and property taxes.

The Morrison Government sees reduced progressive taxation as the road to economic recovery and could be expected to side-line any discussion of progressive land and property taxes.

ABC News (6 October 2020) offered a preview of the reality of the tax changes ahead for differing income levels:

The NSW Review also raises the possibility of a less generous sharing of the national tax redistributions on behalf of more moderately diversified states like Queensland. Meanwhile, Tasmania retains its protected status with 62.6 per cent of that state’s revenue base in the latest 2018-19 budget derived from the Commonwealth in GST sharing and special grants.

The impact on the rescheduling of income tax grants would be bad news for the weaker state economies as shown by comparisons for unemployment rates in September 2020 (ABC News 15 October 2020):

Victoria had the lowest unemployment rate of the states, but that’s because many people could not look for work during the lockdown.(ABC News: Alistair Kroie)

The federal LNP’s tinkering with progressive taxation is a very long-term political agenda in the traditions of the Tax Revolution by conservative US administrations from Nixon, to Reagan, George W Bush and now Donald Trump.

This agenda should be threatening to disadvantaged sections of Australian society during the current COVID-19 recession. Reserve Bank (RBA) data shows the very unequal burdens which are accumulating during these difficult times. The top quintile of Australian society is already doing quite well. The LNP’s blind-spot is always the plight of the lowest quintile who would face higher GST rates and a drift away from redistributive progressive taxation schedules.

Statistical Postscripts Larger firms have had more success in weathering the national recession with a reduction of just one per cent in payrolls from firms with at least 200 employees compared with a fall of 7 per cent in firms with 20 to 200 employees.

Young people are disproportionately affected by the current job crisis across the nation and will be in dire straits when JobSeeker and JobKeeper programmes are wound back further by the federal LNP in an emphasis on that Return to Normalcy:

The Divided Nation shows up in the effects of employment changes by industrial groups. Sectors with high rates of part-time and casualised employment are badly affected by the current recession. In a statistical postscript, RBA notes that employment losses are largest in sectors with the lowest hourly pay-rates.

The federal LNP has been adept at selling its recent budget and foreshadowing the possibility of an early election in late 2021 on the divisive issue of Phase Three Tax Cuts.

The road to recovery according to the federal LNP is paved with more deviations from traditional progressive taxation agendas which are being reinforced by an ongoing commitment to legalized forms of tax avoidance through family trusts, negative gearing of investments and dividend imputations to name some of the most common tax lurks for privileged families.

Australia’s leading economists do not share the federal LNP’s zeal for reducing our taxation base (The Conversation 27 September 2020):

However, some suggestions in the NSW Review have considerable merit. Payroll taxes in particular make very little contribution to national productivity and are at odds with transparent bipartisan business support measures.

“Payroll tax now comprises a lower share of state tax revenue than at the time of the Henry Review for New South Wales and Victoria and, revenue has grown roughly 0.7 percentage points slower on average than state operating expenditure.

Australia’s Long Tradition of Government Sector Intervention

It is in the political interests of the LNP to foster a lower progressive taxation take. This Budget worked well at the 2019 federal election. The assumption that a lower taxation base will advance our post-COVID-19 future is so deeply entrenched in mainstream media reporting that progressive alternatives might be a motorway to the opposition benches at all levels of government.

The federal LNP’s taxation priorities carry embedded assumptions that wage incentives additional training staff and support for the business sector will turn-around the trend lines in private sector investment (PM’s Media Release, 9 October 2020):

“Getting money into the pockets of Australians will give them more to spend at their local shops helping to create more jobs.

Our business tax relief measures will also help to keep businesses to stay afloat, to grow and to hire more people.

It is estimated our tax relief package to reduce the personal income tax burden and encourage business investment will create around 100,000 jobs by the end of 2021-22 and boost GDP by around $6 billion in 2020‑21 and $19 billion in 2021-22.”

 

Australia Always Needed a New Direction

Both the NSW Review and the federal LNP Budget give little attention to Australia’s deplorable rates of private sector capital investment.

Colonial government across Australia prior to 1901 generally supported a high profile for state intervention particularly in the development of essential infrastructure. The weak spots in this colonial era’s style of economic expansion were Australia’s dependence on borrowing from the financial institutions of the City of London. A nation crippled by the enormous burdens of debts from the Great War (1914-18) made little headway in financial development during the inter-war period to 1939.

These new recessionary times during the COVID-19 era are unlikely to be rectified by a new dose of national austerity after the 2021 federal election. Joe Lyons tried such measures during the 1930s as Prime Minister and Treasurer.

Australia needs proactive measures to expand consumer spending and essential infrastructure with the support of new sources of local and overseas capital. Private sector capital formation has been in negative territory continuously since the March Quarter of 2019 as shown by the data from Trading Economics:

Australian Private Capital Expenditure

The United Nation’s UNCTAD World Investment Report is always worth reading for a peek into the future after Australia’s now expected federal election in late 2021.

“Global foreign direct investment (FDI) flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion, according to UNCTAD’s World Investment Report 2020.

This would bring FDI below $1 trillion for the first time since 2005. In addition, FDI is projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022, the report says.

“The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects,” said UNCTAD Secretary-General Mukhisa Kituyi.

The pandemic is a supply, demand and policy shock for FDI. The lockdown measures are slowing down existing investment projects. The prospect of a deep recession will lead multinational enterprises (MNEs) to reassess new projects. Policy measures taken by governments during the crisis include new investment restrictions.

Investment flows are expected to slowly recover starting 2022, led by global value chains (GVCs) restructuring for resilience, replenishment of capital stock and recovery of the global economy.”

Global FDI Inflows, 2015–2019 and 2020–2022 Forecast

Eroding working conditions and commitments to reasonable progressive taxation schedules are no road to economic recovery.

Australia’s vast human and natural resources justify a repeat of those post-1945 reconstruction strategies which kept unemployment at a 1.9 per cent average between 1940-41 and 1973-74 when the first global shock-wave of the energy crisis pushed the average to 7.6 per cent for the next two decades as noted by Jeff Borland and Steven Kennedy in their paper for ABS in 1995:

Australian Unemployment Rate – 1900/01 to 1996/97

New challenges demand more than tinkering with progressive taxation schedules in the interests of political grandstanding to win a federal election for the LNP in late 2021. The current focus on lower taxes and more concessions for the business sector is unlikely to deliver the Post-COVID-19 Future as the welcome outcomes are all derivatives of ideological loyalties to the LNP’s market ideology (Australian Government’s Economic Recovery Plan).

A better style of sustainable economic and community planning might include more emphasis on social market agendas through public private partnerships (PPPs) which receive no mentions in the NSW Review.

Australian and especially overseas corporate sectors would surely want to have a stake in investment fund opportunities by credible financial institutions such as the national Future Fund and the Queensland Investment Fund (QIC) by offering discretionary dividends based on investment performance rather than the traditional fixed interest government loans which are still offered by NSW Treasury.

The non-discretionary dividends would be particularly attractive to overseas investors in our relatively strong national currency as shown by the long-term trends in conversion rates between the Aussie and US dollar:

Graph from poundsterlinglive.com

Overseas investment that is moderated by controls imposed by national and state investment funds assists in keeping our currency at optimum levels rather than the lower dollar rate preferred by successive federal LNP governments with added benefits to the diversification of Australian financial sectors which received no hits in that NSW Review.

These capital flows would fund investment deficit areas in the Australian economy such as sustainable energy plans, essential infrastructure, preventative health programmes and indigenous community and regional development programmes.

This is a very different Light on the Hill to Chifley’s vision which once kept average unemployment rates below 2 per cent until the arrival of the first energy crisis in the 1970s. Such opportunities are open again to both sides of politics if Australian governments can break out of that colonial cringe as welcomed by Prime Minister Paul Keating in 1992.

One thing is absolutely clear. Very little will come out of the NSW Review under the auspices of NSW Treasury and its team of panellists with their hearts set on a more neoliberal future in a divided society that is plodding Back to Normalcy.