With the government still looking to cut taxes in the wake of the pandemic, it seems certain it will look to regressive measures to pay off the debts of its COVID-19 stimulus. There is a better way, Charles Millward writes.
The notable feature of Australia’s response to the Global Financial Crisis was the prioritisation of preserving the banking system and the asset values which underpinned it. A crucial part of that response, apart from direct rescue of the banks, was quantitative easing.
Although Australia has only recently adopted this strategy officially, the massive expansion of the Reserve Bank of Australia’s balance sheet since 2008 and the low level of interest rates suggest it has de facto been following this approach. All indications are that this is set to continue and that this will be a cornerstone of the response to COVID-19. More flooding of medium-term money markets with cash and near zero interest rates will serve to sustain high property and asset valuations.
The chances are the approach was never intended to be permanent, and that when the economy picked up, Reserve Banks across the world would unwind their securities positions and restore interest rates to normal. However, this never happened, and the United States Federal Reserve’s brief attempt to do this in recent years had to be reversed quickly.
Now, most economies are faced with the persistence of this low interest rate regimen, something made even more likely due to the COVID-19 pandemic and its economic impacts.
These low interest rates, however, undermine one of the fundamental tenets of capitalism, that everyone should save and invest money. For many savers, particularly those on the lowest income who do not have access to alternative asset classes, investing money in interest bearing assets has become a joke, with returns so low that they are barely matching inflation.
Further, asset managers and holders of financial assets have switched their investments to the stock-market, potentially creating a bubble. Worse, pressure is exerted on corporate managers to rein in expenditures on research and development and expansion, and focus on returning cash to shareholders so that asset managers can meet their obligations. In the long term, this is an unsatisfactory distortion of the financial system, and probably an unsustainable one too.
The government’s response to the pandemic has been predictable. Apart from the Reserve Bank’s intervention in money markets, the Commonwealth also provided money to firms and individuals idled by the lockdown, and, incredibly, managed to find the money to double Newstart. There is no talk of funding this expenditure through taxation and, if anything, the coalition is talking of cuts to corporate tax to re-start the economy.
Some commentators are suggesting an increase in the GST – a helpfully regressive tax – and a reduction in defence procurement. The subtext of course, is no new taxes on the more affluent in Australia, and, in particular, no wealth taxes. So what the country is likely to end up with is a permanently low interest regime, inflated property prices putting property ownership out of the reach of most millennials, and a tax burden bequeathed to that generation. Clearly, this is not an ideal outcome.
There is an alternative to this path. The COVID-19 pandemic has brought home the stark reality that Australia is a single society, rich and poor alike. Whether expecting people to die for a country in a war or self-isolate in a pandemic, citizens have an obligation to society.
Given that so many citizens have been marginalised by globalisation and the gig economy, pushed into low paid and unstable work, a re-think is required. Increasing economic inequality in both income and wealth is being exacerbated by high house prices, which could rebound long-term to everyone’s detriment.
A re-imagined tax and welfare system would, of course, start with a universal basic income. Providing every citizen with access to health, education and the minimum required to purchase food and shelter should be the basis of any social contract in an affluent society.
Second, simultaneously unwinding the low interest regime and tax breaks that are causing the over-valuation of property is critical, because it is making Australia an unnecessarily expensive place to live.
This also wastes foreign exchange, as banks borrow offshore to finance the ongoing cycle of bidding up properties beyond their economic worth.
Third is the tax system as a whole. The thinking underlying Australia’s system is antiquated. Nothing, beyond the standard tax deductions, encourages a business to hire people in Australia. Yet there remain accelerated deductions for capital and office equipment.
Now, often as not, these deductions replace the savings a business may have made by employing someone. An alternative taxation model might take as a starting point the ill-fated sliding scale tax on mining companies proposed by the Rudd government in 2009.
As returns on capital increase, so the government’s share of income increases. The technology economy has brought forth firms which dominate whole industries – Microsoft, Google, Facebook – yet employ relatively few people.
A sliding scale might be a rate of taxation determined by net income per employee. The value of the profit per employee metric is that it can encourage businesses to hire. After an acceptable return on capital, the government should take an increasing proportion of earnings per employee over that threshold. After all, the government has an obligation to society and if a company profits handsomely from the society while contributing relatively few employed people , then it should be taxed accordingly.
Currently, the government appears poised to wait out this crisis and take a knife to taxes on the middle class and businesses. This must not be the path forward.
A re-imagined post-COVID-19 economy must see a property market where valuations return to the present value of rental yields, the messy bureaucracy associated with welfare payments and means testing replaced by a universal basic income, and a tax system designed to encourage employment. Without these changes, Australia will stifle its own recovery from the huge economic hit of COVID-19 and fail to meet its obligations to its citizens in the process.