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Crikey asked me to edit some notes of a keynote speech I gave at Kevin Rudd’s Manufacturing Roundtable which I posted the night before on Club Troppo. In addition to the micro-economic agenda I quoted yesterday, I raised some macro-economic and tax issues:
- The Spice Girls line pretty much sums up what economics is all about: “Tell me what you want what you really, really want”. In the early period of the previous ALP government, Accord partners decided the one or two things the economy really really needed at any one time and built everything around that. It’s a great, pragmatic tradition we’ve lost sight of.
- Back then we really really wanted to restrain real wages so we could compete rather than contract our way out of our problems.
- Tariff and microeconomic reform and a low exchange rate all helped the transition from inward to outward orientation.
- But by 1989 interest rates became the default instrument for restraining runaway growth not only increasing the risk of (massive) macro-economic misjudgements but jeopardising export growth with an overvalued currency.
- Today’s situation is similar with rate rises the default instrument of macro-economic management. Despite a yawning current account deficit, overvalued exchange rates are again jeopardising export growth.
- Why has Labor said so little about the growth of foreign liabilities? The Government was elected with a Debt Truck travelling the country to highlight how outrageous it was that net foreign debt was nearly $200 billion or 38% of GDP. It’s now over half a trillion dollars or 54% of GDP.
- Shouldn’t Labor commission some enterprising soul (modesty forbids any suggestion of who it should be) to model how much higher foreign debt and interest rates might be without compulsory super?
- Increasing super instead of interest rates would increase investment and keep a lid on the exchange and interest rates. Increasing rates is doing the opposite.
- Tariffs kept our manufacturers focused on domestic markets and out of global niches.
- What tariffs were to manufactures, dividend imputation is to investment.
- Imputation effectively removes company tax liabilities from domestic investors, but the cost of doing so keeps company tax on foreigners at 30% (compared with 19-21% rates that would raise the same revenue without imputation). Cutting rates to that level would generate a flood of new foreign investment. Imputation also discourages Australian firms from investing offshore because it dilutes their capacity to earn franking credits.
It’s time to put our thinking caps on, work out what we really really want, and complete the transition to a global economy.
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