Treasurer Josh Frydenberg has worked out that Australia has a productivity crisis, and he’s worked out what not to do about it. But he’s still clearly at a loss about how to get a stagnating economy moving, if his speech this morning is anything to go by.
Tax cuts off the agenda
The low-profile Treasurer spoke to the Business Council this morning and he deserves credit for bluntly telling the most parasitic and rapacious business lobby in the country that it won’t be getting company tax cuts any time soon. Frydenberg and Treasury, it seems, have finally worked out what some of us have been saying for years — that company tax cuts will simply be wasted in share buybacks and higher dividends, rather than extra investment, if the evidence from the United States and Australia is anything to go by.
If you recall the debate — or what passed for the debate here — over the Coalition’s proposed tax cuts, you’ll remember that giving large companies a tax windfall of tens of billions of dollars was touted as a panacea for every economic woe, including low productivity. Now, Frydenberg admits, businesses have been using spare cash to reward shareholders, rather than invest. “Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates but is a buyback always the best option for the future growth of the company and therefore the economy? Over the last 12 months, approximately $29 billion has been returned to shareholders in the form of buybacks and special dividends compared to an average of $12 billion over the previous four years – a 140% increase.”
It’s surprising to hear a Liberal Treasurer uttering such words, particularly to the perpetrators involved, but most welcome. Welcome, too, is a little bit of honesty about the productivity crisis that has occurred on the Coalition’s watch. “Our productivity growth has started to slow, averaging 1.1% over the last five years,” compared to a long-term average of 1.5%. “The last five years” is entirely within the lifetime of this government — five years doesn’t even get us back to that budget. Frydenberg is, if only implicitly, acknowledging that productivity has collapsed under this government. So what does he propose to do about it?
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Well, nothing, really — it’s up to business. The government is doing all it can, he says. “We are pursuing reforms across the tax, industrial relations, deregulation, competition, education and health systems to enhance our ability to produce more with what we have. It’s a full-court press.” Anything more is up to the states and territories, but mainly business. “A more positive approach to investment and growth by Australian corporates would not only lead to a stronger economy but would contribute to the goal of capital deepening.”
There’s a broad sense in which Frydenberg is right to put the onus on business. Australian corporate management is generally poor, as the banking royal commission, billions in writedowns by mining companies, mismanagement in the media industry, our poor record in innovation and the epidemic of wage theft illustrate. Australian business is good at ripping off workers and pressuring governments for handouts and regulatory advantages, but poor at innovating or serving their customers well. And it’s been that way for long enough that even back during the last “productivity crisis”, which turned out to be a false alarm, right-wing economists were admitting Australian business were duds.
But Frydenberg is wrong, and quite misleading, to say that the government is providing any sort of “full-court press” on productivity. We know that because Scott Morrison, as treasurer, asked the Productivity Commission two years ago for a set of reforms that would enhance productivity growth in Australia — a set of reforms that the government has entirely ignored since the PC responded. A “full-court press” would entail congestion pricing, land tax, proper cost-benefit analyses of infrastructure spending and better targeting of education and health spending. If Frydenberg is going to go to his meeting with his state and territory counterparts with an agenda to accomplish those things, then all power to him, but we’ll believe it when we see it. Instead, it’s all on business to invest more. As a productivity strategy, it has little to recommend it.