There’s less than a month to go to the Federal Budget but what’s the betting that no one in business, Treasury, or the Morrison government has sat down and thought really hard about what might be needed in future years to drive growth?
Well, that’s apart from the old standbys of tax (and personal cuts), labour market reform, more profits for business and high income for the higher paid – all trickle-down ideas that helped give us weak growth and soft wages, but also solid employment growth.
It looks like the Morrison government has some ideas, but nothing dramatic that could help set the economy alight.
Perhaps we should be looking at the US where Joe Biden’s 10-year American Jobs Plan (AJP), unveiled at the end of March has won a surprisingly warm endorsement from the Moody’s ratings agency.
The proposed plan allocates $US1.3 trillion of spending on physical infrastructure, including $US620 billion on transportation, $US100 billion on expanding access to broadband and $US100 billion on the power grid.
Biden’s plan also allocates $US400 billion to expand access to home-based elder care, $US300 billion for developing domestic manufacturing capacity in semiconductors and other advanced technologies, $US180 billion for basic research and development, and $US110 billion for workforce development and protection.
“The proposed spending – roughly 1% of GDP per year – would likely start flowing through the economy in 2022, supporting the post-pandemic economic expansion,“ Moody’s pointed out and would reverse the long-term decline in federal spending on infrastructure.”
“Overall, the plan will be positive for economic growth, employment and productivity. The bill will have redistributive effects – shifting resources to priority sectors and benefiting some companies over others.
“However, the economic impact will depend on implementation and project selection, and to what extent pitfalls from spending on sub-optimal projects are avoided. Thus spending on projects with low social and economic returns will reduce growth multipliers and dilute its overall effectiveness.
“The range of direct spending measures and tax credits in the plan would directly or indirectly benefit myriad public and private entities engaged in financing, building and upkeep of infrastructure assets, electric utilities, state and local governments and automakers.”
“Despite historically low interest rates, US non-residential private investment in equipment and structures has been on a declining trend in recent decades,” Moody’s pointed out in the report.
“Although some of the weakness reflects growing investment in intellectual property, consistent with the country’s shift from a capital-intensive industrial economy to a post-industrial economy, it also indicates long-term weakness in aggregate demand.”
That’s the case here in Australia, as RBA Governor Philip Lowe pointed to in a speech last month on investment, the recovery and their intersection with monetary policy – that business investment has fallen off in recent years:
“This weakness in business investment follows a run of years in which non-mining business investment as a share of nominal GDP was already low by historical standards.
“Since 2010, this investment ratio averaged 9 per cent, compared with 12 per cent over the previous 3 decades. This is a material difference and cumulates to slower growth in Australia’s capital stock, with implications for our longer-term productive capacity.”
“Looking across the economy, there are investment needs and opportunities in areas as diverse as infrastructure, power generation and distribution, health and social services, food production, advanced manufacturing and digitalisation and data science.
“So there is no shortage of areas where additional investment would help our economy grow,“ Lowe said, giving the Morrison government and federal treasury a handy list to start with.
Moody’s points out that “US corporations have increased their cash holdings over the past year and have the capacity to ramp up investment if they see long-term growth prospects improve.
“While corporate taxes will increase under the proposed plan, we expect the impact on business investment to be muted, just as the significant reduction in the corporate statutory tax rate in 2017 did not result in higher corporate investment.
“Over time, a larger physical capital stock resulting from infrastructure and manufacturing investment would likely increase the productive capacity of the economy.
“Spending on workforce development and basic R&D research would also help improve human capital and boost long-term labour productivity by supporting innovation.
It is hard to deny that Australia could achieve similar outcomes.
We would not have to follow the Biden plan – just the idea or a roadmap that seeding the economy for the next 10 years – not with statist plans like China, but with a bit of give and tax via tax incentives, lots of training, improving physical infrastructure for renewables, such as the power-grid, water, sewerage, roadside charging points, more hospitals, supporting companies with ideas in R&D, paying people for their skills, getting away from the rigidities of the gig economy (where people get trapped and can’t escape).
Philip Lowe has the check list to start the debate.
The Future Fund could be used to control spending – the billions in funds outside the central fund could be refreshed and actually used to start the investment process.
And by the way, didn’t you just love the Moody’s observation “While corporate taxes will increase under the proposed plan, we expect the impact on business investment to be muted, just as the significant reduction in the corporate statutory tax rate in 2017 did not result in higher corporate investment.”?
Our current stimulus will vanish next year, just as the Biden $US1.9 trillion stimulus spend will exhaust by late 2022 – so like the US we need something to be argued out and established to support the economy past the fading of the current boomlet and into growth that is being generated from spending by government, business and investors (directly or through their super funds).
The key difference with the UK is the trillions of dollars in the super sector that is looking for a home in long term investments. Industry funds have been far more interested in infrastructure and similar investments. Time to get other investors involved?
