Treasury calls bullshit on company tax cuts, wages growth

It’s a speech Treasury secretary Steven Kennedy wouldn’t have dared give under the previous government — and might be reluctant to give in six or 12 months. But his address yesterday to a meeting of Australian business economists questioned some of the standard refrains we’ve been hearing for the past nine years.

In his discussion of fiscal policy, Kennedy confirmed something that Crikey has been saying for two years but that few others — including the Morrison government — admitted to: there’s been a permanent increase in the size of government spending: “Excluding temporary direct COVID-19 support, payments as a share of GDP are expected to average 26.4% over the decade ahead, compared with 24.8% in the decades prior to the pandemic.”

Kennedy devoted much greater emphasis to this than in his equivalent speech last year.

Where is that increase going? The NDIS — far and away the biggest source of the increase — aged care, defence, health and infrastructure, in that order.

That leaves a simple choice as to how to pay for it: cut elsewhere or raise taxes. It’s here Kennedy says something that would have had him sacked and tried for blasphemy under Josh Frydenberg.

Noting that the burden of increased taxation was falling mainly on individuals, Kennedy said:

In the light of spending pressures and the pressure on income tax arrangements, there seems to be little case to lower taxes elsewhere including company taxes. In fact, in some countries, such as the UK, governments are increasing company taxes and applying tax measures to highly profitable parts of the economy. The case for maintaining company tax rates is made even more compelling in Australia’s case, where we are experiencing a record level in the terms of trade and the banking sector is highly profitable.

Note the casual reference, without naming it, to the UK government slapping a windfall profits tax on its energy sector (you can see why The Australian Financial Review refused to mention Kennedy’s heretical dismissal of company tax cuts).

“Ongoing review of the tax base and tax expenditures to ensure the tax system remains adequate to fund spending commitments and is equitable” was important, Kennedy said, another statement that would have got him into hot water three months ago.

Kennedy also dared to question the standard refrain on wages of both the previous government and the Reserve Bank — of which he is a board member: “To date, we have seen little hard data that shows wages growth lifting, although the latest WPI [wage price index] did show a marked pick up in wage growth for those who received an increase in the March quarter. There is business liaison evidence to suggest businesses are competing harder for workers and offering higher pay, particularly through bonuses and other non-wage forms of remuneration.”

This phenomenon has been around for a while — businesses won’t offer higher pay to attract workers, they’ll only offer one-off incentives or non-financial incentives. But those are no substitute for a proper, permanent increase in wages.

He also reiterated something that the previous government had reluctantly come to accept: productivity growth had stalled on its watch.

“Productivity and real wage growth has been weak for more than a decade,” in effect repeating Labor’s election campaign line that “if we were able to lift productivity growth and move closer to the global frontier that would lead to a permanent lift in the level of income and higher living standards. There is a limit to the extent to which Australian productivity could grow more rapidly than comparable countries, but my guess is that we are not near that limit.”

In the absence of lifting productivity significantly, our options for funding a permanent increase in the size of government are limited. It’s company taxes and closing down tax expenditures. Labor lost the 2019 election going after the latter. Maybe it would have more luck prosecuting the case from government.