MARK HUMPHREY-JENNER: Jim Chalmer’s unsustainable Budget need growth addressed, and fast

Jim Chalmers has acknowledged what we have all known for some time: the Budget is unsustainable. But, how do we fix this and how do we pay for all the nice shiny objects that politicians promise every election?

The Treasurer has floated the idea of “tax reform”. This seems to be a euphemism for “tax hikes”, which, as I’ll explain, will make things worse, not better. There is some talk about “productivity”.

But, we need to focus on the underlying issue: growth.

Growing the economy is how you afford to pay for nice stuff.

The elephant in the room is that Australia has a massive growth problem, which leaves the nation unable to pay for its increased spending demands. GDP per person has fallen for eight of the past nine quarters. Productivity — which just means how much growth we get from our inputs — is stagnant.

But Australia’s spending is increasing unsustainably. There is precious little talk of spending reform, which goes hand-in-hand with growth. For example, spending on the NDIS is growing at least 8 per cent a year, which is more than twice the rate of GDP growth. This is not sustainable.

Growing the economy is how Australia can spend more

Tax hikes will not solve Australia’s economic problem. The best way to think of this is with the Laffer curve. Tax hikes have side effects. These include slower economic growth, capital flight, and emigration.

The relationship between tax hikes and slower growth is tautological: if companies and individuals pay higher taxes, it leaves them with less free cash flow to reinvest in their businesses. If individuals face tax hikes, they spend less in the economy, again driving down growth. If capital gains taxes increase, people invest less in entrepreneurial enterprises — or even in steady companies that need capital to grow — resulting in less growth.

It is also easier now than ever for high-net-worth individuals to simply move to a lower tax jurisdiction. These days, this includes New Zealand, which has no capital gains tax. Dubai, Singapore, and Hong Kong are also attractive.

But, they are not even necessary when Auckland and Wellington are but three hours away and are very nice places to live. The UK experienced the problem of capital flight when it sought to remove non-dom status. Norway experienced this with its wealth tax. People are mobile. And, Australia must compete for capital, not take it for granted.

Indeed, there is a strong case for tax cuts, especially in relation to capital gains. After all, if you want more capital deployed in Australia, you must attract it here. You don’t attract it with some of the highest capital gains taxes in the world. Not only that, but lower CGT would encourage more investment and trading transactions, which in turn bolsters revenue.

Australia has become uncompetitive

All this is to say: the problem with relying on tax hikes is you run out of other people’s money. And, the people with money will run out on you.

This leaves us with growth. Tax hikes are not a good lever to fix the budget black hole. Rather, Australia needs to embrace pro-growth policies.

What might pro-growth policies look like, you might wonder? Or, phrased differently, is growth just a vague platitude that has no real chance of succeeding?

Many of the pro-growth policies are mundane. This is electorally problematic. A root and branch review of things that stymie business is difficult to sell in a 15-second sound bite on TikTok.

Let’s take general practices. We all want more GPs. And, GPs help keep people healthy, which grows the economy. Furthermore, the more GPs we have making money, the more tax revenue we get. But, would you know that GP clinics must jump through environmental green tape to receive accreditation?

Well, that’s what the relevant body — the RACGP — has sought in its sixth edition accreditation guide. So, at a time when we are losing GPs, there is a drive to increase the costs of doing business.

Let’s take another example, this time one from the finance industry. At a time when we need more funding for start-ups, and when we need more high-quality fund managers, ASIC sought to stymie such activities through the arcane-sounding wholesale and sophisticated investor guidelines.

At present, people can invest in “wholesale” funds and in unlisted investments, such as start-ups, if they are sophisticated or high net worth investors. The test had been whether they earn at least $250,000, or have a net worth of at least $2.5 million. But ASIC sought to raise these thresholds. The net result: fewer people to invest in start-ups. And, nascent fund managers would be starved for clients, forcing them into large corporations. Finance 101 tells us that people are more efficient when running their own shop than when working for someone else. In short, regulators sought to worsen growth through increased regulation.

Farmers could no doubt talk about all manner of inefficiencies. A recent flash point has been the dearth of abattoirs, which are seemingly crushed under increasing regulation. In turn, this leads to bottlenecks and inadequate capacity. This, itself, harms farmers, reducing their ability to generate money and reinvest in their businesses.

The short of it: we need to look at even mundane roadblocks to doing business. This does not just include IR laws. Rather, it includes removing regulatory hurdles that simply crunch growth.

Australia would also benefit from actually utilising the resources that it has. For example, instead of interminably delaying the North-West Shelf gas project, if Australia allows more gas production, it makes more in royalties, corporate tax, and income tax from the employees. It also generates more growth via more energy availability.

Similarly with Australia’s uranium deposits: exploiting these will generate more revenue both for investors, and for the Government. But, the inexorable delays create a significant risk for investors; they face a heightened risk of spending money on exploration, on lawyers, and on a bureaucratic process, only for a project to be delayed and then rejected.

Australia needs to stop getting in the way of company formation and stop getting in the way of companies growing. Australia needs to attract capital, not deter it. Tax hikes — as Jim Chalmers appears to want — will worsen Australia’s growth problem. It’s time we started actually doing business, not getting in its way.

Mark Humphery-Jenner is an associate professor of finance at UNSW Business School