Business investment is weak, but an unfunded company tax cut won’t fix it

From The Conversation.

Eight years after the global financial crisis (GFC), economic growth remains weak in many rich nations. Australia has been an exception to the malaise, but growth has slowed as the mining boom winds down.

Business investment is vital to economic growth and to lifting living standards, but a new Grattan report explores why Australian business investment is plummeting. Australia is now experiencing its biggest ever 5-year fall in mining investment, as a share of GDP. Non-mining business investment fell from 12% to 9% of GDP after 2009 and remains unusually low. Why is it low, and what should we do?

The shift to services has reduced investment

Most of the gap in investment between today’s non-mining investment rate and that of the early 1990s is due to long-term structural changes in the economy.

The non-mining market sector slowly became less capital intense, it shifted towards capital-light services, and it shrank as a share of GDP. Together, these factors have reduced non-mining business investment by almost 2% of GDP since the early 1990s. In the chart below, the decline in investment needed to offset “capital consumption” reflects declining capital intensity across the non-mining economy.


These declines are benign. Many non-mining industries now require less capital per dollar of output than they did in the past, because equipment is better and cheaper, in part thanks to the rise of China as a manufacturer. The shift to capital-light services largely reflects households choosing to spend more of their income on these services as their incomes grow.

The role of output growth

A less benign factor, slow output growth, has cut non-mining investment by about a percentage point of GDP compared to 1990, and about two percentage points since the boom years of the mid-2000s, when above-trend growth and buoyant financial conditions drove very strong investment. The role of growth can be seen in the chart above.

In turn, output has grown more slowly for two reasons: slower potential output growth, and a widening gap between actual and potential output.


The potential growth rate of the economy has declined in recent years. The International Monetary Fund (IMF) estimates that potential GDP is now growing at just over 2.5% a year, about a percentage point below its pace between 1995 and 2004.

Potential growth (the rate of output if all resources are being used efficiently) has declined mainly because productivity growth has slowed and the working-age population is growing more slowly. Productivity growth was exceptionally weak between 2004 and 2010. It recovered in recent years, but remains weaker than it was in the 1990s and early 2000s. The working-age population is growing more slowly, mainly because of a decline in net migration since its peak in about 2012 and, in part, because the population is ageing.

In addition, actual growth has been a bit slower than potential in recent years. The IMF estimates the gap between actual and potential output to be about 1.7% of GDP, though it is difficult to estimate with much precision. Several pieces of evidence suggest that actual output is below potential. Inflation is relatively weak and there is some spare capacity in the labour market. The capital stock is ample given the current level of output: office vacancy rates are high, while business capacity utilisation is close to its long-term average.

Transition from the mining boom may have made it difficult for the economy to operate at potential. As mining investment falls, demand for construction, in particular, weakens. In theory, as the terms of trade and mining investment decline, the real exchange rate and other prices can change to maintain full employment. But in practice, slow output growth is common after mining booms, perhaps because businesses and workers take some time to reassess their opportunities.

What next?

Looking ahead, if output growth remains subdued, the current level of non-mining business investment may be the “new normal”. If the economy continues to rebalance, non-mining investment is likely to increase. There are encouraging signs that non-mining investment responds to the exchange rate and other aspects of the business environment in the medium term: it has begun to pick up in NSW and Victoria. Output could even grow above potential for a few years, as the IMF and RBA both forecast. But investment is not likely to return to the levels of the mid-2000s.


Is a company tax cut the answer?

The government has proposed cutting the company tax rate from 30% to 25%, largely on the basis that the competition for mobile capital has intensified (see chart below). That would attract more foreign investment and could increase total business investment by up to half a percent a year. But such a cut would also reduce national income for years and would hit the budget. Committing to a tax cut before the budget is on a clear path to recovery risks reducing future living standards.


Other company tax changes could help. An allowance for corporate equity would make currently marginal investment projects more attractive, though highly profitable firms would pay more tax.

Accelerated depreciation would encourage investment, as would moving from today’s model to a cash flow tax. Both of them help firms to reduce tax paid at the time they make investments. But they would hit the budget hard in the early years, and would have to be phased in slowly.

An allowance for investment (for example, permitting firms to claim over 100% of depreciation) would support new investment without giving tax breaks on existing assets, but may be costly to administer, as firms could be tempted to relabel some operating expenditure as capital expenditure.

Government should ensure any company tax changes are offset by other tax increases or spending cuts.

What else should policymakers do?

Government stimulus and interest rate cuts can encourage business investment if there is spare capacity in the economy. Australia does have some spare economic capacity. But there are constraints on both arms of macroeconomic policy. The RBA is reluctant to cut interest rates from their already low levels, as it is concerned about risky lending. Public debt has grown (though it is still not high by international standards), though bank balance sheets remain large compared to GDP, limiting the scope to expand public sector debt.

Monetary policy should remain supportive, and tough prudential standards can help limit risky lending. There may be modest scope to build more public infrastructure, if governments can improve the quality of what they build.

Broader policies to support economic growth would also lead to more and better private investment. They include reducing tax distortions, boosting labour participation, encouraging competition, improving the efficiency of infrastructure and urban land use, tightening regulatory frameworks, and more reliable climate policy.

No single policy is a silver bullet, but together, they can help make better use of Australia’s existing assets and make new investment more attractive.

Author: Jim Minifie, Productivity Growth Program Director, Grattan Institute

Banks Account for Half of the Australia’s Total Dividends

The Henderson Global Dividend Index found that total dividend payouts across all geographies rose a little – by 0.1 per cent – to reach US$1.154 trillion in 2016, reflecting flat profits. They are predicting a headline growth rate of 0.3 per cent in 2017 with global dividends forecast to reach US$1.158 trillion. The index covers the world’s largest 1,200 firms, representing 90% of global dividends paid.

Strongest sectors were utilities, healthcare and technology, weakest were energy and mining sectors. Finance contributed 23 per cent of the total paid.

In Australia total dividends were US$41.8 billion, down 10.1 per cent on 2015. They say Australian dividends are more reliant on the payouts from just a few large stocks than any other developed country and is the largest payer in Asia Pacific excluding Japan, making up almost two-fifths of the total.

The report says declines in the mining sector inflicted the most damage, with dividend payouts down US$4.5 billion year-on-year. After adjusting for a slightly stronger Australian dollar, the underlying fall from the total market was 12.2 per cent. This included big dividend cuts from Woolworths and Woodside Petroleum.

But their next comment is important:

Together the banks account for half of the country’s total dividends, while CBA alone is responsible for $1 in every $5 distributed.

CBA was the 12th largest dividend payer in the world, with HSBC in 6th place in the rankings. These are the two highest placed finance sector companies.

Think about the implications of this given the talk about corporate tax cuts. Much of the benefit will flow to a small  number of larger companies, and many of these have high numbers of overseas investors. So the flow of “stimulation” into the local economy is likely to be very small.

The North American dividend payments of US$443.7 billion grew at 0.5 per cent because of a series of special dividends and index changes, though underlying growth was 3.9 per cent. The USA accounted for two-fifths of global payouts.


Trade Labour and Trust

From The IMF Blog.

Every two years, the IMF and World-Bank invites global labor union leaders to discuss the global economy and the implications for the labor force. In this podcast, Sharan Burrow, head of the world’s largest trade union federation, says collective action is needed to help better distribute the benefits of growth, if institutions are to regain trust from working people.

Sharan Burrow is General Secretary of the International Trade Union Confederation, and in this podcast she says collective action is needed to help better distribute the benefits of growth.

As head of the world’s largest trade union federation, Burrow lays out—in no uncertain terms, what today’s “stagnating” economy means for the 3 billion people in the global workforce. “It’s certainly not delivering jobs—even where there is growth, particularly for women and young people who are extraordinarily vulnerable.”

While Burrow supports trade and globalization, she says it’s been built on a low wage, labor arbitrage system that has left too many people in insecure and unsafe work.

Burrow also talks about how women’s workforce participation—after having grown significantly in recent years—has come to a near halt, and points out how this is counter-productive.

“The two most significant areas of growth for jobs is investment in infrastructure, and for immediate productivity gains—it’s women’s participation in work,” she added.

Wages growth remains at record low

The seasonally adjusted Wage Price Index (WPI) rose 1.9 per cent through the year to the December quarter 2016, according to figures released today by the Australian Bureau of Statistics (ABS). This result equals the record low wages growth recorded in the September quarter 2016.

Those in the public sector are doing better than in the commercial sector.

Seasonally adjusted, private sector wages rose 0.4 per cent and public sector wages grew 0.6 per cent in the December quarter 2016.

In original terms, through the year wage growth to the December quarter 2016 ranged from 1.0 per cent for mining to 2.4 per cent for health care and social assistance and education and training. Mining industry wage growth has continued to slow over the last three years.

Western Australia recorded the lowest through the year wage growth of 1.4 per cent and Tasmania the highest of 2.4 per cent.

If you correct for inflation, wages in real terms are hardly growing at all.  The trajectory is towards zero!

This is really bad news for those highly in debt households, who on any measure you care to select, have a massive burden thanks mainly to excessive home price growth and mortgage lending. As we have said before, this is a toxic mix, and as mortgage rates rise, as they will, more households will struggle to balance their budgets, dampening discretionary spending and having to wrestle with greater mortgage stress.  According to our research 20% of households would struggle with even a small lift in rates.

US Real Income Remains Frozen

According to the US Bureau of Labor Statistics, real (adjusted for inflation) average hourly earnings were unchanged from January 2016 to January 2017. Before adjusting for inflation, average hourly earnings increased 2.5 percent over the 12 months ending in January 2017. Over the same period, the Consumer Price Index for all Urban Consumers (CPI-U), which is used to adjust average hourly earnings for inflation, also increased 2.5 percent.

Since 2009, the 12-month change in average hourly earnings ranged from 1.5 percent (in October 2012) to 3.6 percent (in December 2008 and January 2009). Over the same period, the 12-month change in the CPI-U ranged from −2.0 percent (in July 2009) to 5.5 percent (in July 2008). The 12-month change in real hourly earnings ranged from −2.4 (in July 2008) percent to 4.8 percent (in July 2009).

The 12-month changes in average hourly earnings and the CPI-U were equal in April, May, and June 2014. From that time until December 2016, the change in hourly earnings was greater than the change in the CPI-U, resulting in positive changes in real average hourly earnings.

These data are from the Current Employment Statistics program and are seasonally adjusted. Data for the most recent 2 months are preliminary.

Why small business tax cuts aren’t likely to boost ‘jobs and growth’

From The Conversation.

The Turnbull government’s signature economic policy at last year’s election was a 5% cut in the company tax rate, over a ten-year period, at a cost to revenue estimated to be in excess of A$48 billion. As the government itself has conceded, this now stands very little prospect of being passed by the Senate.

However, there is one element of the government’s proposal which appears to enjoy almost universal political support – the idea that “small” companies should get a tax cut. The only disagreement among the Coalition, Labor and the Greens on this score is how small a company should be in order to be deserving of paying a lower rate of tax.

From the standpoint of good economic policy this is surprising. There has been a lively debate for a while among economists as to whether cutting company tax rates will boost economic growth, employment and real wages – and the extent to which this theory is supported by evidence. But there is no evidence at all to support the notion that preferentially taxing small businesses will do anything to boost “jobs and growth”.

Advocates of tax and other preferences for small businesses often argue that small businesses are the “engine room of the economy” – because, for example, 96% of all businesses are small businesses, or because small businesses employ more than 4.5 million people.

According to the latest available ABS data, small businesses (defined as those with fewer than 20 employees) employed just under 45% of the private sector workforce in June 2015. Despite this, small businesses accounted for only 5.2% of the increase in private sector employment over the five years to June 2015.

By contrast, large businesses (defined as those with 200 or more employees) employed less than 32% of the private sector workforce in June 2015 – but they accounted for more than 66% of the increase in private sector employment over the five years to June 2015.

Employment and employment growth by size of business

ABS Australian Industry (8155.0) 2014-15, Author provided

Similarly, a smaller proportion of these small businesses engage in any of the four categories of innovation which the ABS recognises in its annual survey of business innovation than of medium or large businesses.

ABS, Summary of IT use and innovation in Australian businesses (8166.0), 2014-15, Author provided

So on the basis of the available evidence, a policy which sought to encourage employment creation and innovation via the use of preferential tax treatment would surely preference large businesses, rather than small ones.

However, that would be politically challenging, given that a large majority of voters think that big companies should pay more tax, not less.

What sort of businesses create jobs and growth when tax is reduced?

An alternative approach, which would be much more likely to have positive effects on employment, investment and innovation, would be to tax new companies at a lower rate.

OECD research shows that young businesses are the primary drivers of job creation. And new companies are more likely to be at the frontier of productivity growth.

New businesses are of course likely to be small, at least initially. Confining preferential tax breaks to new businesses – for example, by prescribing that a lower tax rate is only available to a business for the first (say) three years after its incorporation – focuses the assistance on those businesses which are actually likely to innovate, and to create jobs. This is instead of dissipating it on the much larger number of businesses who have no desire, intention or ability to do either.

Preferentially taxing new businesses is therefore much more likely to achieve the stated goals of boosting jobs and growth, and of encouraging innovation, at much lower cost.

In addition to this, preferentially taxing new businesses avoids the perverse incentives that inevitably arise when the eligibility for some form of preferential treatment is determined by a business’ size. This is frequently demonstrated by the reluctance of businesses to put on an extra worker when doing so would render them liable to pay state payroll tax.

Of course, there would need to be compliance measures designed to forestall “rebirthing” of companies in order to prolong access to tax preferences intended to benefit new companies, but that would not be difficult to provide.

The Coalition’s support for a preferential tax rate for small businesses appears to owe more to its long-standing, almost religious, belief that there is something inherently more noble or worthy about owning and operating a small business, than there is about managing or working for a large one (or a government agency). Also that this belief should be reflected in the tax system, rather than basing it on any evidence that taxing small businesses at a lower rate than large ones will have any positive impact on economic or employment growth.

Why Labor and the Greens should support this view is much more of a mystery.

Author: Saul Eslake, ice-Chancellor’s Fellow, University of Tasmania

The Chill Wind of Underemployment

Whilst the headline ABS data on unemployment may have read ok, there is a critical issue which is having a draining effect on productivity, growth, household incomes and confidence. This is the spectre of underemployment.

The trend data tells the story. There are more than one million people who, though they have some work, want more. This equates to around nine percent of the working population. Some may have just a few hours work each week, yet are counted as employed.

This has a drag effect on wage growth (which is for many at zero currently) and this flows into lower household incomes, despite rising debt and other household costs.

The mirror image is those in full time work but who are working for longer, and out of core hours thanks to the digital transformation in hand. For many of these people, work-life balance is also shot!

Consumer Spending Patterns Vary Significantly

In a new report NAB explores the spending behaviours of their customers. At the top level, the data shows that whist average growth in spending was 3.1%, ACT let with 4.8% whilst in WA spending went backwards in the 4Q16.



Customer spending in Australia – based on NAB’s transaction data (including BPAY) – grew 3.1% y/y in Q4 2016,with average monthly spending during the quarter of $2,117 in metropolitan areas and $1,949 in regions.

Spending growth in Regional areas (3.5%) outpaced Greater Metropolitan or “City” areas (2.9%).

By capital city area (based on ABS definitions), spending growth was fastest in Hobart (4.1%), Sydney (3.9%)and Melbourne (3.7%) and slowest in Perth (-0.4%) and Brisbane (1.7%).

In regional areas, it was fastest inNSW (4.7%) and VIC (3.7%) and slowest in NT (-1.4%) and WA (0.7%).

Spending was dominated by the Eastern states – with NSW, VIC and QLD accounting for around 80% of total spending. Sydney, Melbourne and Brisbane accounted for over half (50.1%) of total NAB customer spending.

The fastest growing metro areas in Australia were Hunters Hill NSW (13.2%), Woollahra NSW (9.9%) andMosman Park WA (9.5%). The fastest growing regions were in NSW – Walgett (19.7%), Upper Hunter Shire(16.1%) and Murray (14.4%).

Cities accounted for 64% of all spending and regions 36%. Cities accounted for the biggest share of spendingin all states, particularly Adelaide (78%), Perth (77%), and Melbourne (75%). Spending in Regional areasaccounted for a comparatively bigger share of total state spending in TAS (50%), QLD (55%) and NSW (40%).

By category, spending growth was fastest for Accommodation, Cafes, Pubs & Restaurants (13.5%).

By examining around 4 million daily transactions, they show where spending is growing fastest and in which industry groups. This will help to better inform consumer behaviour and activity. Given the size of NAB’s customer base, they say this data provides a strong indication of national and regional trends.

Full-time employment increased for fourth straight month

Monthly trend full-time employment increased by 6,500 in Australia in January 2017, according to figures released by the Australian Bureau of Statistics (ABS) today. This was the fourth consecutive month of increasing full-time employment, after eight consecutive decreases earlier in 2016.

The trend unemployment rate was 5.7 per cent for the ninth consecutive month. The trend participation rate was unchanged at 64.6 per cent.


Total trend employment increased by 11,700 persons to 11,984,300 persons in January 2017, reflecting an increase in both full-time (6,500) and part-time (5,100) employment. Total employment growth over the year was 0.8 per cent, which was less than half the average growth rate over the past 20 years (1.8%).

“We are still seeing strong growth in part-time employment in January 2017, and in recent months, increasing growth in full-time employment. There are now around 129,800 more people working part-time than there were a year ago, and around 40,100 fewer people working full-time,” said the General Manager of ABS’ Macroeconomic Statistics Division, Bruce Hockman.

The trend monthly hours worked increased by 3.6 million hours (0.2 per cent), with increases in total hours worked by both full-time workers and part-time workers.

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed increased by 13,500 in January 2017. The seasonally adjusted unemployment rate decreased by 0.1 percentage points to 5.7 per cent, and the seasonally adjusted labour force participation rate decreased by 0.1 percentage points to 64.6 per cent.

Business Confidence On The Up

According to the latest NAB Business Survey for January 2017, both business conditions and confidence jumping to much higher levels.

The strength witnessed in last month’s NAB Monthly Business Survey continued into January, with both business conditions and confidence jumping to much higher levels. While these outcomes are certainly pointing to an improvement in the domestic economy after a soft patch through much of H2 2016, a degree of caution should still be exercised given the diverse and rapidly changing seasonal influences at this time of year (which potentially includes the shift in Chinese New Year to January this year).

In terms of the headline numbers, the business conditions index jumped by a solid 6 points in January, to +16 index points, which is around pre-GFC boom levels. This month, another rise in trading conditions contributed to the outcome, but there was also a noticeable jump in employment conditions, which bodes well for the generally underperforming labour market – the employment index hit its highest level since 2011.

Meanwhile, profits were unchanged at solid levels. By industry, last month’s surprise spike in wholesale conditions was unwound (as anticipated), but that seems to have been more than offset at the aggregate level by improvements in personal services, while retail and mining are no longer negative. NSW enjoyed the bulk of the improvement in conditions, while the rest of the mainland states were relatively steady. Cost price measures in the Survey also lifted notably, suggesting a build in wage pressures, although retail price inflation remained very subdued.

Business confidence also jumped in the month, aligning itself with the general enthusiasm seen in financial markets and more positive sentiment towards the global economic outlook. The business confidence index jumped 4 points to +10 index points in January, which was well above the series long-run average. Responses on capital expenditure were also much more encouraging in January, consistent with a rise in capacity utilisation – although forward orders do not point to a continuation of that strength in the near-term.

Recent strength in the NAB Business Survey is consistent with an anticipated rebound in economic activity, following the very weak Q3 2016 National Accounts. With that said, a confluence of seasonal factors suggests it is unwise to get too carried away with the result just yet, especially as key industries like retail remain extremely weak (despite improving in the month), which suggests the outlook for consumption remains cloudy. NAB Economics also have concerns for the longer-term growth picture, as the contribution from LNG exports, temporarily higher commodity prices and the residential construction boom fade, keeping pressure on the labour market.

Nevertheless, in light of the recent flow of data, NAB’s economic forecasts (which include expectations for the RBA’s cash rate) are currently under review – to be published tomorrow.