If you want to boost our flagging economy, remember not all fiscal stimulus is created equal
Updated: May 19, 2021
The International Monetary Fund has forecasted a sharp decrease in Australia’s economic growth over the next year. The estimate predicts Australia will have an even weaker economy than Greece. Experts have shown the Morrison government’s low-income tax rebates have been ineffective due to misaligned incentives. Australia needs to fast-track tax cuts and rollback regulation to stimulate the flagging economy rather than spending taxpayer dollars to create a short-lived impression of growth.
The current Low and Middle Income Tax Offset, while beneficial to the people receiving the aid, actually lowers incentives to earn more money as shown by economist John Humphreys. By implementing long-term structural tax reforms, the Morrison government can boost GDP by approximately $36 billion per year and increase efficiency by $13 billion per year.
While Frydenberg correctly noted that tax cuts impose costs on government revenue, those tax cuts are not a total loss. By lowering taxes, the Australian government puts money back into the pockets of both consumers and producers. Producers can then put more money back
into their businesses — whether through new hires, increased pay, or more capital investment — stimulating the economy. Even if a tax cut doesn’t ‘pay for itself’, it provides longer-term benefits by creating the long-term structural reform Australia needs given the stagnant levels of workforce productivity and real wage growth.
Burdensome regulation costs businesses time and money putting a damper on investment. Small businesses suffer the most as they do not have the resources to hire experts and lawyers to manage compliance. Monolithic corporations are the only ones who benefit from burdensome, the regulations which squash competition hurting small business and consumers. For example, the finance sector royal commission damaged smaller institutions, reducing competition for big banks.
Minimizing regulation is a type of fiscal stimulus. Chicago economists Jonathan S. Masur and Eric A. Posner explore in their 2016 paper the idea that regulation should be countercyclical, decreasing when the economy slows. During the Great Recession, the Obama administration did just that by putting certain Environmental Protection Agency (EPA) regulations on pause and effectively saving 338,000 jobs.
Cutting regulation saves money for both government and business. It costs taxpayers money to pay bureaucrats to impede the operations of our businesses and to fund the elaborate compliance systems in place to impose these costs.
A working paper published by the Mercatus Center shows not only an increase in the number of regulations per capita in Australia but also the number of words per restrictive regulation.
As Patrick McLaughlin et al put it, “the rise in words per restrictive clause may be prima facie evidence of a systemic rise in the bureaucratic population.”
Increasing government bureaucracy may increase the superficial number of jobs and work. But employing bureaucracy does not increase national productivity. Nothing new or beneficial is created for consumers, and the knowledge and skills of bureaucrats are wasted interpreting the jargon.
The government can stimulate the economy by simply reducing the number of restrictive bars that businesses need to vault over.
Thriving businesses always seek to expand. Bigger businesses require more people to operate and more paycheques are signed. That money is spent stimulating the economy through consumption or, even better, saved, stimulating the economy through investment.
Spending merely increases the profit margin for the businesses whose goods the consumer is buying, while savings accounts and other investment portfolios turn into business loans or equity.
Even when beneficiaries of tax cuts pocket those funds rather than spend them, it isn’t a bad thing. Individuals who save stimulate the economy two-fold, though without as much of an initial sugar high. Saving is simply spending deferred for the consumer and invested funds for the producer.
Cutting regulation as a form of fiscal stimulus, instead of increasing spending, provides a boost to the economy without damaging the budget bottom-line. Additionally, the government resources freed from enforcing regulations can be used to fund tax cuts.
Increasing government spending (much like living solely off of ramen noodles) provides instant gratification but does not improve the overall health of the economy.
When government gets out of the way of business, Australians can get down to business and help fix the economy.
This article appeared in the Spectator 17 October 2019.