GDP growth, not fairness, can lead Australia out of debt

Fairness is one of the most insidious abstract nouns used in politics. A Google search will tell you it is all about treating people equally or in a way that is right and reasonable. It is also synonymous with a number of other related words.

By Don Argus AC FCPA

Fairness is one of the most insidious abstract nouns used in politics. A Google search will tell you it is all about treating people equally or in a way that is right and reasonable. It is also synonymous with a number of other related words.

Politicians, particularly those with socialist leanings, love to use it because it can mean many things to many people. Some even use it as a moral fever about money, who should pay tax, and how those taxes are distributed.

We are being entertained on how corporations, superannuants and those so-called rich people should shoulder the burden of incompetent past government officials and politicians leaving us with a public debt burden that is becoming difficult to service, and none of them has been called to account for this legacy.

So given these perceived injustices one might feel about the level of our cumulative debt and management or mismanagement of our economy, if something as arbitrary as fairness is to replace or supplement statute and common sense as the guide to behaviour, please do not be surprised when Facebook, Twitter, Google and Instagram muster a plausible argument that they should pay little or no tax because they are servicing billions of people for free. None of their development or distribution expenses accrues anything beyond a monthly broadband fee and in some instances a nominal service fee.

Drug companies that sink fortunes into mostly fruitless research to find lifesaving treatments could mount a similar case. You also could muse over an entrepreneur in suburban Sydney or Melbourne or elsewhere paying the same tax rate as their equivalent in a larger funded organisation. The examples of fairness/unfairness are endless.

I recently read a commentator who said a fair contribution for so-called billionaires could be something commensurate with the public services they use — which would imply a payment akin to chickenfeed. It equally could mean a conscientious charitable donation far in excess of the taxes levied by all levels of government.

Imagine the emotional debate we could have assessing the fair tax burden on a state-educated occupant of social housing who sees a doctor regularly but earns less than the income tax threshold, or the reported 3.6 million people in Australia not incurring net tax. This could unearth some imaginative theories of justice.

On the income equality debate, let me observe that income inequality will not be solved by taxing the rich at higher levels. At some point that solution would reduce savings and therefore investment, and thus shrink the potential for economic growth.

To argue any differently is to argue with basic economics and simple maths.

The goal should not be equality of income or wealth but equality of opportunity. The role of government should be to make sure the playing field is level.

What constitutes a level playing field will of course change across time as society becomes richer and technology progresses, but the principle should remain the same. Governments of developed economies and their societies should develop safety nets, and education and healthcare has to be a priority. We have an ingrained system of entitlement in Australia and the welfare spend has grown exponentially where one could observe that we now consider all welfare as safety nets, not substitutes for personal endeavour and achievement.

If we are serious about dealing with income inequality, we need to worry about equality of opportunity in education, and specifically about making sure that the education system is radically reformed by taking it out of the hands of bureaucrats and unions.

We need to make sure the economic and legal playing field is level by getting government favouritism and bureaucratic meddling out of the way and increasing the size of the economic pie for everyone.

One could provide a hypothetical solution to income inequality and fairness with tongue in cheek. Simply penalise the incomes of older people; take away any advantage there is from being married; reduce opportunities for education; penalise people for working more than 35 hours a week; reduce the incentive for business activity with a super-profits tax; subsidise selected industries, which weighs heavily on productivity improvement and benefits a new breed of cronyism that was once the domain of the capitalist system; impose a significant levy on accumulated savings; and launch a debate on inheritance tax.

This quickly would reduce inequalities of income. There’s a disadvantage, of course: it also would destroy the economy and create widespread social unrest.

If the goal is equal outcomes for all, then that is a utopian dream; the problem is that some politicians, bureaucrats and cronies do quite well for themselves. There is no room for achievers, and educated leaders migrate to other environments where the climate inspires people to achieve extraordinary goals and levels of performance.

Income inequality will always be real because we all make ¬choices about the lifestyle we wish to pursue. Increasing taxes and redistributing income is not the answer if the true goal is to improve everyone’s income and lifestyle. If we are seduced by arguments of inequality we will actually make them worse rather than better.

Oh, the theories of justice we could weigh against each other!

Back to reality: there is no silver bullet for tackling the budget deficits, which do not account for repayment of principal debt, and it is time we begin to hold the authors of these complex budget papers accountable for achieving objectives. The possibility is the deficit position will not be returned to surplus at least until 2024 and the fundamental economic reality is the world has not recovered from the global financial crisis; growth in developed economies is continuing to slow despite the various stimulus packages.

Growth in gross domestic product has only two basic components: growth in productivity and growth in the size of the workforce. There is no magic fairy dust one can sprinkle on an economy to make it grow.

To increase GDP we have to actually produce more; that is why it is called gross domestic product. If we wish to expand the economy and at the same time shrink our budget deficit, there must be an economic climate that is friendly to productivity.

For us laymen, productivity is explained as a measure of the efficiency of a person, machine, workplace environment, technology transformation and so on; in other words, it is about converting inputs into useful outputs.

This election should be about the state of our economy and how we can expand it. We seem fixated on single-issue items rather than the totality of the underlying cashflow in the budget and so far the missing commentary has been that the level of indebtedness around the world is not falling.

There is research emerging from the International Monetary Fund that public debt as a percentage of global gross product reached its nadir in 1914, at 23 per cent. The onset of World War I altered the landscape for generations, global debt peaked at 150 per cent of GDP in 1946, and McKinsey in 2014 reported global debt added up to $US199 trillion or 286 per cent of GDP.

Australia’s gross debt to GDP is a whopping 258 per cent, and this high level of debt will have an influence on our capacity to grow.

With our budget remaining in deficit until well into the 2020s, all this free spending, fantasy prom¬ises and smoke and mirrors used in the presentation of our financial position, as pointed out by Judith Sloan, leaves me and many others disappointed and somewhat anxious at the injustice of this apparent mismanagement of our economy.

Fighting a debt problem with more debt is doomed to failure and theories supporting such folly ignore the basic premise that has emerged in other nations: that if your cumulative debt burden is growing faster than your GDP, then there is trouble ahead.

I believe we will inherit the challenges confronting the damaged economies of the developed world.

No one has adequately reconciled the competing forces of insufficient growth and too much debt.

The challenge is not merely one of insufficient spending, it is insufficient income.

History has taught us there are two ways to increase GDP: increase your population or workforce participation; or increase productivity.

We must continue to give business incentives to offer opportunities for our youth, but we should also be encouraging young, educated immigrants willing to work, which would assist productivity growth in outputs generated through efficiency, rather than adding more inputs.

If we fail to pursue sensible tax, spending and micro-economic reform to remain competitive, then we will have missed the opportunity to prosper from the development of the Asian region, and the feel-good factor experienced during the past 20 years will be gone for a long time.

Don Argus is one of Australia’s leading business figures. He is a prominent FCPA, former chairman of BHP Billiton and former chief executive of the National Australia Bank.

This article was originally published in The Australian (paywall). 

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