Government needs to change economic policy tack

The Turnbull Government starts its second term with a dilemma and a mental block on policy.

With the economy muddling along and growing at a weak pace – with unemployment rising and inflation dead in the water – the government needs to change policy tack to help deliver a stronger rate of growth in the years ahead and to stem any unwelcome rise in the unemployment rate. There is a mistaken notion that such pro-growth policies will cost the budget money at a time when the budget de ficit is uncomfortably wide. Making the government uneasy in the post-election climate is the fact that the budget de ficit problems are at a point where the credit rating agencies are threatening to take away Australia’s important triple-A credit rating. The conventional and misguided thinking goes along the lines that if the government undertakes some pro-growth fiscal stimulus, the budget de ficit will widen. This old economic policy thinking is rapidly becoming obsolete. The budget deficit can be contained or even lowered at the time some stimulus measures are implemented through the use of progressive policies that reduce income and wealth inequality. Each dollar of government spending or taxing will have a very di fferent impact on economic growth depending on how that dollar is allocated. There has been a plethora of recent research that shows how well-targeted income redistribution will not only boost the rate of job-generating economic growth but could also help to reduce the budget de ficit. The simple finding from the bulk of that research is that low- and middle-income earners have a higher propensity to consume (spending any extra money they receive) than very high income earners. The more spending there is in an economy, the faster will be the rate of economic growth. Boiling the research down to a practical, stylised example of the economic growth bene fits of greater income equality – and improvements to the budget bottom line can be seen if the uber-rich have, say, one percent of their wealth taxed each year. The BRW Rich 200, who have wealth of around $200 billion, would pay annual tax of $2 billion. If this revenue was allocated through government policy so that $900 each was directed to two-million low- and middle-income earners through tax cuts and other payments, there would, in the first instance, be $200 million surplus cash to reduce the budget de ficit. For the very rich, their consumption patterns would be unchanged. For someone like James Packer, for example, the $50 million tax paid would still leave him with $4.95 billion and would be unlikely to impact on his spending on food, clothing, holidays or other goods and services. For the two-million low income earners, the $900 perhaps paid at say $18 a week over a year, would be largely spent. Some of that spending would find its way into goods and services tax revenue which would further reduce the budget de ficit. Importantly, bottom line economic growth would be stronger because of this spending; the bottom line of the budget would improve and all for a policy change that tackles income and wealth inequality. About the only di fficulty with such a policy proposal is dealing with the very wealthy who no doubt would feel somewhat aggrieved at having to pay a little more tax and have the access and financial ability to mount a campaign against such a change. This would be despite the likely consequence of the economy growing faster as a result of the change. Policies that reduce inequality are good for economic growth, easy to implement and, if well crafted, can improve the budget bottom line. Other than the noisy well-o ff arguing against such policies, it is hard to see why such policies are not more popular. Maybe for the next election? @TheKouk