Finance Finance News Inside the Treasurer’s bearded-lady economics
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Inside the Treasurer’s bearded-lady economics

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On a day when we could be discussing Guy Sebastian’s plans to sing at Eurovision, instead the nation’s commentariat is spending time on the spurious projections of the Intergenerational Report.

It is a report as confusing as the bearded lady Conchita Wurst, who wowed Eurovision last year.

As noted previously, this report tells us that if things keep going as expected for 40 years (something that, of course, never happens), we’ll be 77 per cent richer on average than we are now in real terms.

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Yep, that means you can buy 77 per cent more with your wages.

In the same breath, however, the report adds that there is no way of funding current patterns of public service delivery.

AAP
Treasury released its Intergenerational Report on Thursday. Photo: AAP

Taxing our comparatively richer heirs at more than 23.9 per cent of Gross Domestic Product (GDP) is seemingly unconscionable, even though they’ll be getting on for being twice as rich as we are.

The Department of Treasury, egged on by the government, will soon be at the heart of a tax white-paper debate, in which many tax inefficiencies will be examined – such as the $36 billion of superannuation tax concessions, $31 billion of capital gains tax concessions, and about $11 billion of tax foregone on the negative gearing of residential properties.

A very large slice of those foregone revenues represents tax minimisation and wealth management by well-heeled Australians, so treasury may have to concede that tightening them up is well overdue.

Trouble is, that would swell the government coffers above the 23.9 per cent level, and so corresponding income tax cuts would simply have to be delivered to keep the overall tax-take in check.

But why?

One reason offered is that taxing wealthy Australians more would mean they would work less, and so income tax cuts would help maintain workforce participation and help get us to that wealthier future.

It’s all so logical, but all so silly when you look at the assumptions that produce these scenarios.

Several of the key assumptions are built into the chart below, showing where all that growth in wealth will come from.

 

GDP-050315-thenewdaily

 

Let’s first consider what won’t make us richer.

Population growth doesn’t help much, because it produces ‘extensive’ economic growth, not intensive growth.

That means the size of the economy grows, but shared between more people we all earn roughly the same.

Participation rates have made us richer in the past 40 years, particularly as more women joined the workforce, but that social trend couldn’t last forever – which is why participation is a small net negative above. Likewise total hours worked.

Shutterstock
Year-on-year labour productivity gains of 1.5 per cent will make the nation richer. Photo: Shutterstock

But what will make us richer is year-on-year labour productivity gains of 1.5 per cent – the same rate as seen over the past 40 years.

The report says: “For every hour average Australians work today, they produce twice as many goods and services as they did in the early 1970s. It is no coincidence that average income per person has also broadly doubled in this period.

“Technology is changing the way we interact with each other and how we live our lives. It is changing the face of business, markets, governments and social engagement. In the 1970s, the Internet, mobile phones and social media did not exist as we know them today.

“Now they are integral parts of our lives and IT-related industries employ nearly as many people in Australia as the mining industry. Technological advances, such as advanced robotics, 3D printing and self-navigating vehicles have the potential to unlock quality of life improvements.”

It’s an exciting vision, but as far as economic assumptions go it is bold to say the least.

Often labour productivity is transformed by technology.

As the Australia Institute’s Richard Denniss told The New Daily on Thursday: “No carpenter ever complained about the advent of the nail-gun.”

That’s true, but if a carpenter can put up a house frame twice as fast with a nail-gun, we either consume twice as many houses or every second framer has to find something else to do.

A similar, and very visible example, is currently seen at major retailers.

The checkout staff vanish, and self-checkout machines are installed. The capital intensity goes up and the displaced staff can find work in another industry.

Or can they?

Labour productivity is a wonderful thing if something like full employment can be maintained.

But this is not the case in the US, where labour productivity has leapt ahead since the Global Financial Crisis (GFC) and produced what some call a ‘jobless recovery’.

The unemployed add to the dole queues and bulk up the underclass.

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Senator Ricky Muir says when change in economy puts people out of work, calling them “lazy” is the worst approach. Photo: AAP

As Senator Ricky Muir pointed out to Fairfax this week, sometimes workers are surplus to requirement, and the experience is soul destroying.

Mr Muir is simply saying that when structural change in an economy puts people out of work, calling them “lazy” is the very worst approach.

He says: “We can’t afford as an economy, let alone a society, to crush the hopes of the next generation.”

That’s why the backlash against the Abbott government’s welfare cuts last May was so fierce – because at the community level, people know that most jobless are doing their best to get back into work.

That’s what makes this report so confusing.

The idea of a cumulative increase in productivity (and real GDP) of nearly 80 per cent is attractive.

But getting to that point may just require increased welfare spending, not cutbacks as the government tried to make in May.

This report argues that we’ll need fewer workers to maintain current or higher levels of prosperity, and, that we cannot afford to increase tax revenues at all to provide services to the human beings spat out by that process.

It’s bearded-lady economics, when the Guy Sebastian solution is right under our noses.

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