Finance Finance News Frydenberg’s tax cut for foreign investors is a triumph of spin over substance
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Frydenberg’s tax cut for foreign investors is a triumph of spin over substance

Josh Frydenberg
Josh Frydenberg wants to cut taxes for foreign infrastructure investors. But they have nothing in which to invest. Photo: AAP
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Treasurer Josh Frydenberg has proudly declared the Morrison government is “always looking” for ways to cut taxes.

It is no surprise, then, that the government, wanting to be seen to be “doing something” about a stagnant economy, has reached for a tax stunt – a 50 per cent tax cut for foreigners wanting to invest in big infrastructure projects here.

It doesn’t matter that various economists have immediately called out the nonsense.

It doesn’t matter that this is an unnecessary waste of revenue, will have little (if any) net positive impact on getting new projects underway, that the impact (if there is any) will be many years away when the economy needs help now, or that it’s simply a second-rate policy given the better alternatives available.

It only matters that it’s something for the Treasurer to announce when the government is under pressure over falling wages growth and rising unemployment, with the extra benefit being it provides an excuse to trot out the furphy of “record” federal investment in infrastructure.

It only matters that the stunt was swallowed by the usual compliant media. The Australian’s Simon Benson – the government’s favoured recipient of advance PR material – predictably gushed:

“Tax incentives to drive billions of dollars in foreign capital for ­nation-building infrastructure will be granted for projects worth more than $500m in a move by the Morrison government to inject further stimulus into the economy.”

Yes, that does sound like a quote out of the Utopia TV series, except it is less credible.

The simple reality is that the world is awash with capital desperate for anything worthwhile to invest in.

It is not a shortage of money holding back further infrastructure investment here – it is a shortage of projects being brought forward by governments, a shortage of political vision.

The big investors, including those leading our $2.7 trillion superannuation money mountain, are scouring the world for infrastructure projects. The shortage of such projects in a global low-interest rate environment is driving up the price such investors are willing to pay to be part of the action.

While Treasurer Frydenberg feeds his media chooks the necessity of cutting foreign investors’ withholding tax from 30 per cent to 15 per cent, there is more than $20 trillion sitting in government and corporate bonds offering negative interest rates.

That is an amount of money that is impossible to comprehend. It’s a quarter of all the world’s government bonds.

The Reserve Bank governor devoted a considerable part of a recent speech to the problem of excess global savings desperate for a home.

“The Swiss government, for example, can borrow for 30 years at an interest rate of −0.2 per cent. If it were to issue a zero coupon security at this yield, it would mean that the buyer would give the Swiss government 106 Swiss Francs today and receive back just 100 Swiss Francs in 30 years’ time, with no other payments between now and then,” he said.

“Over recent times, private companies including Coca-Cola, Orange and Siemens have issued unsecured bonds with zero coupons and negative yields.”

Anyone brighter than Josh Frydenberg should be able to see there’s no need to halve tax to attract investment in such a climate.

Indeed, the Australian government can presently borrow money for 10 years for about one per cent.

The opportunity exists for the government to issue “infrastructure bonds” and get knocked over in the rush by investors foreign and local.

Infrastructure Australia has a long list of projects promising rates of return that are multiples of what such bonds would cost.

(But Infrastructure Australia has no power – it can only run its ruler over projects and make recommendations. The lacklustre political leadership retains the ability to ignore it and roll out the pork barrel instead for dud or marginal projects – such as the National Party’s pet Inland Rail spendathon.)

I repeat: it’s not about any need for tax breaks, it’s about offering projects to investors.

In any event, Harris’ Law applies: Everything is capitalised.

What the former NSW auditor general, Tony Harris, meant is that policies get built into the price. Halve the tax and investors will pay more, double the tax and they will pay less – it all comes out in the wash about the same.

Global investors of course prefer to pay less tax if they are able to – the financial engineers naturally lobby for and grab every tax loophole and Caribbean Island they can find. It’s in their DNA.

But when they are short of investment opportunities, paying tax will not stop them coming and halving tax to rope them in isn’t necessary.

Instead of a media stunt, we urgently need a commitment to fill in the construction hole looming beyond our approaching peak spend.

As the accompanying Macromonitor graph shows, we are enjoying a remarkable surge in infrastructure construction, primarily thanks to the east coast state governments.

This boom is playing a major role in fending off a recession, but on current committed projects, it peaks next year, plateaus for a while and then starts falling.

The contribution to GDP growth comes from investment growing. Once it plateaus, it doesn’t contribute to growth, and once it starts falling, it subtracts from it.

There’s no shortage of infrastructure we need and that would pay for itself – ask Infrastructure Australia or the Productivity Commission. We just need governments to commit to the project and, in the case of the Federal Government, to overcome its surplus fixation and increase its funding commitment.

Whenever he gets the opportunity, Treasurer Frydenberg likes to trot out his “record $100 billion infrastructure investment” line from his April budget. To put it kindly, that’s just political spin.

New South Wales and Victoria dominate the big-ticket transport projects.

The $100 billion is over 10 years – $10 billion a year. Back in 2014, then-Treasurer Joe Hockey was promising $50 billion over six years – $8.33 billion a year. Midway through Mr Frydenberg’s promised decade, Joe’s $8.33 billion in 2014 dollars will be worth more than Josh’s $10 billion in 2024 dollars. It’s a con to sell it as a increase.

And the colour of the “new” Federal money is yet to be seen, other than some $35 million spent on advertising it.

And the final kicker for Mr Frydenberg’s stunt is its emphasis on mega-projects, things costing more than half a billion dollars. Politicians love the big announcement, as Utopia viewers and Infrastructure Australia followers know.

The mega-projects shouldn’t necessarily be our priority to get the most bang for our buck. Too often, they turn into mega-embarrassments. It’s the economic and social quality of the project that counts – the quality, not the width.

But you don’t get gushy “nation-building” puff pieces in The Australian by telling it straight.

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