INTHEBLACK July 2020 - Page 13



GET SMART
// T I M E S T H R E E
COMPILED BY SUSAN MULDOWNEY
ARE HIGHER TAXES
THE BEST WAY
TO SHORE UP
THE ECONOMY?
J O M AS T E R S
MEMBER
RESOURCE
18 ITB July 2020
PA U L D R U M F C PA
JOHN DALEY
C H I E F E C O N O M I S T, E Y O C E A N I A
G E N E R A L M A N A G E R , E X T E R N A L A F FA I R S ,
P O L I C Y A N D A D V O C A C Y, C PA A U S T R A L I A
C E O , G R AT TA N I N S T I T U T E
The impact of COVID-19 on economic activity was
almost immediate, and the government response
was swift. The debt burden we have as a result of
this health crisis is debt that we had to incur, but
it could realistically take decades to pay off. We
do need to address this debt in time, otherwise
we leave a burden for future generations.
In economic terms, there is no black-and-white
solution to repaying this debt. It will require a
combination of government revenue raising,
containing government spending and growing
our economy. Everything needs to be on the table.
The more we can do to grow our economy, the
less we will need to act directly on government
spending and revenue raising. Productivityenhancing reform is critical – we need to look
at how we tax, how we train our workforce for
the future, and how red tape and a complex
industrial relations system are hampering growth
and innovation.
Tax reform needs to be part of the conversation,
as it not only impacts government revenue
directly, but also affects productivity and
economic growth. Australia has a complex tax
system, with a reliance on personal income and
corporate tax. From an economic perspective,
a change in the tax mix to rebalance that reliance
more in favour of consumption taxes, which
provide a more sustainable tax base with a lower
cost to economic growth, could be worth putting
on the table.
Whichever policy path the government chooses,
the road back for the economy will not be fast
or straight.
The public discourse on how governments worldwide
should pay for their various COVID-19-related fiscal
stimulus measures has already commenced – even
before the funds have been fully spent, and before
countries around the world are fully out of lockdown.
At the same time, economic indicators, such as
unemployment levels and GDP, are worsening.
There is no quick-fix recovery solution. There’s no
doubt increasing taxes to fund the cost of fiscal stimulus
measures is one option governments will be considering,
and so they should be. However, this needs to be carefully
balanced against consideration of the impact such
measures may have on recovery and, more specifically,
on business investment, entrepreneurship and innovation,
as well as on household consumption.
Globally, most businesses have taken a major hit
financially due to various governments’ responses to
COVID-19, and many will not survive the COVID-19
lockdown phase. For those businesses that do survive,
one of the last things they need is the additional burden of
increased taxes. Further, increasing taxes on consumption
or personal income at this time will only dampen household
spending – even though households may be desperate
for some retail therapy after the lockdowns are eased and
shops re-open.
Governments should be considering what they can do
to help businesses bounce back, as well as encouraging
new businesses to start up and succeed. This includes
providing support to encourage businesses to more
effectively use digital technology and enter new markets
via online sales, and helping enable trade to markets
domestically and globally. Governments should be aiming
to grow tax revenues by increasing business profitability
and jobs growth and, if possible, doing so without putting
the heavy yoke of increasing taxes on economies and on
their residents in the foreseeable future.
Australian state and territory governments are
spending 9.5 per cent of GDP to look after
households and businesses through the COVID-19
shutdown. Once restrictions ease, Australia will still
face a deep, globally synchronised recession, and it is
not inconceivable that gross debt will hit A$1 trillion,
which is about 50 per cent of GDP, and up from less
than 30 per cent before the crisis.
The least painful way to deal with this higher
debt is rapid GDP growth, so that the debt quickly
becomes a smaller proportion of our resources.
This was Australia’s budget strategy after World
War II.
However, this time is different. No one is
forecasting a baby boom like the one that rapidly
expanded the working-age population after World
War II. Ongoing quarantine restrictions are likely
to constrain the contribution of net migration to
population and GDP growth. Furthermore,
economic productivity per person has been
sluggish around the world for 15 years, and there’s
no obvious reason to think it will spring back.
Australia will have to pay for budget deficits
over the next couple of years with budget
surpluses in future. This means that, at some
stage within the next five years, we will need either
lower government spending or higher taxes – and
successful budget repair usually requires both.
The taxes that would do the least economic
damage are largely on investment by individuals –
particularly reforms to capital gains tax, negative
gearing and superannuation. Arguably, these would
also be the fairest taxes to raise, as they have
increasingly skewed the tax system to favour
capital income, benefiting older people over time.
_
To learn more about the government's response to COVID-19
and access CPA Australia's tax and financial advice, visit:
cpaaustralia.com.au/taxadvice
03
02
01
Tax reform needs to be part of the conversation,
as it not only impacts government revenue
directly, but also affects productivity and
economic growth.
_
Governments should be aiming to grow tax
revenues by increasing business profitability
and jobs growth.
_
At some stage within the next five years, we
will need either lower government spending
or higher taxes – and successful budget
repair usually requires both.
MEET THE
EXPERTS
JO MASTERS
As the chief economist for
EY Oceania, Jo Masters is
passionate about driving
discussion around the
traditional and disruptive
forces that shape the
economy. Her involvement
in the banking sector has
focused on economic
research and trends, and
currency strategy. Masters
sits on the advisory
committee for the Financy
Women’s Index, and teaches
economics 101 to SheStarts,
an accelerator program for
female entrepreneurs.
PAUL DRUM
FCPA
As CPA Australia's general
manager, external affairs,
Paul Drum FCPA was the
voice of CPA Australia in the
public debate for 22 years,
before his tragic passing in
May 2020. He had over
30 years of experience in
public policy in Australia
and internationally.
JOHN DALEY
John Daley has been CEO of
the Grattan Institute since it
was founded 11 years ago. He
has published extensively on
economic reform priorities,
budget policy, tax reform,
housing affordability and
generational inequality.
Daley has worked at the
University of Oxford, the
Victorian Department
of Premier and Cabinet,
consulting firm McKinsey
& Company and ANZ
Bank, in fields including
law, public policy,
strategy and finance.
intheblack.com July 2020 19

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