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Killing the zombies

May 10th, 2017

Among the measures in last night’s budget was the decision to kill off, once and for all, more than $10 billion of “zombie measures”. These cuts proposed in Joe Hockey’s disastrous 2014 Budget, rejected by the Senate, but kept on the books as proposed savings until now.

More importantly, the Budget abandons the undead ideology of market liberalism (aka economic rationalism, neoliberalism and so on) that dominated policy thinking in Australia in the decades leading up to the Global Financial Crisis, and continued to be taken for granted by most of the political class long after that.

Among the specific elements of market liberalism, I described in Zombie Economics back in 2010, those most central to current policy debates are privatisation (in the broad sense of rolling back the size and scope of state activity), trickle down economics, and austerity. All of these have been abandoned, to a greater or lesser extent in this budget.

The zombie that has been killed off most thoroughly is austerity. Extreme rhetoric about debt and deficits, and the claim that the only appropriate response was cuts in spending are central to the zombie idea of austerity, and have now been abandoned.

Privatisation has similarly been abandoned, at least in crucial respects. The government has abandoned attempts to squeeze Medicare and accepted the reality of the NDIS. The cut down version of Gonski now on offer may be unsatisfactory, but it is at least an acceptance of public responsibility. And Morrison’s discovery of ‘good debt’ has seen a return to traditional public infrastructure investment financed by borrowing.

It’s true that the budget doesn’t do anything to make the tax system more progressive. The company tax cuts pushed through last year will do the opposite, as will the expiry of the ’emergency budget levy”. Still, the push in the opposite direction has been abandoned. The top marginal rate of income tax and the threshold at which it applies are the same as they were in 2008, when the Rudd government partially implemented the tax cuts promised by Howard and Costello. So, even if the zombie of trickle down economics is still walking, it’s taken some heavy damage.

The willingness of the government to hit the big banks with billions of dollars in new taxes (or levies) is also indicative of the change. In the heyday of neoliberalism, the Efficient Markets Hypothesis presented the financial sector as the ultimate source of economic wisdom, standing in judgement over governments. Now, the banks are seen on all sides as a burden on the productive economy, an appropriate target for taxation.

Of course, there’s still plenty to dislike about the budget. Most obviously, there are the gratuitous attacks on easy targets like welfare recipients and foreign aid. But these represent culture war gesture politics, not a serious economic policy.

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  1. bjb
    May 10th, 2017 at 20:59 | #1

    It’s going to be interesting to see where this leaves Tim “don’t blame me I wasn’t in charge” Nicholls come the next election. When he was Treasurer he categorically ruled out increasing any taxes and was still hot for privatisation.

  2. Peter Chapman
    May 10th, 2017 at 21:02 | #2

    I agree this budget brings some significant changes, but if the ideas have been killed off, they may remain as ghosts that retain a power to haunt, if not walk among us. For who in government (or opposition) can articulate a “serious economic policy”? This is policy by inference, but no-one seems to articulate it in any coherent sense. Perhaps Morrison, Turnbull et al. are unwilling to say, “This is our policy… This is how we will use debt…” because they may want to do U-turns at a later date. They are certainly not about to say “Austerity is dead”, “We have abandoned market liberalism” because that would mean admitting that many besides Abbott were wrong in the past. So we are a long way from seeing a clearly stated approach to economic policy, let alone something we could call evidence-based, theoretically coherent, internally consistent, etc. Perhaps Labor will take up that challenge? I am not holding my breath.

  3. Ernestine Gross
    May 10th, 2017 at 23:53 | #3

    It took three years, the ‘deportation’ of a former Treasurer to another continent and a double dissolution to stop the ship laden with 19th century dogma from going any further on the same course. (Or should I use a metaphor involving barnacles?)

    The dogmatic version of naive market economics (financial capitalism, neoliberalism, economic rationalism, …, trickle down, …, zombie economics) didn’t emerge overnight and it wasn’t announced either. It seems to me it’ll take some time before the new course of the ship will be clearly identifiable. (I am waiting for the prolonged absence of phrases such as ‘efficiency dividend’ as a signal of the ship moving in the direction of reasoning – a good thing.)

  4. Ikonoclast
    May 11th, 2017 at 06:39 | #4

    Ah yes, the “efficiency dividends”. Long ago, in one of my unread diatribes, I said these were code words for “cuts”.

    I should collect my writings together (the best of my own bad bunch) from this blog and elsewhere and call them the “Unread Diatribes”. Come to think of it, why should I collect them? The “Unread Diatribes” are exactly where they ought to be.

  5. pablo
    May 11th, 2017 at 08:46 | #5

    @Ikonoclast
    Don’t delete Icon, think about a good editor proficient in political economy and history.

  6. Newtownian
    May 11th, 2017 at 10:05 | #6

    Have you never watched a Zombie movie John? You cant actually kill Zombies. And they keep coming back even when limbs have been chopped off. And like the Black Knight in Monty Python and the Holy Grail they will still bit you (chicken) if you get close enough. Further the limbs themselves are potentially lethal like the moving strangling hand. They have a life of their own.

    Extending this metaphor to the present instance there are still plenty of Zombies and bits thereof:
    * The vast bulk of the academic economics community still giving out their Riksbank prizes – the biggest barrier to ‘moving forward’ in my book as against just kicking the can down the road.
    * The vast bulk of progressive economists who still dont understand natural ecosystems (a little dig at you but I’m thinking as much of good lefties like Paul Mason who dont get the implications of limits to growth either.
    * The Japanese (and maybe Chinese) banks.
    * The French banks who the Greeks owe who the Germans keep propping up else it makes their manufacture exports unaffordable.
    * The Euro controllers who oversee the latter.
    * The US legal system ready to support predatory parasites like Paul Singer.
    * Wall St’s influence reasserting neoliberal ‘principles’ whether it be Bush, Obama, Hillary, of Donald Bargearse in charge.
    * The revitalized CDO sector.
    * A large proportion of the value of stocks.
    * The global inflated real estate bubble (not just us)(though maybe they are more comparable to Mr Creosote).

    My point I guess is to wonder what a budget means in an era where all these Zombie bits are still all out there ready to make business as usual projections like Morrison’s a load of nonsense longer term.

    It seems that 2008 has still not taught anyone in your field the lesson that catastrophic events will happen (i.e. huge unexpected ones on the scale of say the Millenium Drought which was called this in part because it was supposed to have a recurrence probability of 1 in 1000 years).

    The real question is when is the next one coming, it being overdue if past cycles are any guide, and then where will economics and its practitioners be, whether they are left or right?

  7. Smith
    May 11th, 2017 at 12:01 | #7

    “The company tax cuts pushed through last year will do the opposite [of progressive]”

    They will have no effects on progressivity, or indeed on anything. Shareholders will lose in franking credits what they gain in company tax cuts, dollar for dollar.

  8. may
    May 11th, 2017 at 12:15 | #8

    pablo :
    @Ikonoclast
    Don’t delete Icon, think about a good editor proficient in political economy and history.

    and.

    have the result right along side studies of other economic ideologies that show the draining of assets/abilities/ wellbeing from the majority of a given population to a (sometimes miniscule) minority.

    i know i’m banging on, but as an admitted ignoramus in the economic “sciences”,

    capitalism looks like just one of the many ways this is accomplished.

  9. Chris
    May 11th, 2017 at 13:44 | #9

    “gratuitous attacks on easy targets like … foreign aid … represent culture war gesture politics, not a serious economic policy.”

    I understand and agree with what you are getting at here – but cuts to foreign aid result in real people actually dying, which strikes me as a rather serious matter of economic policy.

  10. ChrisH
    May 11th, 2017 at 14:16 | #10

    @Smith
    The company tax cuts will be the opposite of progressive.

    The wealthy high income earners are, disproportionately, shareholders. Income retained in company vehicles will go lightly taxed (at most) and substantial tax will be postponed indefinitely. That postponed tax, retained in the company, will be used to generate more income…itself to be lightly taxed with substantial tax postponed indefinitely.

    Later, for many wealthy high income earners, the accumulated postponed tax will be rolled over tax free through a variety of superannuation, retirement and small business concessions, commonly leveraged on each other.

    This will reduce progressivity substantially. And it’s a real effect on real gains and real tax collections.

    There might be no effect if companies had to distribute all income to shareholders. But they don’t, they won’t, and probably they’ll distribute less.

  11. ChrisH
    May 11th, 2017 at 14:17 | #11

    @Smith
    The company tax cuts will be the opposite of progressive.

    The wealthy high income earners are, disproportionately, shareholders. Income retained in company vehicles will go lightly taxed (at most) and substantial tax will be postponed indefinitely. That postponed tax, retained in the company, will be used to generate more income…itself to be lightly taxed with substantial tax postponed indefinitely.

    Later, for many wealthy high income earners, the accumulated postponed tax will be rolled over tax free through a variety of superannuation, retirement and small business concessions, commonly leveraged on each other.

    This will reduce progressivity substantially. And it’s a real effect on real gains and real tax collections.

    There might be no effect if companies had to distribute all income to shareholders. But they don’t, they won’t, and probably they’ll distribute less than they do now.

  12. Smith
    May 11th, 2017 at 14:30 | #12

    @ChrisH

    “the accumulated postponed tax will be rolled over tax free through a variety of superannuation, retirement and small business concessions, commonly leveraged on each other.”

    That’s a fair point, at least qualitatively. But how big a deal is it in practice?

  13. 2 tanners
    May 11th, 2017 at 14:43 | #13

    @Chris #8 I agree about the seriousness of foreign aid, but Labor under Gillard started these cuts. I don’t think it’s a culture war thing, more a dollar saving exercise (at the expense of lives, as you say) that most Australians agree with or at least don’t object to.

  14. ChrisH
    May 11th, 2017 at 15:17 | #14

    @Smith
    The postponement is the source of regressive effect. Making the postponement permanent, via the superannuation, small business, and retirement concessions, is merely gold plating the regressive effect.

    Postponement is huge. Making it permanent is substantial but difficult to demonstrate in scale using publicly available data. (Internal ATO and Treasury data would tell more, could you but get it.)

    But postponement of tax for a long time, and making gains from the postponed tax, gives a huge benefit whether made permanent or not. And making the benefit permanent is only necessary when there is some practical reason that would otherwise end the postponement.

  15. Smith
    May 11th, 2017 at 16:08 | #15

    @ChrisH

    So postponing the tax paid is a big deal. I can believe that, at least over long periods. But how much does cutting the company tax rate from 30% to 25% make it a bigger deal?

  16. Crocodile
    May 11th, 2017 at 16:41 | #16

    Smith :@ChrisH
    So postponing the tax paid is a big deal. I can believe that, at least over long periods. But how much does cutting the company tax rate from 30% to 25% make it a bigger deal?

    ChrisH paints a bleak picture. Retained earnings may also lead to higher ratios of capital to labour, increasing labour productivity and therefore wages.

  17. ChrisH
    May 11th, 2017 at 17:43 | #17

    @Smith
    You took the position above that the tax cuts were not regressive, that ‘they will have no effects on progressivity, or indeed anything’.

    That position was plainly wrong. It’s a big deal, and not over long periods. (I’d quite like to postpone a large part of my taxes for just a year: my gain would be pretty attractive. Postponing indefinitely would be enormously more attractive. Any discount rate for future tax turns indefinite deferral into something very like complete elimination.)

    Now you want to know how much the increased postponing of tax will do. Well, it’s an increase in the amount postponed from around two-fifths of the tax the rich would otherwise pay this year, to half the tax the rich would otherwise pay this year. That’s about a tenth of their tax, indefinitely postponed, and made available as the basis for more gains.

    I mentioned that ATO and Treasury figures are not accessible generally. It’s like modelling how the use of interposed trusts or companies allows better off students to avoid or minimise student debt repayments – which generally won’t apply to earnings made by the well off through interposed vehicles.

  18. Smith
    May 11th, 2017 at 18:28 | #18

    @ChrisH

    Let’s put a few numbers on this. If I have a business worth $1m, get a rate of return of 5%, pay tax of 30% and retain all the earnings, after 10 years the business is worth $1.4m which let’s say I can tip into a tax free super pension account. Along the way I’ll have paid $134,000 in tax (present value). If instead I pay myself a dividend and don’t retain any earnings and I pay income tax at 47% then I’ll pay $181,000 in tax in total. So by retaining the earnings I save $47,000 in tax and I can earn $70,000 tax free until I die. This compares to a $50,000 tax free super pension if I didn’t retain the earnings.

    So we can agree that there are substantial gains to be made by retaining earnings in a business and then taking the money out in a way that means you don’t pay any tax. Thank you, Peter Costello.

    But the question is how much difference does it make if the company tax rate is 25%. The answer is you save an additional $21,000 in tax and you have a tax free pension of $72,000 not $70,000. I say: not that big a deal.

    The problem isn’t small cuts in the company tax rate. The problem is the ability for some people to pay little or no tax on their super pension earnings.

    If instead the tax rate 25% after 10 years I’ll have an extra $34,000.

  19. ChrisH
    May 11th, 2017 at 22:46 | #19

    @Smith

    If I have a business generating $50,000 a year its value increases as it pays less tax. If its returns are kept, untaxed, in the business they increase its value and the actual working assets on which further returns are made.

    In your numbers, the business seems not to earn any more however much the company accumulates. All you seem to do is accumulate the amounts: they earn nothing and add nothing more than their nominal amount to the value of the company.

    As I understand the big benefit from postponing tax, it’s the compounding earnings made on the postponed tax. Your numbers treat that compounding earning effect (and its consequent boost to company value, considered as the capitalization of earnings) as zero. I don’t think that can be sound.

    You refer to ‘present value’ of tax paid. Presumably, for the purpose of this simplified numbering, you are treating the rate of return as real (only). But the rate of return is a compound one and the value of the company rises accordingly. The gain, from a .25% increase in compound returns, and on a notional starting value of $1m, is just under $137,000: that seems pretty substantial to me.

    My compound return at a 30% company rate is just over $731,000. My compound return at a 25% company rate is just under $878,000.

    If I take my earnings each year, pay my tax at 50% (simplifying calculation), and reinvest at the same working rate of return, my compound return is just over $203,000. An effective tax rate a little lower raises my return but not much. Consider top marginal rate plus medicare levy…

    Looks to be a big deal to me. And it’s correspondingly a big deal for tax receipts which are correspondingly reduced.

  20. Greg McKenzie
    May 15th, 2017 at 08:07 | #20

    The Laffer Curve has a lot to answer for in terms of Zombie measures. When you “dumb down” something as complex as tax reform then dummies like most politicians get it round the wrong way. Piketty has done decades of empirical studies on this area. Yet how many politicians have bothered to read his book? Would I we let engineering feats be trivialised in this way? A Harbour Bridge that was so expensive only rich people could afford the toll, it the likely result of letting politicians theorise about construction projects. Economists need to seize back the high ground. Thank goodness we have John Quiggin in this country.

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