Two items caught my eye in The Australian.
A Treasury report has warned that corporate Australia is blaming a decade of political instability for contributing to an investment slump, as Scott Morrison issues a call for businesses to fuel the new investment boom in the health and education sectors.
The Treasury report cites a range of factors contributing to weak business investment that are based on global factors, high hurdle rates for investment lending which were largely out of government control.
“The psychological impacts described as the ‘scars’ of the GFC on business decision-makers, are deeper and more extensive than we had originally expected,’’ the Treasury report says.
But it also canvasses what it claims is sovereign risk over rapidly changing policy and political uncertainty at all levels of government.
Remember the utter disregard for public money? Remember Gonski, National Broadband Network, National Disability Insurance Scheme, stimulus packages, racking up massive debt and little to show for it?
These are not unrelated issues. In 2013 the incoming government should have cancelled Gonski, the NBN, the NDIS, and every other government spending program that was completely unaffordable. Not re-jigged, re-imagined, delivered quicker and cheaper than was originally promised. Cancelled.
Instead the incoming government committed to a massive expansion of the government that would have required tax revenues to remain at historic highs to be fiscally responsible. Since then it has scrabbled to raise more revenue with new taxes and re-interpretations of old taxes. Now why would anyone want to invest in Australia when they face an unknown but increased tax burden in future?
The “scars” of the GFC persist because the wounds have yet to be closed, yet alone healed. When the budget is still in deficit and the debts incurred during the GFC yet to be paid off it’s a bit premature to be taking about scars.
Some gratuitous advertising: channeling my inner Steve Kates I wonder if Treasury even understand why the “scars” are more extensive they had expected? I suspect not, but there is a very nice explanation as to why this is happening in Chapter 14 of Steve’s Free Market Economics. Long story short. Government spending does not and cannot substitute for private spending. This is because economic resources are not homogenous. Increased government spending (ostensibly to make up for decreased private spending) does not restore the economy to where it was before, but rather distorts economic activity and further displaces private activity. Steve explains this story in a few diagrams and it explains the economic malaise we have observed over the past decade much better than the “psychological impacts” that the Treasury appears to blame.