It's the economy, stupid!

“Northern Zone” - back to Deng Xiaoping’s future?

I do agree with Professor Mark Crosby and many other commentators that a fiscal “northern zone” is a bad idea.

First, tropical Australia is divided across two states and a territory. Do we need to discriminate one against another?

More importantly - and this is what the majority of commentators have immediately picked up on - this policy will inevitably create a tax haven. Why not to register a company in Darwin, and concentrate a considerable part of the operations elsewhere?

One could possibly enhance the proposed policy by requiring that companies claiming this tax concession must create jobs in the north. However, although this would be a more targeted policy, it would create another layer of bureaucracy followed by more sophisticated schemes to bypass scrutiny.

Meanwhile, my objections extend beyond the equity and compliance perspectives.

It is not surprising that, as Mandarin language-trained and experienced Department of Foreign Affairs public servant, prime minister Kevin Rudd turns to the concept of special economic zones - implemented on an extremely large scale in China since late 1970s.

However, if Mr Rudd was also trained in comparative economics and economic history, he would probably know that the underlying aim of former leader Deng Xiaoping was to break from the failing hardline, centrally planning economic system.

He contemplated achieving his aim gradually and gently, by creating areas of efficient market economy and creatting open “enclaves”, coexisting - for the time being - with the rest of the less liberalised Chinese economic system.

Unlike China 30 years ago, Australia is a rather efficient market economy - although the sectors that until most recently were the “wealth-creating engines”, are running out steam. Therefore, artificially boosting the economy of a particular constituency, especially the one with demonstrating a relatively high level of growth and employment, does not look an adequate solution to this country’s arising structural problem.

It would be rather needed, though, to look for new “engines”, including innovative opportunities in the north. But rather than fiscal policies, proposed by the Coalition microeconomic-based industry policies, probably, would better serve the purpose. And if there are tax concessions, or other financial incentives, then they, probably, would better target particular projects, rather than geographic locations or constituencies. Easy to say. However, look at the possible negative consequences, outlined by Professor John Freebairn.

Again, I would agree with Mark Crosby: where is the money coming from?