tag:theconversation.com,2011:/uk/topics/business-investment-17396/articlesBusiness investment – The Conversation2023-11-21T12:13:10Ztag:theconversation.com,2011:article/2181362023-11-21T12:13:10Z2023-11-21T12:13:10ZAutumn statement: tax cuts could boost UK economy, but businesses also need more certainty<p>It’s the right time <a href="https://news.sky.com/story/rishi-sunak-promises-to-cut-taxes-as-autumn-statement-looms-13012154">to cut taxes</a> to grow the economy, according to Prime Minister Rishi Sunak. Both he and the chancellor have been discussing the “<a href="https://www.telegraph.co.uk/politics/2023/11/17/jeremy-hunt-interview-tax-cuts-autumn-statement-2023/">path to reducing the tax burden</a>” in recent days. </p>
<p>The government is set to make its autumn statement on its financial plans this week. With the UK tax burden at levels not seen <a href="https://news.sky.com/story/tory-public-service-pledges-and-corrective-measures-after-austerity-pushed-tax-burden-up-12972281#:%7E:text=Calculated%20as%20a%20share%20of,is%20not%20particularly%20heavily%20burdened.">since the 1940s</a>, Conservative party members have been increasingly calling for cuts ahead of the next general election.</p>
<p>Autumn statements aren’t always used to make major fiscal policy announcements. Last year’s statement provided an opportunity for a mini-budget and a raft of policy changes. But that was after <a href="https://theconversation.com/only-a-u-turn-by-the-government-or-the-bank-of-england-will-calm-uk-financial-markets-191523">the disastrous market reaction</a> to the package of unfunded tax cuts announced in September 2023 by Hunt’s predecessor Kwasi Kwarteng.</p>
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Read more:
<a href="https://theconversation.com/emergency-budget-announcement-expert-reaction-to-new-uk-chancellors-attempt-to-calm-financial-markets-192669">Emergency budget announcement: expert reaction to new UK chancellor's attempt to calm financial markets</a>
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<p>This year, among expectations of <a href="https://theconversation.com/six-ways-the-upcoming-autumn-statement-could-affect-your-personal-finances-217854">personal finance issues</a> such as savings and pensions, the prospect of tax cuts has suddenly become a strong possibility. The chancellor has some unexpected “fiscal headroom” following <a href="https://theconversation.com/price-inflation-is-slowing-but-heres-why-it-still-feels-like-were-in-a-cost-of-living-crisis-218055">more favourable inflation figures</a> recently, and so it seems the government feels ready to announce tax changes sooner rather than later.</p>
<p>But given the government’s recent history of flip-flopping when it comes to business taxes, this week’s statement could provide the chance to take a firm stand in this area before the next general election.</p>
<h2>Extending ‘full expensing’</h2>
<p>The <a href="https://www.gov.uk/capital-allowances/annual-investment-allowance">Annual Investment Allowance</a> (AIA), and the threshold at which it’s charged, changed many times during the 2010s before settling at £1 million in 2020. This means companies can spend on new equipment and other capital costs up to this amount and deduct it from taxable profits each year. Before that, only a certain amount of capital spending could be fully claimed as a taxable allowance in the year of purchase.</p>
<p>When the government introduced full expensing in March 2023, it meant qualifying capital expenditures – including plant and machinery that would usually qualify for the “main rate” capital allowance of 18% – of any amount could be claimed in full as an allowance.</p>
<p>Full expensing was introduced as a way to encourage capital investment, and no doubt to soften the blow caused by <a href="https://www.theguardian.com/uk-news/2023/mar/12/hard-road-to-follow-for-uk-prosperity-says-jeremy-hunt-before-budget">a sharp increase</a> in the rate of corporation tax. It’s due to end in March 2026, but there is growing speculation that it could either be extended by one or two years, or become permanent. </p>
<p>This would be <a href="https://www.iod.com/news/uk-economy/iod-full-expensing-of-business-investment-very-welcome-to-drive-growth-urges-it-to-be-made-permanent/">welcomed by businesses</a>. It would be an opportunity to gain immediate tax savings from investments, rather than as a trickle over the years an asset is in use. It would also provide some stability, helping companies to plan. This hasn’t been easy in recent years when the government was constantly changing the AIA limit.</p>
<p>This seems like an unlikely vote-winner however, given that an extension to an existing allowance isn’t as instantly alluring as something like a new tax cut or increases to personal thresholds. </p>
<p>It also raises questions around what will happen after the next general election: if Labour forms the new government (as <a href="https://www.electoralcalculus.co.uk/prediction_main.html">recent polling</a> suggests could happen) would it be tempted to reverse this policy? It’s possible that Jeremy Hunt is thinking this could create a “wedge” issue that could draw away potential voters for any incoming Labour government that wants to appeal to business. </p>
<p>Since the chancellor has already <a href="https://www.theguardian.com/politics/2023/nov/19/jeremy-hunt-warns-against-fuelling-inflation-after-downplaying-income-tax-cuts?utm_term=655b13aa303588a628a7f5ce21fa5d27&utm_campaign=BusinessToday&utm_source=esp&utm_medium=Email&CMP=bustoday_email">pledged to avoid</a> any measures that could cause inflation, permanent full expensing could be the most businesses can hope for this autumn.</p>
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<img alt="Woman with glasses at a desk by a window, calculator, paper work, computer." src="https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Cutting business taxes could boost the economy but businesses need consistent messaging to plan.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/african-american-accountant-auditor-calculator-2039877848">Andrey_Popov/Shutterstock</a></span>
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<h2>Changing corporation tax</h2>
<p>One of the more startling elements of the Conservative government’s fiscal policy in recent years has been its change to the rate of corporation tax. This is the tax that all incorporated companies in the UK pay on their taxable profit, before dividends can be distributed to shareholders.</p>
<p>In 2010, George Osborne became the first Conservative chancellor for 13 years, and he set about <a href="https://commonslibrary.parliament.uk/research-briefings/sn05945/">significantly reducing</a> the headline corporation tax rate from 28% to 20% in 2016, followed by <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-9178/">a further rate cut</a> to 19% in 2017. </p>
<p>In his 2021 budget, Rishi Sunak, appointed chancellor in 2020, made two significant announcements about this tax. First, that the main corporation tax rate would increase to 25% from April 2023. And while the short-lived Liz Truss-led government had planned to cancel this increase, it came to pass in 2023, as planned, after Jeremy Hunt took over as chancellor. </p>
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<a href="https://theconversation.com/corporation-tax-u-turn-why-the-latest-change-means-more-uncertainty-for-uk-business-192641">Corporation tax U-turn: why the latest change means more uncertainty for UK business</a>
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<p>Second, Sunak re-introduced a “small profits” tax rate, where companies that have annual taxable profits below £50,000 only incur a 19% corporation tax. Higher profits are taxed at a marginal rate of 26.5%, creating a tapered effect – that is, that a company’s effective tax rate would gradually increase if their profits also grow. The marginal rate exists for any profits up to £250,000 – any higher and everything incurs the 25% rate.</p>
<p>The government initially <a href="https://news.sky.com/story/budget-2023-corporation-tax-set-to-rise-from-19-to-25-in-april-12827274">justified the corporation tax increase</a> as a way to mitigate the loss of government revenue during COVID. But Truss and Kwarteng’s attempt to reverse the tax emphasised that increasing it is viewed by some in Conservative circles as a betrayal of the party’s low-tax philosophy.</p>
<p>Hunt may use the autumn statement for other measures that could gain broader voter support, but keeping the corporation tax rate the same will probably continue to frustrate MPs on the right of the Conservative party.</p><img src="https://counter.theconversation.com/content/218136/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Midgley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK government has recently indicated that it could make some surprise tax announcements in coming days.Gavin Midgley, Senior Teaching Fellow in Accounting, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1839382022-05-27T14:49:18Z2022-05-27T14:49:18ZInflation: there’s a vital way to reduce it that everyone overlooks – raise productivity<p>Inflation has become one of the great issues of our times. The UK’s is the highest in the G7, weighing in at <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/april2022">9% a year</a> according to the most recent figures on consumer price inflation. </p>
<p>When you look at the other common measure for prices, <a href="https://moneyweek.com/merryns-blog/the-difference-between-cpi-and-rpi-and-why-it-matters-55018#:%7E:text=The%20RPI%20is%20an%20arithmetic,the%20number%20of%20items%20involved.">retail price inflation</a>, which adds mortgage rates into the equation and is also calculated a little differently, it is even higher at 11%. This is important because RPI is used for raising prices across a range of items, from train tickets and mobile phone contracts to student loans. </p>
<p>The question of why inflation is so high is well rehearsed. The initial impetus came from greater demand, but it is being further fuelled by supply issues. </p>
<h2>What caused high inflation</h2>
<p>On the demand side, quantitative easing (QE) during the pandemic – in which central banks “created money” to help prop up the economy – has increased the amount of money in the system <a href="https://tradingeconomics.com/united-kingdom/money-supply-m3">by over 20%</a>. </p>
<p>When lockdown ended, this helped to ensure that there was pent-up demand for goods and services: <a href="https://tradingeconomics.com/united-kingdom/retail-sales-annual">retail sales</a> rose by over 20% year on year in May 2021, for instance, and hit another peak of nearly 10% in January 2022. At the same time, demand from firms helped to drive huge price increases in key industrial commodities such as <a href="https://www.macrotrends.net/1476/copper-prices-historical-chart-data">copper</a> and <a href="https://tradingeconomics.com/commodity/steel">steel</a>. Also, <a href="https://tradingeconomics.com/commodity/crude-oil">oil prices</a> rose by approximately 67% in 2021 and another 20% in 2022 to date. </p>
<p>Heightened demand has collided with constraints on the global supply chain from social distancing, self-isolation rules and <a href="https://theconversation.com/shanghai-worlds-biggest-port-is-returning-to-normal-but-supply-chains-will-get-worse-before-they-get-better-182720">renewed lockdowns in China</a> (even the <a href="https://theconversation.com/suez-canal-blockage-how-cargo-ships-like-ever-given-became-so-huge-and-why-theyre-causing-problems-158090">Ever Given getting stuck</a>). As a result, the cost of <a href="https://tradingeconomics.com/commodity/baltic">shipping goods</a> is around 35% higher than the pre-pandemic high (and over 700% higher than its low). And all of this is before discussing the <a href="https://www.ips-journal.eu/topics/economy-and-ecology/how-the-war-in-ukraine-impacts-global-suppy-chains-5894/#:%7E:text=Ukraine's%20economy%20is%20in%20disarray,significantly%20impacting%20the%20Russian%20economy.">war in Ukraine</a>.</p>
<p>The response by the Bank of England has been to increase the <a href="https://tradingeconomics.com/united-kingdom/interest-rate">headline rate of interest</a> from 0.1% to 1%, and to stop QE. Tightening monetary policy affects demand as the interest due on many debt repayments is rising and the cost of borrowing is going up. As a result, the <a href="https://www.gfk.com/en-gb/products/gfk-consumer-confidence-barometer">GfK UK consumer confidence index</a> is sitting at -40, a historically low level (when the number is positive, it means consumer confidence is high). </p>
<p>This combination of higher interest rates and higher prices has increased the likelihood of a recession. In part, this is because increasing interest rates discourages businesses from investing. But there’s also another problem with discouraging investment: it’s part of the long-term solution to our inflation problem. </p>
<h2>Productivity and investment</h2>
<p>This is linked to the UK’s long-term problem with productivity: in other words, how much each worker produces. The UK productivity rate is growing, which you would expect as technology brings improvements, but the growth is less than that of key international competitors like the US, Germany and France. </p>
<p>While the rate of growth has returned to pre-pandemic levels after plunging during the lockdowns, it is still slower than in the years before the global financial crisis of 2007-09. A <a href="https://www.pwc.co.uk/who-we-are/regional-sites/london/press-releases/london-has-the-highest-productivity-levels-in-uk.html#:%7E:text=PwC%20concludes%20that%20UK%20output,the%20UK's%20'economic%20centre'.">PwC report from 2019</a> highlights that annual growth in UK productivity was 2% for the ten years to 2008 and 0.6% for the ten years after, with a <a href="https://worldpopulationreview.com/country-rankings/most-productive-countries">productivity gap</a> of approximately 10% to Germany and over 30% to the US. </p>
<p><strong>G7 productivity growth, 1997-2021</strong></p>
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<a href="https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart of long-term productivity growth" src="https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/465716/original/file-20220527-15-g33eut.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/internationalcomparisonsofproductivityfinalestimates/2020">ONS</a></span>
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<p>Why does productivity matter for inflation? When a workforce is more productive it produces more goods and services, and at a lower cost per unit. This means there is a greater supply of these things, which puts downward pressure on prices and is therefore associated with lower inflation. </p>
<p>How do we raise productivity? One important way is to invest more, but this has been a weakness in the UK. <a href="https://tradingeconomics.com/united-kingdom/private-investment">Business investment</a> plateaued in 2016 following the Brexit referendum, fell with COVID-19 and remains almost 10% below the 2019 level. The nation’s investment spending as a proportion of GDP (16.7%) <a href="https://www.ceicdata.com/en/indicator/united-kingdom/investment--nominal-gdp">compares poorly</a> with the US (22.5%), Japan (25%) and the EU (24.3%). This is despite evidence that UK companies are <a href="https://www.ft.com/content/ae65d82f-db70-4763-9d96-65be6fc12ba1">holding £140 billion</a> in cash and have a backlog of accumulated projects. </p>
<h2>What can be done</h2>
<p>The question is how to encourage firms to release this investment potential. The government is planning to increase headline corporation tax <a href="https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023">from 19% to 25%</a> in 2023, which is not going to help and should arguably be scrapped. To further incentivise investment, there’s also a need for more generous rules around tax relief, including extending the “<a href="https://swoopfunding.com/uk/covid-19/super-deduction/">super-deduction</a>” that was brought in two years ago, which can reduce companies’ tax bills by 25%. </p>
<p>As well as encouraging companies to invest and expand, the government needs to incentivise people to start new companies. For example, the UK has lost <a href="https://www.statista.com/statistics/318234/united-kingdom-self-employed/">three-quarters of a million</a> self-employed workers since February 2020. </p>
<p>To encourage more start-ups, the UK government, the devolved administrations and councils need to come together to develop strategic plans for different regions. This includes making better use of universities as local hubs for expertise and developing clusters of similar firms based on local specialisms that can help one another by sharing equipment and collaborating. <a href="https://www.centreforcities.org/reader/six-ideas-effective-local-industrial-strategies/">Plans exist</a>, but need to be actioned; levelling up must be more than a catchy slogan.</p>
<p>Public investment has to be part of the picture. This especially includes education, both at school, where upgraded facilities are required to ensure that young people are fully trained in the latest technology; and for over-18s, with a clearer balance between university and apprenticeship training. </p>
<p>Getting east to west is about to become substantially easier in London thanks to Crossrail, but remains tortuous elsewhere, whether from Leeds to Manchester or Edinburgh to Glasgow. Quicker transport links improve the mobility of goods and labour, while truly upgrading internet connections (full fibre and 5G) improves links when travel isn’t necessary. Both improve productivity.</p>
<p>Inevitably, these kinds of interventions involve further spending. But this has to be viewed as a long-term solution. After WWII, government debt was well <a href="https://www.statista.com/statistics/282841/debt-as-gdp-uk/">over 200% of GDP</a> and took <a href="http://news.bbc.co.uk/1/hi/6215847.stm">50 years</a> to be paid off. The same time scale can be considered now.</p>
<p>UK Chancellor Rishi Sunak has been talking a lot about the need to unlock investment and raise productivity, but there is still very little detail about what the government intends to do. There are lots of economic benefits to raising productivity, but bringing down inflation is the one that everyone seems to have missed.</p><img src="https://counter.theconversation.com/content/183938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Increasing productivity means increasing investment, but raising interest rates makes businesses do the opposite.David McMillan, Professor in Finance, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1750542022-01-30T01:42:56Z2022-01-30T01:42:56ZTop economists expect RBA to hold rates low in 2022 as real wages fall<figure><img src="https://images.theconversation.com/files/443112/original/file-20220128-15-11po5ja.png?ixlib=rb-1.1.0&rect=233%2C0%2C3473%2C2000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s leading forecasters expect the Reserve Bank to resist pressure to lift interest rates all year, despite rising interest rates overseas, much higher inflation, plunging unemployment, and financial market traders pricing in two hikes in the next six months.</p>
<p>The 24-person forecasting panel assembled by The Conversation also predicts:</p>
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<li>weaker economic growth</li>
<li>much lower housing price growth<br></li>
<li>next to no growth in the Australian share market<br></li>
<li>little or no further inroads into unemployment</li>
<li>and wage growth so weak that real wages go backwards. </li>
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<p>Two-thirds of the <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">forecasting panel</a> expect the Reserve Bank to leave rates ultra low until at least the first quarter of 2023, when it will have a better read on price pressure, wages and the jobs market.</p>
<p>Investors are banking on a different outcome. </p>
<p>Ahead of the Reserve Bank board’s first meeting for the year <a href="https://www.rba.gov.au/">on Tuesday</a>, securities exchange trading is pricing in an increase in the Reserve Bank’s cash rate from its historic low of 0.10% to 0.25% by <a href="https://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf">June</a>, followed by an increase to 0.5% by August, and two further increases to 1.0% by Christmas.</p>
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Read more:
<a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-in-2022-171731">Top economists see no prolonged high inflation, no rate hike in 2022</a>
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<p>If that happened, it would leave mortgage rates higher than they were before COVID and before two years of ultra-low interest rates pushed up home prices 25%.</p>
<p>The <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021">Bank of England</a> increased its cash rate from 0.1% to 0.25% in December and the <a href="https://www.rbnz.govt.nz/monetary-policy/official-cash-rate-decisions">Reserve Bank of New Zealand</a> lifted its cash rate in October and November to 0.75%. A 40-year high in inflation is expected to force the <a href="https://www.theguardian.com/business/2022/jan/26/us-federal-reserve-rise-interest-inflation">US Federal Reserve</a> to lift rates in March.</p>
<p>But China has moved in the other direction, cutting rates and imploring the rest of the world not to “<a href="https://www.afr.com/world/asia/don-t-raise-interest-rates-china-s-xi-tells-the-west-20220118-p59p05">slam on the brakes</a>”.</p>
<h2>On balance, no rate hike all year</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reserve Bank Governor Philip Lowe addresses the National Press Club on Wednesday.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
</figcaption>
</figure>
<p>Now in its <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">fourth year</a>, the Conversation survey taps the expertise of leading forecasters in 18 universities and financial institutions, among them economic modellers, former Treasury, OECD and Reserve Bank officials, and a former member of the Reserve Bank board. The panel was surveyed on January 20.</p>
<p>Eight of the panellists predict the Reserve Bank will begin lifting its cash rate this year. One, former OECD official Adrian Blundell-Wignall, expects the bank to begin lifting in March, ahead of the federal election. </p>
<p>But the bulk of those surveyed point to the bank’s target of achieving average inflation “<a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">sustainably within</a>” its target band of 2-3% over time, noting that inflation has been well below that band for most of the past five years.</p>
<p>Governor Philip Lowe will outline his thinking after the first Reserve Bank board meeting of the year in an address to the <a href="https://www.npc.org.au/speaker/2022/944-philip-lowe">National Press Club</a> on Wednesday.<br>
The panel expects him to suggest he will need to see more than a short-lived burst of higher inflation before he lifts rates.</p>
<p>The panel’s median (middle) forecast is for rate hikes to begin in April 2023. Three panellists, including Peter Tulip, a former research manager at the bank, expect no increase before February 2024.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=779&fit=crop&dpr=1 600w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=779&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=779&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=979&fit=crop&dpr=1 754w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=979&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=979&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<hr>
<h2>Inflation not yet a problem</h2>
<p>Although inflation has jumped to a four-decade high of 7% in the United States, and although Australia’s headline inflation rate has hit 3.5%, the so-called “<a href="https://www.rba.gov.au/publications/bulletin/2010/mar/2.html">underlying inflation rate</a>” targeted by the Reserve Bank hasn’t yet reached the top of the bank’s 2-3% target band.</p>
<p>The panel’s average forecast is that it won’t reach it in 2022 or 2023, and that it will decline in 2023.</p>
<hr>
<iframe src="https://flo.uri.sh/visualisation/8481472/embed" title="Interactive or visual content" class="flourish-embed-iframe" frameborder="0" scrolling="no" style="width:100%;height:500px;" sandbox="allow-same-origin allow-forms allow-scripts allow-downloads allow-popups allow-popups-to-escape-sandbox allow-top-navigation-by-user-activation" width="100%" height="400"></iframe>
<div style="width:100%!;margin-top:4px!important;text-align:right!important;"><a class="flourish-credit" href="https://public.flourish.studio/visualisation/8481472/?utm_source=embed&utm_campaign=visualisation/8481472" target="_top"><img alt="Made with Flourish" src="https://public.flourish.studio/resources/made_with_flourish.svg"> </a></div>
<hr>
<h2>Real wages shrinking</h2>
<p>But inflation is expected to be high enough to send real wages backwards, perhaps for two consecutive years – a first in the 25-year history of the wage price index.</p>
<p>In 2022 the panel’s average forecast is for wages growth of just 2.7% in the face of underlying inflation of 2.9%, pushing down real wages (buying power) 0.2%.</p>
<hr>
<p><iframe id="Mzdz7" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Mzdz7/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel expects wages growth to remain no higher than prices growth in the year that follows, despite historically low unemployment and labour shortages.</p>
<p>In 2023 it expects wages growth to do no better than underlying inflation at 2.8%.</p>
<hr>
<p><iframe id="A85mM" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/A85mM/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>GDP growth sinking</h2>
<p>Economic growth is expected to sink. The panel expects the December 2021 bounce out of state lockdowns to be reported on March 2 to be followed by a March quarter impacted by something akin to “voluntary lockdowns”, as Australians restrict movements in response to Omicron.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-you-might-feel-anxious-after-lockdown-and-how-to-cope-169089">Why you might feel anxious after lockdown -- and how to cope</a>
</strong>
</em>
</p>
<hr>
<p>Even as immigration and freedom of movement return, the panel expects economic growth to sink back towards 2.5%, which is roughly where it was before COVID and well below the 3-4% common in the 1990s and early 2000s.</p>
<p>Panellists pointed to “increasing social and political discord” and weaker demand from China, along with the “absence of any policies designed to lift productivity growth above dismal pre-COVID rates” as drags on growth, and identified government spending as one of the few supports.</p>
<hr>
<p><iframe id="7r7vI" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/7r7vI/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel expects China’s economic growth to sink below US economic growth for the first time since the 1970s.</p>
<p>Mei Dong of the University of Melbourne said Chinese growth would suffer from a shrinking working-age population growth, declining employment participation, markedly slower productivity growth and a decision by Chinese authorities to de-emphasise GDP growth as an objective. </p>
<hr>
<p><iframe id="O5Psd" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/O5Psd/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Spending held back</h2>
<p>The broadest measure of overall living standards, real net national disposable income per capita, is expected to climb more strongly than real wages in 2022, reflecting growth in other sources of income including company profits.</p>
<p>Consumer spending is expected to grow by a healthy 3.7% in real terms, although by nowhere near as much as it would if the boost in saving during the COVID pandemic was fully unwound.</p>
<hr>
<p><iframe id="RpDqC" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/RpDqC/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Household saving soared to an unprecedented 23.6% of income in mid-2020 amid concern about COVID, plunged down to a still-elevated 11.8% in mid 2021 after restrictions eased, and then soared again to 19.8% as Delta took hold. </p>
<p>The ratio is expected to remain at an elevated 12% throughout 2022, well above the few per cent common in the decades leading up to COVID, as households hang onto rather than spend income, uncertain about the future.</p>
<p>In December, Treasurer Josh Frydenberg spoke about the unusually high saving rate as a source of future spending, saying it was “a lot of damn money that’s been accumulated”. The panel’s forecasts suggest that accumulation will continue.</p>
<hr>
<p><iframe id="1uEUN" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/1uEUN/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel expects non-mining business investment to grow strongly throughout 2022, although in response to budget measures rather than what economist Stephen Anthony describes as structural drivers moving in the other direction.</p>
<p>Panellist Mark Crosby says investment should slow towards the end of 2022 as the prospect of higher interest rates dents the construction industry.</p>
<hr>
<p><iframe id="ALmaR" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ALmaR/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Unemployment with a ‘4’, but not a ‘3’</h2>
<p>Few of the panellists expect Australia’s unemployment rate to fall much below its present <a href="https://www.abs.gov.au/media-centre/media-releases/employment-65000-unemployment-rate-falls-42">4.2%</a> in the two years ahead, despite what former ANZ economist Warren Hogan describes as the strongest labour demand Australia has ever seen.</p>
<p>He says the problem is the skills employers are looking for don’t match those of job-seekers and the workers likely to become available in the years ahead. </p>
<p>Janine Dixon says businesses are putting more people on their payrolls to cover sick leave and isolation leave, making it likely there has been an increase in underemployment.</p>
<hr>
<p><iframe id="rEZDd" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/rEZDd/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>In releasing the December budget update, Treasurer Frydenberg forecast “the addition of around one million jobs” between October 2021 and mid-2025.</p>
<p>It’s a projection broadly endorsed by the panel, although mainly because they believe that’s what population growth is likely to deliver.</p>
<p>Mark Crosby described it as a “pretty ordinary outcome given the rate of jobs growth seen prior to the pandemic”. Much would depend on migration. The more migrants, the more extra jobs. </p>
<hr>
<p><iframe id="JIVsv" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/JIVsv/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Weaker home price growth</h2>
<p>After a year in which national housing prices soared <a href="https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge">22%</a>, the panel is expecting more sedate growth of 6.5% in Sydney and 6.1% in Melbourne.</p>
<p>Katrina Ell of Moody’s Analytics believes the market has already peaked. She says mortgage rates will creep higher this year regardless of whether the Reserve Bank lifts official rates, and measures put in place by the Prudential Regulation Authority are starting to cramp investor interest.</p>
<p>Warren Hogan disagrees, seeing investors driving the next phase of the housing market. He says cashed-up upper middle to high income households will try to protect their wealth against rising inflation by buying real estate.</p>
<hr>
<p><iframe id="2kBUv" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/2kBUv/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Subdued markets</h2>
<p>In aggregate, the panel expects the exchange rate to stay broadly where it is at 71 to 72 US cents in 2022, and expects the ASX200 share price index to end the year about where it began, after climbing 13% in 2021 and sinking 6% in January. </p>
<p>They expect the iron ore price to fall from US$137 per tonne to US$98.</p>
<p><iframe id="B6DUS" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/B6DUS/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p><em>The panel:</em></p>
<p><iframe id="tc-infographic-628" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/628/9a20218fd520d7328a3b922b9b1c497e61f6e947/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p><a href="https://docs.google.com/spreadsheets/d/1Lv3SpLMZ0BwvOMPoI-CcYurMqXsx1bsgiYW4IuJuWHA/edit#gid=0">Results spreadsheet</a>, <a href="https://cdn.theconversation.com/static_files/files/1952/2022_Forecasting_Survey_-_Raw_Data.pdf">pdf</a></p>
<p><em>This Conversation survey is the first not to include the views of Griffith University professor and former IMF and Treasury official Tony Makin who passed away suddenly in November, aged 66. His contributions were greatly valued.</em></p><img src="https://counter.theconversation.com/content/175054/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s expert panel predicts prices will rise faster than Australians’ pay can keep up in 2022 – and that’s not their only concern about the local economy.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1723762021-11-23T03:38:27Z2021-11-23T03:38:27Z‘Can-do capitalism’ is delivering less than it did. Here are 3 reasons why<p>The good news is supposed to be that when the government gets out of the way “can-do capitalism” will have us roaring back to where we were before.</p>
<p>That’s the prime minister’s <a href="https://www.pm.gov.au/media/address-victorian-chamber-commerce-and-industry">newest slogan</a>, and we had better hope for more.</p>
<p>The unpleasant truth is that before the pandemic Australia’s economy was disturbingly and unusually weak. Can-do capitalism wasn’t doing what it should.</p>
<p>Reserve Bank chief economist <a href="https://www.rba.gov.au/speeches/2021/sp-ag-2021-11-18.html">Luci Ellis</a> put it this way a few days after Morrison talked about freeing the engines of the economy to do their work. </p>
<blockquote>
<p>In the decade or so leading up to the pandemic, there was a nagging sense that these engines of prosperity were running out of steam – investment was low, productivity growth was lagging, and many of the behaviours we associate with business dynamism were on the decline. </p>
</blockquote>
<p>Outside of mining, business investment had been shrinking as a share of the economy for more than a decade.</p>
<hr>
<p><strong>Private non-mining business investment, share of nominal GDP</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433269/original/file-20211122-13-17tug6e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Net of second-hand asset transfers.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/speeches/2021/sp-ag-2021-11-18.html">ABS, RBA</a></span>
</figcaption>
</figure>
<hr>
<p>Outside of the ride-share industry, fewer businesses were being created and fewer businesses destroyed.</p>
<p>“For all the talk of disruption, the overall sense one gets from the data is of a bit less dynamism or inclination to shake things up,” Ellis said.</p>
<p>And we were in the middle of a “<a href="https://theconversation.com/australias-great-resignation-is-a-myth-we-are-changing-jobs-less-than-ever-before-170784">great resignation</a>” of a different kind to the departures from jobs being seen in the United States. </p>
<p>Australians were increasingly resigned to staying in the jobs they had. Job switching had sunk to all-time lows.</p>
<hr>
<p><strong>Proportion of employed Australians who switched jobs during the year</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433275/original/file-20211122-27-8aoims.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/job-mobility/feb-2021">Australian Bureau of Statistics</a></span>
</figcaption>
</figure>
<hr>
<p>In short, despite technological revolutions, despite a government saying it was getting out of the way, and despite record low interest rates that made it cheap to invest and expand, in the lead-up to COVID-19 businesses weren’t doing that. By the time the pandemic arrived, annual economic growth had slid to 2.1%.</p>
<h2>Government hasn’t been holding business back</h2>
<p>One thing Ellis says can’t explain the pre-pandemic reluctance of businesses to invest is government regulation pushing up costs. She says if costs had been rising, inflation wouldn’t have fallen to near record lows. </p>
<p>And if labour costs had been rising, wage growth wouldn’t have fallen to unprecedented lows, and firms would have been investing more in machines to replace workers.</p>
<h2>Businesses themselves have been unusually cautious</h2>
<p>There’s evidence to suggest that in the decade since the global financial crisis Australian (and other) firms have become more risk-averse.</p>
<p>Instead of falling with the falling cost of borrowing, the “<a href="https://www.rba.gov.au/speeches/2015/sp-so-2015-09-24.html">hurdle</a>” rates of return that businesses tell the Reserve Bank they require in order to justify investments have remained stubbornly high.</p>
<p>It’s a “won’t do” rather than a “can do” mindset, and Ellis says it might be because Australian managers don’t want to be associated with projects that fail, or because their firms have only limited management capacities and don’t want to commit to projects in case better ones come along.</p>
<h2>Except for some firms</h2>
<p>Her most intriguing suggestion is that some firms are market leaders at installing new technologies (especially those driven by artificial intelligence) – so much so that their competitors can’t catch up.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433333/original/file-20211123-19-1lan6yr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Tip Top cut distribution costs 14%.</span>
<span class="attribution"><a class="source" href="https://research.csiro.au/data61/wp-content/uploads/sites/85/2015/02/ITL_Improving-Profitability_Brochure.pdf">CSIRO</a></span>
</figcaption>
</figure>
<p>Tip Top Bakeries produces more than one million loaves of bread a day and delivers to more than 18,000 locations Australia-wide. </p>
<p>It used to send out its trucks in hub-and-spoke patterns using schedules drawn up by humans. </p>
<p>Since it began using <a href="https://research.csiro.au/data61/wp-content/uploads/sites/85/2015/02/ITL_Improving-Profitability_Brochure.pdf">artificial intelligence</a> and machine learning to route trucks in configurations no human would have thought of, it has cut its distribution costs <a href="https://research.csiro.au/data61/wp-content/uploads/sites/85/2015/02/ITL_Improving-Profitability_Brochure.pdf">14%</a> and lifted its gross profit after distribution 7%.</p>
<p>Ellis makes the point that earlier technological innovations such as laptops and spreadsheets were easy to use.</p>
<p>Artificial intelligence and machine learning might be the first new technologies to be actually harder to use and require a rarer set of skills than those they replace. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/if-youre-preparing-students-for-21st-century-jobs-youre-behind-the-times-131567">If you're preparing students for 21st century jobs, you're behind the times</a>
</strong>
</em>
</p>
<hr>
<p>The few “superstar” firms that adopt these new technologies (such as <a href="https://www.woolworthsgroup.com.au/page/media/Latest_News/woolworths-to-partner-with-knapp-on-first-automated-online-fulfilment-centre-in-western-sydney">Woolworths</a> with its fully automated distribution centre) are becoming able to do things their smaller competitors cannot, locking those lesser firms into a “low-wage, low-investment groove”.</p>
<p>Ellis cites evidence that the spread of technological knowledge has slowed, leading to a “winner-takes-all world” of increasing industry concentration.</p>
<p>It might still be possible to convince a lender you’ll be Australia’s next big thing in an industry with a market leader, but it’s getting harder.</p>
<h2>‘Can-do capitalism’ needs help</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433354/original/file-20211123-15-12h0wja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/speeches/2021/sp-ag-2021-11-18.html">Reserve Bank Assistant Governor Luci Ellis</a></span>
</figcaption>
</figure>
<p>The third possible explanation advanced by Ellis for the growth of the “think carefully before attempting” mindset over the past decade is in sharp contrast to Morrison’s distinction between “can-do capitalism” and “don’t-do governments”.</p>
<p>It’s to do with long-term cycles.</p>
<p>When conditions are weak, Ellis says, firms focus on defending what they’ve got instead of pursuing new opportunities. </p>
<p>We’ve been in that cycle for a decade, possibly made worse by governments withdrawing support in order to get nearer to balancing their budgets. </p>
<p>Now that governments are spending big and abandoning caution to fight the pandemic there’s a chance the cycle will turn.</p>
<p>It would be great if she turns out to be right. </p>
<p>If she is, it won’t be because the prime minister was right. It’ll be because business needed a leg-up.</p><img src="https://counter.theconversation.com/content/172376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Outside of a few superstar firms investing heavily in artificial intelligence, investment by Australian businesses has been shrinking for a decade and isn’t set to bounce back.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1653942021-08-01T07:57:14Z2021-08-01T07:57:14ZTop economists say cutting immigration is no way to boost wages<figure><img src="https://images.theconversation.com/files/413917/original/file-20210730-13-qiyzoi.png?ixlib=rb-1.1.0&rect=65%2C0%2C3850%2C1994&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s top economists have overwhelmingly rejected cuts to either permanent or temporary migration as a means of restoring lost wage growth.</p>
<p>The 56 leading economists polled by the Economic Society and The Conversation include a former head of the Fair Pay Commission and a former expert member of the Fair Work Commission’s minimum wage panel.</p>
<p>Among the experts, selected by their peers, are specialists in economic modelling and the economics of labour markets from both the private and public sectors.</p>
<p>All but five rejected cuts in temporary migration as a means of boosting wage growth. All but three rejected cuts in permanent migration.</p>
<p>The results put the economists at odds with Reserve Bank Governor Philip Lowe, who last month drew a link between temporary migration and weak wage growth saying employers had been using overseas hires to fill gaps that would have been filled by locals, diluting “upward pressure on wages in these hotspots”. He said this might have <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">spilled over</a> to rest of the labour market. </p>
<p>Cutting temporary and cutting permanent migration were the first two of ten options for boosting wage growth presented to the panel of economists. The panel rated them third last and second last. Only “holding back growth in female and older worker participation” was marked down more.</p>
<p>Each economist was asked to pick three of the ten options. The most popular, picked by 78.2%, was measures to boost productivity growth. The next most popular, picked by 50.9%, was measures to boost business investment.</p>
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<p>Michael Keane of The University of NSW said the idea that population growth and increased labour supply were constraining wage growth was “so naive as to not really be worthy of comment”.</p>
<p>Consultant Rana Roy said only a “cultivated amnesia” could ignore the near-uninterrupted growth in real wages in US, industrialised Europe and Australia amid record inbound immigration in the decades after the second world war.</p>
<p>Gabriela D'Souza of the Committee for Economic Development of Australia said the idea owed much to a “one dimensional view of the world” that took account of only the direct impact of immigrants on particular wages and not the impact of their demand for goods and services on a broader range of wages. </p>
<p>Dozens of studies had identified the overall impact as “near zero”.</p>
<h2>Productivity ‘almost everything’</h2>
<p>Robert Breunig of the Australian National University said immigrants appeared to add to productivity rather than detract from it, meaning slowing down immigration could slow down rather than add to productivity and growth.</p>
<p>Three quarters of the panel nominated productivity growth as the most important precondition for higher wages growth, endorsing the conclusion of Nobel Prize winning economist <a href="https://www.google.com.au/books/edition/_/awA0yp1V8c8C?hl=en&gbpv=1&pg=PA11&bsq=%22Productivity+isn%27t+everything%22">Paul Krugman</a> that “productivity isn’t everything, but in the long run it is almost everything.”</p>
<p>Krugman famously added that a country’s ability to improve its standard of living
over time depended “almost entirely on its ability to raise its output
per worker”.</p>
<hr>
<p><strong>Wages growth is way below the Reserve Bank’s +3% target</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/413909/original/file-20210730-15-1o6fk2j.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Total hourly rates of pay excluding bonuses, seasonally adjusted. Change from corresponding quarter of previous year.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2021">ABS Wage Price Index</a></span>
</figcaption>
</figure>
<hr>
<p>Ian Harper, a former head of the Howard government’s Fair Pay Commission and a current member of the Reserve Bank board, said that without productivity growth, any boost in wages growth that was delivered was likely to be nominal — matched by inflation — rather than real, delivering higher living standards. </p>
<p>One of the best tools for lifting production per worker was business investment.</p>
<p>One of the five economists who thought immigration hurt wages growth, Macquarie University’s Geoffrey Kingston, said it seemed to do it by thinning investment per worker. In the 1980s, under Prime Minister Bob Hawke, increased immigration helped push down real wages for five years in a row.</p>
<p>Several of those surveyed said wage growth needed investment in more than machines. Griffith University’s Fabrizio Carmignani said what also mattered was investment in “human capital” via education and research and development.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/exclusive-top-economists-back-unemployment-rate-beginning-with-4-159989">Exclusive. Top economists back unemployment rate beginning with '4'</a>
</strong>
</em>
</p>
<hr>
<p>Adrian Blundell-Wignall, a former division chief at the Organisation for Economic Co-operation and Development, said reforming the education system and getting rid of elitism had to be part of the plan. </p>
<p>“That the best predictor of how well you do at school is how rich your parents are and where they went to school is a national tragedy,” he said. “The entitlement and club economy that comes with this permeates politics, business, and who gets the best jobs after completing school.”</p>
<p>Former Rudd and Gillard government minister Craig Emerson said while measures to boost productivity growth were essential, even if implemented soon, they would take years to flow through into higher wages.</p>
<h2>It’s how you divide the pie</h2>
<p>Saul Eslake said whether or not higher productivity growth actually delivered higher real wages would depend on the division of the fruits of that growth between wages and profits. </p>
<p>John Quiggin said nearly every reform of Australia’s industrial relations system since 1975 had acted to reduce the bargaining power of unions. All ought to be reviewed with a “presumption in favour of repeal”.</p>
<p>Mala Raghavan of the University of Tasmania said wage growth had become uneven. Wages for a small number of managers had soared while wages for others — especially casual workers — had barely moved.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-want-jobseeker-boosted-100-per-week-tied-to-wages-150364">Top economists want JobSeeker boosted $100+ per week, tied to wages</a>
</strong>
</em>
</p>
<hr>
<p>The Australian National University’s Emily Lancsar saw a triple benefit from reforming the industrial relations system to support higher wage decisions: it would increase wages directly, it would put money that would have been paid out as profits in the hands of people likely to spend it, and the increases would flow through to workers not directly affected by the decisions.</p>
<p>Labour market specialist Jeff Borland added that there was a case for strengthening the ability of unions to obtain gender pay equity in female-dominated occupations.</p>
<p>None of those surveyed were optimistic about the prospect of quickly lifting wages growth. The Reserve Bank said in July it wasn’t planning to lift interest rates until aggregate growth exceeded <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">3%</a>.</p>
<hr>
<p><em>Detailed responses:</em></p>
<p><iframe id="tc-infographic-600" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/600/ca64844362ba8fd936ad5de919fadcc88cd66b20/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/165394/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Only five of the 56 economists surveyed believed lower immigration would boost wage growth. The rest backed measures to lift productivity and investment and changes that boosted the power of unions.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1616552021-05-27T06:30:34Z2021-05-27T06:30:34ZBounce-back in investment holds open possibility of good news<figure><img src="https://images.theconversation.com/files/403081/original/file-20210527-20-n10uxq.jpg?ixlib=rb-1.1.0&rect=193%2C203%2C3082%2C1377&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Blue Planet Studio/Shutterstock</span></span></figcaption></figure><p>Private business investment is one of the key drivers of economic growth.</p>
<p>Business investment in equipment (and even in buildings) drives productivity, which the Nobel Prize winning economist Paul Krugman famously observed </p>
<blockquote>
<p>isn’t everything, but in the long run it is almost everything</p>
</blockquote>
<p>As he put it, a country’s ability to improve its standard of living over time “depends almost entirely on its ability to raise its output per worker”.</p>
<p>Which is why one of the forecasts in this month’s budget stood out.</p>
<p>The budget forecast non-mining business investment to grow 1.5% in the coming 2021-22 financial year, after falling last year and then to jump a huge <a href="https://theconversation.com/budget-2021-the-floppy-v-shaped-recovery-159230">12.5%</a> during 2022-23.</p>
<p>Thursday’s <a href="https://www.abs.gov.au/statistics/economy/business-indicators/private-new-capital-expenditure-and-expected-expenditure-australia/mar-2021">capital expenditure figures</a> released by the Bureau of Statistics are important not only because they tell us what private firms <em>have</em> been spending on plant and equipment and buildings and structures, but also what they are <em>planning</em> to spend in the months and years ahead.</p>
<h2>The survey that points to the future</h2>
<p>Economists like me are pretty sceptical of surveys. </p>
<p>We like to see what people actually do (so-called “revealed preference”), rather than what they say they intend to do (“stated preference”).</p>
<p>But the bureau has a decent track record with this survey. In part that’s because the people surveyed are the chief financial officers of the major firms. They tend to report what they know is in train rather than “spin” grander visions.</p>
<p>And they usually understate what eventually happens.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/budget-2021-the-floppy-v-shaped-recovery-159230">Budget 2021: the floppy-V-shaped recovery</a>
</strong>
</em>
</p>
<hr>
<p>On what has actually happened, their reports suggest that private non-mining business investment bounced back 7.1% in the first three months of this year.</p>
<p>In the six months to March (since September) it jumped 13.8%, after falling 11.4% in the previous six months of COVID restrictions leading up to September.</p>
<hr>
<p><strong>Quarterly non-mining private capital expenditure</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=233&fit=crop&dpr=1 600w, https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=233&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=233&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=293&fit=crop&dpr=1 754w, https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=293&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/403071/original/file-20210527-13-wge3s0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=293&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/business-indicators/private-new-capital-expenditure-and-expected-expenditure-australia/mar-2021">ABS Private New Capital Expenditure and Expected Expenditure, Australia</a></span>
</figcaption>
</figure>
<hr>
<p>When it comes to what lies ahead, the estimates for 2021-22 are picking up.</p>
<p>The March estimate is up 11.3% from the estimate made in December.</p>
<p>It is still well down on the latest estimate for 2020-21, about 13% down. But actual non-mining investment is usually somewhere between 30% and 50% higher than what’s expected (the bureau calculates “realisation ratios”) meaning there’s a good chance it will meet the budget forecast for 2021-22.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-wages-growth-desultory-unemployment-stunning-161099">Vital Signs: wages growth desultory, unemployment stunning</a>
</strong>
</em>
</p>
<hr>
<p>Whether it will make it over the much larger bar of the 12.5% increase forecast for 2022-23 is an open question.</p>
<p>The point is, the figures published on Thursday give us no reason for thinking it couldn’t. The Bureau of Statistics has left open the possibility of very good news.</p>
<p>The bounce-back in investment exceeds market expectations. </p>
<h2>Better, and better than expected</h2>
<p><a href="https://markets.jpmorgan.com/research/email/-v2hkjsh/zP-HG_wjZRrHWfEpMAaEGA/GPS-3758131-0">JP Morgan</a> reports that the consensus of forecasts was for an overall increase in investment (mining and non-mining) of 2% in the March quarter. We got 6.3%.</p>
<p>It matters because it tells us businesses are feeling optimistic about the future — optimistic enough to expand, notwithstanding everpresent uncertainties.</p>
<p>We don’t know when our international borders will reopen. We don’t know how long Melbourne’s newest lockdown will last. We don’t know whether enough Australians will be vaccinated to reach herd immunity.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/exclusive-top-economists-back-unemployment-rate-beginning-with-4-159989">Exclusive. Top economists back unemployment rate beginning with '4'</a>
</strong>
</em>
</p>
<hr>
<p>And the results also matter because more business investment will be needed if we are to drive unemployment down to the government’s new (<a href="https://theconversation.com/exclusive-top-economists-back-budget-push-for-an-unemployment-rate-beginning-with-4-159989">and welcome</a>) target of somewhere below 5%.</p>
<p>The extra jobs will have to come from enterprises employing more people. They won’t do it unless they think it is worthwhile to invest.</p><img src="https://counter.theconversation.com/content/161655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>Businesses won’t employ more people unless they are prepared to invest. Figures out on Thursday suggest they are.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1487972020-12-02T00:41:13Z2020-12-02T00:41:13Z6 things to watch for as Australia crawls out of recession<figure><img src="https://images.theconversation.com/files/372129/original/file-20201201-21-4qu1ml.jpg?ixlib=rb-1.1.0&rect=54%2C387%2C2881%2C1287&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Sergey Tinyakov/Shutterstock</span></span></figcaption></figure><p>Our economy has <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">grown</a> in the September quarter (the three months to September) after two quarters of going backwards.</p>
<p>Using the literal meaning of <a href="https://www.dictionary.com/browse/recession">recession</a>, we are no longer in one – economic output (the things we produce and consume) is no longer be going backwards.</p>
<p>But things won’t be like they were. Even a rebound in gross domestic product of <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/sep-2020">3.3%</a> (the biggest in 40 years) doesn’t make up for the 7% we lost in the previous quarter, meaning we’ll remain worse off than we were at the start of the year and much worse off than we would have been had the pandemic not happened.</p>
<p>Here are six things to expect as the economy recovers:</p>
<h2>1. Consumer spending will recover first, but might need help</h2>
<p>Consumer spending will to return to normal first, as <a href="https://budget.gov.au/2020-21/content/bp1/download/bp1_bs2.pdf">forecast in the budget</a>. </p>
<p>(Don’t be fooled by the forecast decline of 1.5% for 2020-21 compared to 2019-20. From where we stood in the June quarter 2020 – an enormous decline of 12% on the March quarter – this is a massive recovery.)</p>
<p>So far the signs are promising, but in part this might be because the stimulus payments are still flowing, keeping household disposable income above pre-COVID levels. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/it-isnt-right-to-say-we-are-out-of-recession-as-these-six-graphs-demonstrate-151210">It isn't right to say we are out of recession, as these six graphs demonstrate</a>
</strong>
</em>
</p>
<hr>
<p>The coronavirus supplement that tops up JobKeeper and other benefits (originally A$225 per week) winds down to $75 per week after Christmas and <a href="https://theconversation.com/top-economists-want-jobseeker-boosted-by-100-per-week-and-tied-to-wages-150364">expires on March 31</a>.</p>
<p><a href="https://treasury.gov.au/coronavirus/jobkeeper/extension">JobKeeper</a>, originally $1,500 per fortnight, became harder to get in October and will wind down to $1,000 per fortnight in January and $650 for part-time workers, before expiring on March 31.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372146/original/file-20201201-15-1uqejhr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Victoria has funded tutors to assist students left behind.</span>
<span class="attribution"><span class="source">fizkes/Shutterstock</span></span>
</figcaption>
</figure>
<p>Treasury expects wage growth to be slower than price growth for the next two years, so a household-led recovery is by no means guaranteed.</p>
<p>If the recovery stalls in the household sector, activities such as hospitality, retail and arts and entertainment will suffer a second blow and unemployment will remain high. </p>
<p>After the year we’ve had, the household sector could be forgiven for losing confidence. </p>
<p>The government should consider extending the coronavirus supplement payments, and be ready for further one-off stimulus payments if required. </p>
<p>Unlike the imminent income tax cuts, these measures are temporary and can be discontinued as soon as they are no longer required.</p>
<p>Governments can also stimulate demand directly. Victoria has announced an additional <a href="https://education.vic.gov.au/about/careers/teacher/Pages/tutors.aspx">4000 tutors</a> to assist school students left behind after an interrupted year. Other areas in which governments could usefully create meaningful jobs include the care sector and the arts.</p>
<h2>2. Overseas demand won’t assist in the recovery</h2>
<p>Exports face headwinds and are unlikely to recover over the next 18 months.</p>
<p>The International Monetary Fund expects the global economy to shrink by <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020">4.4%</a> in 2020 after growing 2.8% in 2019, a turnaround of more than 7%.</p>
<p>This will be apparent in all of Australia’s major customers including China and will depress demand for exports.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/budget-2020-promising-tax-breaks-but-relying-on-hope-147012">Budget 2020: promising tax breaks, but relying on hope</a>
</strong>
</em>
</p>
<hr>
<p>More importantly, travel bans have come close to eliminating “exports” of tourism and education, which together account for almost one fifth of Australian export income.</p>
<p>This income will remain weak until international travel properly restarts. </p>
<h2>3. We will lose four years population growth</h2>
<p>Before the crisis, the 2019 mid-year budget update predicted Australia’s population would grow from 25.6 million to <a href="https://budget.gov.au/2019-20/content/myefo/download/02_Part_2.pdf">28.4 million</a> by June 2026. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372156/original/file-20201201-15-uad5u0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Births and immigration will remain low for years.</span>
<span class="attribution"><span class="source">KieferPix/Shutterstock</span></span>
</figcaption>
</figure>
<p>This year’s budget says we won’t get there until June 2030, a full four years later. </p>
<p>Even after travel resumes, net overseas migration is expected to remain lower than before due to economic uncertainty and weak labour market conditions. </p>
<p>Businesses will find it more difficult to get the staff they need through skilled migration, crating a greater role for higher education and vocational education. </p>
<p>By 2024 migration is assumed to return to normal, yet population growth will continue to be slow. This is because the birth rate is <a href="https://population.gov.au/docs/recent_impacts_on_australias_population_quick%20guide.pdf">projected</a> to be lower than usual for the remainder of the decade. </p>
<h2>4. Business investment will be weaker, and different</h2>
<p>2020 has been a difficult year, but it’s also been the year we’ve learnt to do things differently. </p>
<p>We have learnt about on-line shopping, working from home, telehealth and on-line entertainment, and we will continue to make use of what we have learnt after the pandemic is over. </p>
<p>These changes could drive the next genuine wave of productivity growth. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/covid-19-has-changed-the-future-of-retail-theres-plenty-more-automation-in-store-139025">COVID-19 has changed the future of retail: there's plenty more automation in store</a>
</strong>
</em>
</p>
<hr>
<p>Bricks-and-mortar retail, commercial office space, roads, bridges and railways are all investments that facilitate the meeting and movement of people.</p>
<p>With new technologies and a smaller population that is learning to keep things local, these old-world investments won’t be as generate the same returns as they once might have. </p>
<p>Where we might see the investment dollars being spent is on home improvements, while government investment dollars could be spent on improving local amenities such as parks and community centres.</p>
<h2>5. We’ll need to get more people into paid work</h2>
<p>A year ago, 66% of Australia’s adult population was participating in the labour market, either by being employed or looking for work.</p>
<p>During the crisis the participation rate dipped below 63%. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372169/original/file-20201201-15-1yd5aam.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Australia’s economy could place more emphasis on caring.</span>
<span class="attribution"><span class="source">Toa55/Shutterstock</span></span>
</figcaption>
</figure>
<p>It has since returned to 65.8%, a touch above where the budget expects it will stay.
Other countries including <a href="https://data.oecd.org/emp/labour-force-participation-rate.htm">Canada, Britain, New Zealand and Germany</a> do better than us.</p>
<p>There’s room to get more unpaid carers (many of them women) into the paid workforce.</p>
<p>More than <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/barriers-and-incentives-labour-force-participation-australia/latest-release">900,000</a> people who perform significant unpaid caring work say they would like more paid employment.</p>
<p>In my work for the National Foundation for Australian Women, I found the net budgetary cost of increasing caring services was <a href="https://nfaw.org/wp-content/uploads/2020/10/Appendix-A.pdf">modest</a>, mainly because it brought about a strong increase in the tax-paying workforce.</p>
<h2>6. One last dark cloud: the terms of trade</h2>
<p>The terms of trade measure what we can buy for each unit of what we sell; how many imports we can buy for each unit we export.</p>
<p>The budget forecasts a fall of almost 11% in 2021-22 as a result of lower prices for iron ore. </p>
<p>Taking a long view, this may be nothing more than a correction, but it is as big a fall in a single year as we experienced in the <a href="https://www.blackincbooks.com.au/books/dog-days">dog days</a> after the end of mining boom when the terms of trade declined for four consecutive years, and we experienced four years without real growth in income growth per capita. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/an-all-out-trade-war-with-china-would-cost-australia-6-of-gdp-151070">An all-out trade war with China would cost Australia 6% of GDP</a>
</strong>
</em>
</p>
<hr>
<p>Population, participation and productivity are the “three P’s” that drive economic growth in the long run, but in the short run a big decline in the terms of trade poses a <a href="https://theconversation.com/myefo-projections-signal-a-deepening-income-recession-35539">real risk</a> to a household-led economic recovery. </p>
<h2>Where to from here</h2>
<p>In an effort to avoid more economic pain, the government has rightly abandoned fiscal restraint in the most recent budget. </p>
<p>Much of its recovery strategy (perhaps too much) is built around income tax cuts and investment incentives.</p>
<p>I see a need for a greater emphasis on temporary measures aimed at supporting household spending, given the role it will have to play in unwinding the recession.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/modelling-finds-investing-in-childcare-and-aged-care-almost-pays-for-itself-148097">Modelling finds investing in childcare and aged care almost pays for itself</a>
</strong>
</em>
</p>
<hr>
<p>In the longer term, there is a case for paring back some of the larger income tax cuts to expand child care, aged care and disability care; measures that would support low-paid workers, boost labour force participation, and improve the standard of living for many Australians.</p><img src="https://counter.theconversation.com/content/148797/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janine Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Without a jump in consumer spending the recovery will be slow, and that’s in doubt.Janine Dixon, Economist at Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1495232020-11-11T19:19:49Z2020-11-11T19:19:49ZWhy zero interest rates are here to stay<figure><img src="https://images.theconversation.com/files/368819/original/file-20201111-13-1olrvsy.jpg?ixlib=rb-1.1.0&rect=703%2C269%2C2747%2C1728&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">ksb/Shutterstock</span></span></figcaption></figure><p>It’d be wrong to interpret last week’s Reserve Bank decision to cut its cash rate to <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">0.10%</a> as an emergency response to the COVID crisis. </p>
<p>The implication would be that once the pandemic is controlled the economy will return to something like the pre-crisis “normal” and the ultra-low interest rates will end.</p>
<p>In reality, in this as in many other things, the pandemic has merely accelerated developments that have been underway for a long time. </p>
<p>One is the long-term decline in the “neutral” rate of interest. </p>
<p>The <a href="https://www.brookings.edu/blog/up-front/2018/10/22/the-hutchins-center-explains-the-neutral-rate-of-interest/">neutral rate</a> is normally defined as the real (inflation-adjusted) rate of interest which is neither expansionary, pushing up inflation, nor contractionary, pushing up unemployment.</p>
<p>More importantly the neutral rate should be one that over time matches the total supply of savings with the total demand for those savings by businesses and households wanting to put them to work making buildings and equipment (capital investment). </p>
<h2>‘Neutral’ is less than it was</h2>
<p>As Treasury Secretary Stephen Kennedy observed in this year’s post-budget address, the neutral rate of interest has been <a href="https://treasury.gov.au/speech/policy-and-evolution-uncertainty">falling for 40 years</a>. </p>
<p>Reserve Bank estimates suggest it fell from around 3% in the 1980s and 1990s to around <a href="https://www.rba.gov.au/publications/bulletin/2017/sep/2.html">less than 1%</a> in 2016.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Model -based estimates of real neutral rate.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/bulletin/2017/sep/2.html">Rachael McCririck and Daniel Rees, Reserve Bank Bulletin September 2017</a></span>
</figcaption>
</figure>
<p>It will have fallen further since, and fallen more sharply since the pandemic began, turning negative.</p>
<p>One way to work that out what the Reserve Bank thinks the real neutral rate is now is to look at where the nominal cash rate is now (near zero) and what the bank says inflation will have to climb to before it will allow the cash rate to climb (<a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">2%</a>).</p>
<p>This suggests the bank believes the real (inflation adjusted) neutral cash rate is minus 2%.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/weve-just-sold-15-billion-31-year-bonds-whats-a-bond-143598">We've just sold $15 billion 31-year bonds. What's a bond?</a>
</strong>
</em>
</p>
<hr>
<p>Another way to get a handle on it is to look at long-term real rates, one of the longest being the return on a 30-year US Treasury inflation-indexed bond.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=236&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=236&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=236&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=296&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=296&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=296&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Constant maturity, orange = recession.</span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/series/DFII30">Federal Reserve Board of St. Louis</a></span>
</figcaption>
</figure>
<p>Like the Reserve Bank estimate of the neutral rate for Australia, this estimate for the US fell to around 1% by 2016. </p>
<p>Then it fell further, dropping to close to zero by the start of this year, before turning negative with the onset of the pandemic.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Even Alphabet, the parent of Google, is borrowing at less than the inflation target.</span>
<span class="attribution"><span class="source">Uladzik Kryhin/Shutterstock</span></span>
</figcaption>
</figure>
<p>Most other countries don’t sell inflation-indexed bonds with such long maturities. But the 50-year and 100-year non-indexed bonds issued by a number of OECD countries are yielding interest rates below 2%, the target rate of inflation for most central banks. </p>
<p>Even highly-rated private corporations like Alphabet (the parent of Google) are refinancing their debt with long-term bonds paying <a href="https://www.afr.com/markets/debt-markets/alphabet-locks-in-record-low-funding-costs-20200804-p55iho">less than 2%</a>.</p>
<h2>Too much saving?</h2>
<p>Much of the discussion of declining interest rates has focused on the idea of a “savings glut”, with a particular focus on China, which had very high savings rates early this century. </p>
<p>But China’s savings rate peaked some years ago and is headed down. Savings rates in other countries have been falling as well. </p>
<h2>Too little investment</h2>
<p>The real problem is a lack of demand for those saved funds. </p>
<p>Corporate profits have grown strongly, but instead of being reinvested they have often been <a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">returned to shareholders</a>, through either dividends or share buybacks.</p>
<p>Companies seem to believe they don’t need that many funds.</p>
<p>The simplest explanation is that the dominant firms in an information economy don’t need much capital in the form of buildings and equipment to maintain their position. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-business-investment-is-flatlining-and-it-isnt-clear-that-suasion-or-a-special-allowance-will-help-122614">Vital Signs. Business investment is flatlining, and it isn't clear that suasion or a special allowance will help</a>
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<p>The market value of a typical manufacturing or resource-based firm is usually about the same as the book value of the capital invested in the firm. In the jargon of financial markets, the <a href="https://www.investopedia.com/terms/p/price-to-bookratio.asp">price-book ratio</a> is close to 1.</p>
<p>By contrast, leading firms in the information economy, such as Alphabet and Facebook, have price-book ratios of five or six. Microsoft and Apple, with profits derived from control of operating systems that require only gradual upgrades, have price-book ratios of 15 and 21.</p>
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Read more:
<a href="https://theconversation.com/we-asked-13-economists-how-to-fix-things-all-back-the-rba-governor-over-the-treasurer-126283">We asked 13 economists how to fix things. All back the RBA governor over the treasurer</a>
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<p>Public investment hasn’t come to the rescue enough, even when it has been cheap to borrow.</p>
<p>It’s been tightly constrained by decades of policy driven the ideas variously described as neoliberalism, economic rationalism and market liberalism.</p>
<p>Bank of England economist Lukasz Rachel and former US Treasury Secretary Larry Summers argue that in the absence of the large-scale public programs we have had, the neutral rate of interest would be <a href="https://www.brookings.edu/bpea-articles/on-falling-neutral-real-rates-fiscal-policy-and-the-risk-of-secular-stagnation/">even lower</a>.</p>
<h2>There’s no sign of a revival</h2>
<p>When there’s a greater supply of something (savings) than there is demand for it (for investment) the price of it (the interest rate) won’t rise. </p>
<p>After we emerge from the pandemic we are going to have to adjust to a world where interest rates (at least adjusted for inflation) are permanently at or below zero. </p>
<p>As Dorothy says to Toto in the Wizard of Oz (believed by some to be an allegory about <a href="https://blogs.stthom.edu/cameron/the-wizard-of-oz-as-a-monetary-allegory/">monetary policy</a>) “we’re not in Kansas any more”.</p><img src="https://counter.theconversation.com/content/149523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s more to that Coronavirus. Even before it, businesses weren’t keen to invest.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1402892020-06-08T12:35:45Z2020-06-08T12:35:45ZBusinesses get extension for instant asset write-off<figure><img src="https://images.theconversation.com/files/340318/original/file-20200608-176571-ewjifq.jpg?ixlib=rb-1.1.0&rect=42%2C134%2C5531%2C3270&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In its latest move to spur business investment, the government will extend its $150,000 instant assets write-off until the end of the year.</p>
<p>The six-months extension, which will be legislated, will cost $300 million in revenue over the forward estimates.</p>
<p>As part of the government’s pandemic emergency measures, in March it announced that until June 30 the write-off threshold would be $150,000 and the size of businesses eligible would be those with turnovers of under $500 million.</p>
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Read more:
<a href="https://theconversation.com/free-childcare-ends-july-12-with-sector-losing-jobkeeper-but-receiving-temporary-payment-140253">Free childcare ends July 12, with sector losing JobKeeper but receiving temporary payment</a>
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<p>The government is battling a major investment slump. Bureau of Statistics capital expenditure figures show non-mining investment fell 23% in the March quarter and 9% over the year to March.</p>
<p>Spending on plant and equipment fell 21%, spending on buildings and equipment plunged 25%.</p>
<h2>An extra six months</h2>
<p>Apart from giving businesses generally more time to claim the write-off, the government says the extension will help those which have been hit by supply chain delays caused by the pandemic.</p>
<p>The write-off helps businesses’ cash flow by bringing forward tax deductions. The $150,000 applies to individual assets – new or secondhand - therefore a single enterprise can write off a number of assets under the concession.</p>
<p>With rain breaking the drought in many areas, farm businesses are getting back into production, so the government will hope the extension will encourage spending on agricultural equipment.</p>
<p>About 3.5 million businesses are eligible under the scheme.</p>
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Read more:
<a href="https://theconversation.com/morrisons-coronavirus-package-is-a-good-start-but-hell-probably-have-to-spend-more-133511">Morrison's coronavirus package is a good start, but he'll probably have to spend more</a>
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<p>The instant asset write-off has been extended a number of times over the years, and its (much more modest) thresholds altered.</p>
<p>On the government’s revised timetable, from January 1 the write-off is due to be scaled down dramatically, reducing to a threshold of $1000 and with eligibility being confined to small businesses – those with an annual turnover of below $10 million.</p>
<p>But there will be pressure to continue with more generous arrangements, to head off the danger of a fresh collapse in investment.</p>
<p>In a statement, treasurer Josh Frydenberg and small business minister Michaelia Cash said the government’s actions “are designed to support business sticking with investment they had planned, and encourage them to bring investment forward to support economic growth over the near term”.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=617&fit=crop&dpr=1 600w, https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=617&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=617&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=776&fit=crop&dpr=1 754w, https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=776&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/340316/original/file-20200608-176560-ih9nut.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=776&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Commonwealth Government</span></span>
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<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government will extend its $150,000 instant assets write-off until the end of the yearMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1294352020-01-09T18:52:09Z2020-01-09T18:52:09ZHigh hurdle rates are holding back businesses, but perhaps they should be<figure><img src="https://images.theconversation.com/files/309217/original/file-20200109-138649-191yp4g.jpg?ixlib=rb-1.1.0&rect=581%2C142%2C2313%2C1209&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian businesses are demanding rates of return far higher than their cost of capital, but that doesn't make those hurdles wrong.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Calls by the head of the Australian Competition and Consumer Commission Rod Sims for Australian businesses to cut the hurdle rates of return they expect on new investments should be taken with a grain of salt.</p>
<p>A <a href="https://www.investopedia.com/terms/h/hurdlerate.asp">hurdle rate</a> is the minimum annual return that an investor or firm demands in order to allow a new project to go ahead.</p>
<p>For years, interest rates have been falling, cutting the cost of borrowing, but the hurdle rates of return demanded from that borrowing have remained little changed.</p>
<p>Sims told the <a href="https://www.afr.com/policy/economy/drop-hurdle-rates-or-risk-missing-out-sims-20200102-p53ocf">Australian Financial Review</a> this month that the rates of return demanded should be lower because interest rates were lower.</p>
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<a href="https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/309220/original/file-20200109-138715-zpeemc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">ACCC Chairman Rod Sims.</span>
<span class="attribution"><span class="source">JOEL CARRETT/AAP</span></span>
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<p>“We don’t want to lose investment that we should otherwise get because of hurdle rates that are too high,” he said.</p>
<p>“And we don’t want overseas companies coming in and buying our assets because they’ve got more realistic hurdle rates”.</p>
<p>It is straight from the Reserve Bank’s playbook. </p>
<p>Both the present Reserve Bank governor Phillip Lowe and his predecessor Glenn Stevens have said the same thing. </p>
<p>“We hear reports that a hurdle rate of return of 13-14% has been hard-wired into the corporate culture in some companies,” Lowe said in <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-10-29.html">October</a>.</p>
<p>Yet, “at low interest rates, many investments that didn’t make sense at higher interest rates should now make sense”. </p>
<blockquote>
<p>This is especially so for investments with long-term payoffs, because future returns no longer need to be discounted as highly. This means that low interest rates give us the opportunity to lengthen our horizons and think about projects with really long-term payoffs.</p>
</blockquote>
<p>Lowe and Sims are right to observe that some hurdle rates remain surprisingly high. </p>
<h2>What if the reluctance to invest is rational?</h2>
<p>Investment in mining and manufacturing projects is way below earlier peaks notwithstanding record low interest rates, even though investment in other industries is close to its historical high.</p>
<p>Which suggests something else could be in play, and not only here. Some overseas hurdle rates are as high as 12% to 15%.</p>
<p>A dampened appetite for risk is one explanation, thanks to a rise in global economic policy uncertainty. Another is challenging business conditions, especially in Australia’s two largest sectors; banking and resources. </p>
<p>Consensus estimates of future profits have been downgraded.</p>
<h2>Profit forecasts have been downgraded</h2>
<p>Among the ASX 200, which are the 200 most valuable companies traded on the Australian Securities Exchange, the consensus forecast for annual returns has slid to its lowest point in three years. Among the major banks consensus estimates have slid to their lowest level in two decades.</p>
<p>This largely reflects the lift in minimum capital requirements imposed by the Australian Prudential Regulation Authority, higher compliance costs associated with the implementation of the banking royal commission recommendations and the divestment of high returning wealth management businesses whose activities are no longer tenable for banks in the wake of the royal commission. </p>
<h2>Demands from shareholders have been upgraded</h2>
<p>In contrast, the expected profitability of mining companies has improved. But they are increasingly disciplined about how they use their capital, focused instead on generating free cash flow.</p>
<p>They are conscious of catering to greater demand from their shareholders for dividends and share buybacks. </p>
<p>Those shareholders remember well the destructive growth strategies pursued at the peak of the China boom a decade ago. </p>
<p>Most are happy that the dividend payout ratio for the sector has climbed well above long term norms to 60%, meaning that six dollars out of every ten dollars of profit is paid out to shareholders rather than invested back in the business.</p>
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<strong>
Read more:
<a href="https://theconversation.com/we-asked-13-economists-how-to-fix-things-all-back-the-rba-governor-over-the-treasurer-126283">We asked 13 economists how to fix things. All back the RBA governor over the treasurer</a>
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<p>Against this backdrop, the competition watchdog and the Reserve Bank bemoaning what they consider to be stubbornly high hurdle rates will do little to precipitate a recovery in investment. </p>
<p>The Reserve Bank would achieve more by making an unambiguous commitment to do whatever it takes to achieve its inflation target, which it has undershot for the past five years. </p>
<p>It would boost expectations for wages growth, which remains close to record lows, boost consumer spending, and make investment more worthwhile.</p><img src="https://counter.theconversation.com/content/129435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Salvatore Ferraro does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Businesses are reluctant to invest, but that might be because they know what they are doing.Salvatore Ferraro, PhD candidate, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1234762019-09-17T13:28:21Z2019-09-17T13:28:21ZNew technology isn’t the cause of inequality – it’s the solution<figure><img src="https://images.theconversation.com/files/292812/original/file-20190917-19040-1luxv5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/engineer-hand-using-tablet-machine-real-1140287369?src=xr2OcsWQI-kWpKC3AMvqtg-1-0">MNBB Studio/Shutterstock</a></span></figcaption></figure><p>Technology has been blamed for a lot recently. Automation and artificial intelligence have supposedly led to substantial <a href="https://www.forbes.com/sites/amysterling/2019/06/15/automated-future/#56616982779d">job losses</a>, reduced <a href="https://www.washingtonpost.com/opinions/lawrence-summers-its-time-to-balance-the-power-between-workers-and-employers/2017/09/03/b1c9714e-901e-11e7-8df5-c2e5cf46c1e2_story.html">bargaining</a> power for workers and increased <a href="https://rm.coe.int/discrimination-artificial-intelligence-and-algorithmic-decision-making/1680925d73">discrimination</a>. It is even <a href="https://www.technologyreview.com/s/531726/technology-and-inequality">blamed</a> for growing <a href="https://www.nber.org/reporter/winter03/technologyandinequality.html">income and wealth inequality</a> and, as a result, the presidency of <a href="https://bruegel.org/2016/11/income-inequality-boosted-trump-vote/">Donald Trump</a>, <a href="http://www.dannydorling.org/?p=6940">Brexit</a>, the rise of <a href="https://www.france24.com/en/20181116-income-inequality-financial-crisis-economic-uncertainty-rise-far-right-europe-austerity">far-right</a> populism in Europe and the spectre of <a href="https://www.weforum.org/agenda/2019/01/income-inequality-is-bad-climate-change-action/">climate change</a>.</p>
<p>In response, calls are being made for <a href="https://cpr.unu.edu/ai-global-governance-why-we-need-an-intergovernmental-panel-for-artificial-intelligence.html">global oversight</a> <a href="https://www.wired.co.uk/article/how-to-regulate-technology">and regulation</a> of technology and there are attempts to slow down its spread through <a href="https://www.federalreserve.gov/econres/ifdp/files/ifdp1230.pdf">protectionist</a> trade policies and political <a href="https://www.nber.org/papers/w11022">lobbying</a>.</p>
<p>But perhaps we should be careful about so readily blaming technological innovation for these social problems. In fact, our <a href="https://www.bertelsmann-stiftung.de/en/publications/publication/did/inclusive-growth-for-germany-18-technological-innovation-and-inclusive-growth-for-germany/">recent research</a> into the causes of rising income inequality in Germany suggests a lack of innovation and entrepreneurship is actually at the root of the problem.</p>
<p>We shouldn’t be trying to obstruct technological innovation and diffusion. Rather, we should face up to the challenge of <a href="https://www.merit.unu.edu/publications/working-papers/abstract/?id=8317">bringing back</a> to Western economies the entrepreneurship, innovativeness and business dynamism that characterised the <a href="http://ftp.iza.org/dp11194.pdf">years after World War II</a>, when growth was also more inclusive.</p>
<p>Germany is a particularly useful case to study. In recent decades, inequality has risen fast, and to <a href="https://makronom.de/produktivitaet-deutschland-muss-seinen-innovationsstau-aufloesen-um-die-ungleichheit-zu-verringern-28778">unprecedented</a> levels since unification. But unlike in the US, for example, there has been little <a href="https://www.sciencedirect.com/science/article/abs/pii/S0048733318302488">financialisation</a> of the economy and no significant outsourcing of jobs due to <a href="https://voxeu.org/article/globalisation-and-job-biographies-german-manufacturing-workers">globalisation</a>. Whereas the US runs a huge trade deficit, Germany runs a large trade surplus. Importantly, evidence shows automation has <a href="http://www.eu-nited.net/robotics/upload/pdf/2017-09_Robots_CEPR_Germany.pdf">created more</a> jobs in Germany than it has destroyed. So why is inequality rising so rapidly in the EU’s largest economy?</p>
<p><a href="https://ged-project.de/allgemein-en/how-germanys-weak-innovation-eco-system-is-driving-inequality/?cn-reloaded=1">We argue</a> that this is because consumers, investors and innovators in Germany are effectively “on strike”. Consumption by households, government and corporations could be much higher in Germany, but they are all <a href="https://www.ft.com/content/1f705ce8-543d-11e8-b3ee-41e0209208ec">saving massively</a>. Public and corporate gross fixed <a href="https://bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">investment spending</a> are dwindling. As a result, the domestic market, which is <a href="https://www.handelsblatt.com/today/politics/demographic-armageddon-aging-population-on-course-to-wipe-out-germanys-finances-within-30-years/23582318.html?ticket=ST-2589375-wnubOeZRbezgzvtYcPSR-ap4">also aging</a> rapidly, is not as attractive a place for entrepreneurs and corporations to stimulate innovation.</p>
<p>Without enough investment, labour productivity growth has significantly declined over the past three decades, falling from 2.5% in 1992 to 0.3% in 2013, eight times <a href="https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en">slower</a>. This has been <a href="https://www.wsj.com/articles/germany-looks-to-curb-trades-union-power-1418300430">used to justify</a> a progressive reduction in real wages, union bargaining power and social security benefits to <a href="https://ideas.repec.org/p/sru/ssewps/2018-02.html">maintain competitiveness</a>. And this is one of the fundamental mechanisms driving German inequality.</p>
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<img alt="" src="https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Germans are saving too much money.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/female-hand-money-cash-department-window-603947780?src=Ja1XHghbsIIbC1QwiQb3EA-1-1">SouthernTraveler/Shutterstock</a></span>
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<p>This conclusion may seem at odds with common perceptions of Germany as a successful, technology-driven developed economy. Despite falling overall investment, the country certainly appears to be spending massively on stimulating innovation. German spending on research and development <a href="https://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS?locations=DE">has increased</a> by around 50% in real terms between 2000 and 2016 and is now approaching an excellent 3% of GDP.</p>
<p>The question is: what is all this money buying? Why are productivity and economic growth not accelerating? Put simply, Germany’s innovation is less effective and less likely to be commercialised than in the past. For example, the ratio between the number of patents granted and the number actually applied for has been in <a href="https://makronom.de/produktivitaet-deutschland-muss-seinen-innovationsstau-aufloesen-um-die-ungleichheit-zu-verringern-28778">long-term decline</a> since the late 1980s. The relative quality of patents as measured <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/ecoj.12314">by citations</a> has also declined. There are only four German firms among the world’s <a href="https://www.wipo.int/publications/en/details.jsp?id=4369">top 30</a> innovative corporations in high-tech areas such as 3D-printing, nanotechnology, and robotics. </p>
<p>And while total innovation spending is high, it’s concentrated in larger companies. Most small and medium sized firms in Germany are <a href="https://www.sciencedirect.com/science/article/abs/pii/S0048733317302081">investing nothing</a> or very little in innovation.</p>
<p>The decline in the impact of innovation also reflects the fact that entrepreneurship has been stagnating in Germany. The Mannheim Enterprise Panel <a href="https://www.zew.de/en/forschung/the-mannheim-enterprise-panel/">index of start-up activity</a> (a good measure of entrepreneurial dynamics) fell from 120 to 60 between 1990 and 2013, a 50% decline. This is partly because <a href="https://www.sciencedirect.com/science/article/pii/S0022199612001651">existing companies</a> have adopted conservative or defensive strategies to keep out new entrants to the market rather than use innovation to compete with them.</p>
<p>To reduce inequality, Germany needs innovation that will increase labour productivity. The country needs more firms, particularly small and medium ones, to develop and commercialise new technology and adopt a more robust spirit of entrepreneurship.</p>
<p>Achieving this will require critical changes in the innovation system, in particular to stimulate <a href="https://www.bmwi.de/Redaktion/DE/Downloads/E/einsetzung-der-kommission-wettbewerbsrecht-4-0.pdf?__blob=publicationFile&v=6">competition</a>, invest more in critical public <a href="https://bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">infrastructure</a>, and improve <a href="https://www.npr.org/2019/01/03/678803790/berlin-is-a-tech-hub-so-why-are-germanys-internet-speeds-so-slow?t=1568543761610">internet</a> connectivity and speed. Urgent measures are also needed to refocus the country’s vital <a href="https://www.economist.com/business/2018/03/01/german-cars-have-the-most-to-lose-from-a-changing-auto-industry">auto industry</a> away from being locked into out-of-date technologies. </p>
<p>Most importantly however the country needs to adopt measures that will spur on the government, consumers and companies to spend more. This will be good for innovation by <a href="https://ideas.repec.org/p/unm/unumer/2018047.html">creating the demand</a> for new products and services. And one way of funding this would be to <a href="https://theconversation.com/if-g7-are-serious-about-tackling-inequality-they-should-implement-our-global-tax-framework-122332">more effectively tax</a> big corporations.</p><img src="https://counter.theconversation.com/content/123476/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Germany’s rising inequality shows what happens when consumers and companies don’t widely embrace innovation.Wim Naudé, Professorial Fellow, Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), United Nations UniversityPaula Nagler, Affiliated Researcher, Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), United Nations UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1226142019-08-29T20:03:35Z2019-08-29T20:03:35ZVital Signs. Business investment is flatlining, and it isn’t clear that suasion or a special allowance will help<figure><img src="https://images.theconversation.com/files/290042/original/file-20190829-106517-1ymupiy.jpg?ixlib=rb-1.1.0&rect=0%2C173%2C3988%2C1898&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's easy to ask businesses to invest more, hard to get them to do it.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>You know the economy is in trouble when a clever and successful Liberal Party treasurer resorts to doing an <a href="https://en.wikipedia.org/wiki/Elizabeth_Warren">Elizabeth Warren</a> impersonation in front of the Business Council of Australia in hopes of boosting investment.</p>
<p>That’s what <a href="https://joshfrydenberg.com.au/latest-news/making-our-own-luck-australias-productivity-challenge/">Josh Frydenberg</a> did on Monday, saying:</p>
<blockquote>
<p>Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates. But is a buyback always the best option for the future growth of the company and therefore the economy?</p>
</blockquote>
<p>Let’s set aside the fact that the recent uptick in buybacks was almost entirely due to a $15.4 billion capital return from BHP after selling off what was left of its ill-fated shale oil and gas investments in the United States.</p>
<h2>Are buybacks bad?</h2>
<p>A bunch of US Democratic presidential hopefuls sure think so. Self-proclaimed “Democratic Socialist” Bernie Sanders joined with the more centrist Senate Minority leader Chuck Schumer to <a href="https://www.nytimes.com/2019/02/03/opinion/chuck-schumer-bernie-sanders.html">propose legislation</a> that would require companies spending money to buy back their own shares to raise the minimum wage of their workers $15 an hour and provide seven days of paid annual sick leave.</p>
<p>A number of other prominent Democrats have similar ideas, including Warren, and fellow Senators Kamala Harris and Cory Booker.</p>
<p>There is a myth that share buybacks are some kind of “sure thing” benefit to shareholders that is worth dispelling. </p>
<p>The myth goes like this.</p>
<p>A company buys back some number of its outstanding shares from willing sellers. That reduces the number of shares, but future profits haven’t changed. So, earnings per share go up, and so does the stock price. </p>
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Read more:
<a href="https://theconversation.com/back-yourself-treasurer-frydenberg-tells-business-but-its-not-that-simple-122397">'Back yourself' Treasurer Frydenberg tells business. But it's not that simple</a>
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<p>That’s said to be is a win for the remaining shareholders, but the business won’t invest as much in capital expenditures and workers might miss out on pay rises.</p>
<p>This logic is tantalising, but wrong. What is overlooked in that the business used cash on hand to buy back its stock. So the value of the company to the shareholders who didn’t sell isn’t the same – it’s been reduced by the amount of the buyback.</p>
<p>The key question is whether that cash can be used more productively inside the company than paid out. US firms like Apple and Boeing have recently undertaken significant buybacks and seen their share price rise relative to the broader stock market. That’s the market telling us that the money is better used outside of Apple and Boeing than in.</p>
<p>The correct term for buybacks like that that increase value is “good corporate governance”, not “short-sighted capitalism” or “theft”.</p>
<h2>How to get business to invest more</h2>
<p>Having said that, Frydenberg was spot on in his analysis of what is needed to boost wages in Australia:</p>
<blockquote>
<p>If we are going to create new jobs and enable people to earn more for what they do, we need businesses to increase their capital expenditure and to adopt new technologies and business practices that effectively integrates capital with labour.“</p>
</blockquote>
<p>The question is how to do that.</p>
<p>One thing’s for sure, trying to bully companies into doing it isn’t the answer.</p>
<p>Business invest earnings in plants and equipment when the economic environment is attractive. </p>
<p>Bureau of Statistics figures released Thursday made clear that business have a <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">negative view</a> of that environment. </p>
<p>Capital expenditures were down a seasonally-adjusted 0.5% in the June quarter – worse than market expectations – and down 1% over the year.</p>
<h2>The problem with an investment allowance</h2>
<p>One idea the treasurer is reportedly considering is a so-called ”<a href="https://www.bca.com.au/in_the_absence_of_tax_cuts_investment_allowance_is_key">investment allowance</a>“, much like the investment allowance the <a href="https://www.acra.com.au/government-investment-allowance-10-tax-rebate/">Rudd government</a> introduced during the global financial crisis between December 2008 to December 2009.</p>
<p>It would give businesses an immediate tax deduction of, say, 10% on spending on equipment and plant and machinery, in additional to the normal annual deduction for depreciation.</p>
<p>The problem with such allowances is that they don’t provide certainty. The fact that they have been brought in and quickly ended makes it look as if they will be taken away. So businesses use them to bring forward investments rather than make long term plans.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-next-government-can-usher-in-our-fourth-decade-recession-free-but-it-will-be-dicey-116887">The next government can usher in our fourth decade recession-free, but it will be dicey</a>
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<p>And it is hard to limit them to "additional investment” as Frydenberg said he wanted to on Monday.</p>
<p>By contrast, cutting the company tax rate would signal a permanent shift in policy. It’s politically difficult, which perversely would make it a credible signal about future conditions.</p>
<p>Cutting the rate right away, to 25%, would help move us away from one of the highest corporate tax rates in the developed world, and would boost investment.</p>
<p>The best <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20130570">empirical evidence</a> is that about half the benefit of company tax cuts goes to workers. And as <a href="https://www.afr.com/opinion/the-evidence-is-in-cutting-australias-corporate-tax-will-cut-inequality-20180129-h0prje">I wrote early last year</a>, that evidence suggests that young, low-skilled, and female workers benefit the most.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387">Vital Signs. If we fall into a recession (and we might) we'll have ourselves to blame</a>
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<p>We also need major government investments in physical and social infrastructure to deal with flagging demand and create an environment in which companies will find it worthwhile to invest. </p>
<p>In the low-growth, low-inflation, secular stagnation world we are in budget surpluses are neither prudent nor evidence of sound economic management. They are a death sentence for jobs and growth.</p><img src="https://counter.theconversation.com/content/122614/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government can help boost business investment, but it would take a boost in government investment and would keep the budget in deficit.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1101272019-01-31T11:44:11Z2019-01-31T11:44:11ZThe Fed changed its strategy on interest rates – here’s what it means<figure><img src="https://images.theconversation.com/files/256468/original/file-20190130-75085-jbwkig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Federal Reserve Chairman Jerome Powell speaks at a news conference.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Federal-Reserve-Powell/09a39f2d973842ffb31b2a14a2b4ddd1/2/0">AP Photo/Alex Brandon</a></span></figcaption></figure><p>The Federal Reserve <a href="https://www.nytimes.com/2019/01/30/us/politics/fed-interest-rate.html">just took the monetary policy equivalent</a> of a sharp 90-degree turn. </p>
<p>On Jan. 30, the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130a.htm">U.S. central bank signaled</a> that it was done raising benchmark interest rates <a href="https://www.commdiginews.com/business-2/fed-aggressive-interest-rates-107861/">after two years of aggressive rate hikes</a>. As such, the Fed held its target rate steady at a range of 2.25 percent to 2.5 percent. </p>
<p>This stands in sharp contrast to six weeks ago, when the Fed <a href="https://www.reuters.com/article/us-usa-fed/fed-raises-interest-rates-signals-more-hikes-ahead-idUSKBN1OI0DV">was forecasting</a> two hikes in 2019 and at least one more in 2020.</p>
<p>The abrupt change was maybe not a complete surprise given the <a href="https://theconversation.com/the-fed-cares-when-the-stock-market-freaks-out-but-only-when-it-turns-into-a-bear-109124">market jitters in December following its last decision</a> to raise interest rates. Back then, investors reacted negatively to the prospect of further rate increases slowing the U.S. economy, which has been performing well. Today, there are growing concerns about <a href="https://news.abs-cbn.com/business/01/21/19/imf-fears-trade-war-and-weak-europe-could-trigger-sharp-global-slowdown">slowing growth abroad</a>, which increases the risk of a domestic slowdown.</p>
<p>In my view as a <a href="https://scholar.google.com/citations?user=cjaAlq4AAAAJ&hl=en">scholar who studies how financial news affects markets</a>, the Fed’s decision to keep rates where they are is a way for it to signal its awareness of significant and increasing risks on the horizon. By declaring that it “will be patient,” the central bank is giving itself plenty of room to maneuver if things get worse.</p>
<h2>US economy going strong</h2>
<p>The Fed’s two main goals are maximum employment and price stability. And by both measures, conditions in the U.S. are about as good as you can get. </p>
<p>Jobs growth continues to be strong, with <a href="https://www.cnbc.com/2019/01/04/nonfarm-payrolls-december-2018.html">companies adding 312,000</a> jobs in December. Wages are rising and the <a href="https://tradingeconomics.com/united-states/unemployment-rate">unemployment rate has hovered</a> below 4 percent since July. In September, it reached a 49-year low.</p>
<p>Inflation, meanwhile, was <a href="https://tradingeconomics.com/united-states/inflation-cpi">1.9 percent at the end of 2018</a>, close to the Fed’s target of 2 percent. </p>
<p>More than that, the U.S. economy <a href="https://tradingeconomics.com/united-states/gdp-growth">has been on a tear</a> for much of the past year and a half, posting some of the strongest growth figures in five years. </p>
<h2>Global headwinds and the shutdown</h2>
<p>Unfortunately, that’s not the end of the story. In his <a href="https://www.marketwatch.com/story/fed-interest-rate-decision-and-powell-press-conference-live-blog-and-video-2019-01-30">press conference</a> after the decision, Fed Chairman Jerome Powell pointed to several increased risks and headwinds that could throw sand in the well-oiled U.S. economic machine.</p>
<p>For one thing, we still don’t know the full impact of the <a href="https://theconversation.com/us/search?utf8=%E2%9C%93&q=shutdown">35-day partial government shutdown</a>, but it will for sure lead to lower first-quarter GDP growth. The Congressional Budget Office <a href="https://www.wsj.com/articles/cbo-shutdown-will-cost-government-3-billion-of-projected-2019-gdp-11548688574">estimates the cost of the shutdown at US$11 billion</a>, which will be offset in coming quarters by about $8 billion of increased activity as a result of starting the government back up. <a href="https://www.usatoday.com/story/news/politics/2019/01/29/will-there-be-another-government-shutdown/2705509002/">It is also unclear</a> if lawmakers and the president will reach a deal before the three-week truce is up in February. </p>
<p>In addition, surveys of consumer and business confidence <a href="https://thehill.com/opinion/finance/427515-self-inflicted-wound-of-shutdown-may-continue-to-fester">have been edging lower</a>. The risk of disruption to the global supply chain from tariffs, trade wars and Brexit as well as <a href="https://news.abs-cbn.com/business/01/21/19/imf-fears-trade-war-and-weak-europe-could-trigger-sharp-global-slowdown">slower growth in major economies</a> like China and the European Union remains high.</p>
<h2>Growing risks</h2>
<p>Taken together, these seemingly contrarian numbers – solid domestically but weak internationally – have led the Fed to dramatically change its stance on the path of interest rates.</p>
<p>One way to interpret this abrupt change is that, while the Fed continues to believe that GDP <a href="https://www.thebalance.com/us-economic-outlook-3305669">will grow by more than 2 percent</a> in 2019, the risks have clearly increased. </p>
<p>Is this to say that the Fed views a recession as more likely? Perhaps. But by keeping interest rates steady, the central bank is giving the economy as much breathing room as possible, allowing businesses and consumers to access capital at lower borrowing costs. Moreover, it is quite likely that no rate increases will be considered until spring at the earliest. </p>
<p>That doesn’t mean it is time to start stocking up on canned goods. But the latest Fed move does suggest that the end of the current economic expansion – which will soon be the <a href="https://money.cnn.com/2018/01/30/news/economy/us-economy-boom-history/index.html">longest on record</a> – may be closer than previously thought.</p><img src="https://counter.theconversation.com/content/110127/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Gilbert does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fed abruptly ended two years of aggressive interest rate hikes, signaling the longest economic expansion on record may be coming to a close.Thomas Gilbert, Associate Professor of Finance and Business Economics, University of WashingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/944832018-04-27T02:02:11Z2018-04-27T02:02:11ZBudget policy check: do we need company tax cuts?<p><em>In this series - Budget policy checks - we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.</em></p>
<p><em>In this piece we look at the need for company tax cuts.</em></p>
<hr>
<p>Business investment in Australia declined steadily for four years after peaking in 2013. In early 2016, the Turnbull government settled on a series of company tax cuts as their preferred policy to reinvigorate business investment and the economy. </p>
<p><a href="http://www.copsmodels.com/elecpapr/g-260.htm">Our modelling shows</a> that a cut to the company tax rate for large businesses will indeed lift foreign investment in Australia, driving an economic expansion and an increase in pre-tax wages, but there is more to the story. </p>
<p>Like many policy changes, there are winners and losers. The give-and-take nature of the tax cut means that the <a href="https://theconversation.com/big-business-doesnt-want-to-talk-about-it-but-smes-lose-from-a-company-tax-cut-57965">“losers” from the tax cut</a> will be Australian-owned businesses and the Australian government. We find that despite the expansion in GDP, the average income of the Australian population (a more suitable measure of the material welfare of the population) will fall.</p>
<h2>Do we need investment to maintain jobs and economic growth?</h2>
<blockquote>
<p>The jobs growth figures last year – we all know now, more than 1,100 jobs a day – that’s had a really big impact on our economy and we can expect that to continue and now lead to – I would expect – better wage outcomes as long as businesses keep investing and businesses can keep remaining competitive.</p>
</blockquote>
<p><em><strong>- Treasurer Scott Morrison</strong></em></p>
<p>More investment creates more buildings, equipment and intangible assets that enable workers to be more productive and, in theory, earn higher wages. </p>
<p>If investment is weak for a prolonged period, job opportunities are reduced and wage growth will weaken. </p>
<p>In a well-functioning economy, population growth and technological progress naturally attract investment. When investment only keeps pace with population or employment growth, wages stagnate. For wages to grow, investment needs to be above this level. This happens when there is technological progress, generating the higher returns which attract the level of investment needed. </p>
<p>Australian investment depends largely on foreign finance, so world economic conditions, including rates of corporate tax in other countries, also play a role.</p>
<p>In reality the link between investment and wages is not always clear cut. If unemployment or underemployment is high, investment may lead to growth in jobs without wage growth. </p>
<p>Businesses might also make profits in excess of a “normal” rate of return. These profits exist when new businesses struggle to break into a market dominated by a few large players, and can be an impediment to wage growth. </p>
<p>Even if you do accept that higher investment does lead to higher wages, giving tax cuts to companies to stimulate investment is not justified on this basis. </p>
<p>If company taxes are cut there will be significant costs to government revenue that amount to a “windfall gain” to the (mostly foreign-owned) investments that have already been made on the basis of the 30% tax rate. On balance, the positive impact on growth and wages is not enough to justify the loss of this revenue.</p>
<h2>Is there a problem with business investment in Australia?</h2>
<blockquote>
<p>Business investment is critical to economic growth. When firms are empowered to invest in new productive capacity and technology, it supports innovation and helps create new opportunities and employment for Australians.</p>
</blockquote>
<p><em><strong>- Treasurer Scott Morrison</strong></em></p>
<p>Business investment is now showing signs of picking up. <a href="https://www.rba.gov.au/speeches/2017/sp-dg-2017-11-13.html">In a speech</a> late last year, Reserve Bank deputy governor Guy Debelle saw “signs of life” in investment growth, particularly in the services sector and in infrastructure projects completed by the private sector on behalf of the public sector.</p>
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<p><a href="https://grattan.edu.au/report/stagnation-nation/">A Grattan Institute report</a> identifies four very good reasons for the four-year decline. These include a return to “normal” investment following the mining boom and an overall decline in the amount of money needed to create capital goods in most industries. The report also points to an ongoing shift towards households spending more on services such as retail, cafes, and professional services and slow economic growth overall.</p>
<p>Viewed in this light, there are plausible and benign reasons underlying the decline in investment. These suggest that it is not a large enough problem to justify “repair” in the form of a costly tax cut.</p>
<h2>What’s the verdict?</h2>
<p>Certainly business investment has weakened over the last five years, and along with this we have seen weak wage growth. It would be foolhardy to argue against the need for more business investment. Jobs and growth underpinned by a healthy level of investment are essential aspects of a modern society. </p>
<p>But cutting the company tax rate is not the way to go. It may deliver more business investment and economic activity, but by forgoing taxation revenue from existing investment, it comes at a cost to the average income of the Australian people.</p>
<p>To reap the benefits of strong business investment without a costly tax giveaway, Australia must continue to play to its strengths. Reducing the government revenue base through a cut to company tax will undermine the sort of stable, prosperous society that underpins the world-class environment that we strive to offer all investors.</p><img src="https://counter.theconversation.com/content/94483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janine Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To reap the benefits of strong business investment without a costly tax giveaway, Australia must continue to play to its strengths.Janine Dixon, Economist at Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/914292018-02-07T15:48:37Z2018-02-07T15:48:37ZAmazon headquarters: here’s what it will take to be the winning city<figure><img src="https://images.theconversation.com/files/205308/original/file-20180207-74482-1hv32xy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Amazon's original headquarters in Seattle. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/editorial-buildings-landmarks-daytime-view-amazon-723982027">Shutterstock.</a></span></figcaption></figure><p>Cities across the US are locked in fierce competition to host Amazon’s second headquarters – known as HQ2. This is a big race: <a href="https://www.citylab.com/life/2018/01/hq2-hunger-games-meet-your-tributes/551000/">a shortlist of 20 cities</a> seems to think this particular corporate investment can go a long way to solving some of their ongoing economic problems.</p>
<p>The process of inward investment – whereby large firms establish operations in a new location, either at home or abroad – has been seen for a long time as a way of creating positive economic change. They can create many new jobs in areas which are crying out for them, but they also bring new entrepreneurial activity, improved management skills, international know-how and a wider boost to other local businesses. </p>
<p>But these decisions can cause big problems. As is typical, Amazon has effectively set off a competition between a number of major US cities for its investment, which means they will all now be trying to outbid each other in terms of the “offer” they can make. This will include their existing assets such as land, infrastructure, transport connectivity and, most importantly, people – ideally with the right blend of skills and aptitudes that Amazon needs. </p>
<p>The big downside of this form of competition is that cities will start offering inducements of a fiscal nature – usually in the form of tax breaks – in order to capture the big prize.</p>
<h2>A big prize</h2>
<p>Amazon is now <a href="http://uk.businessinsider.com/the-extraordinary-size-of-amazon-in-one-chart-2017-1?r=US&IR=T">one of the biggest businesses</a> in the world, having very successfully tapped into our growing desire for the convenience of online shopping and deliveries to our doorstep. The business is evolving and expanding, and the company now needs a second major HQ operation, in addition to their existing global control centre in Seattle. </p>
<p>With the promise of up to <a href="http://uk.businessinsider.com/amazon-headquarters-automation-robots-cities-2017-12">50,000 new jobs</a> and US$5 billion in construction investment, it is no surprise that over 230 US cities threw their hats into the ring for this major prize. Bids were invited, and then a shortlist of 20 possible host cities drawn up. This list includes major metropolises such as Atlanta, Boston and Los Angeles, as well as smaller cities such as Indianapolis, Miami, Austin and Columbus, Ohio.</p>
<p><div data-react-class="InstagramEmbed" data-react-props="{"url":"https://www.instagram.com/p/BeiI-VVlfcT","accessToken":"127105130696839|b4b75090c9688d81dfd245afe6052f20"}"></div></p>
<p>Major inward investments do indeed have the capacity for <a href="https://www.oecd.org/investment/investmentfordevelopment/1959815.pdf">major economic uplift</a>. But it’s not just the volume of jobs that might be created locally which is important – it’s how this new investment becomes truly embedded into the local and wider regional economy. There are many examples of big business investing in an area, only to up sticks a decade later and move on to the next best location – often overseas - to take advantage of lower operating costs.</p>
<h2>The long game</h2>
<p>Each bidding city needs to be very clear about what it is prepared to offer Amazon. If this includes tax incentives, then there also needs to be an obvious, long-term payoff, in terms of local economic impact. The winning city must have a firm strategy in place for receiving Amazon, and this needs to cover a few significant factors. For instance, the city needs to have a clear idea of how many new jobs will really be created, how good they are and over what time period they will appear. </p>
<p>Amazon, like many big e-commerce businesses, will be quick to take advantage of the efficiency savings driven by automation and artificial intelligence. This may eventually reduce the total number of jobs available in its new facility. </p>
<p>Ideally, the city that wins will be able to create a business environment that encourages Amazon to locate more and better quality jobs away from Seattle and not just have lower-order, back office functions in its new operation.</p>
<p>Similarly, inward investment can have a major impact economically by strengthening local supply chains – those local businesses that can provide specialised goods and services to the new arrival. These supply chains need to operate effectively and be supported with managerial, infrastructural and skills enhancement, so that they become a critical part of Amazon’s business model. That way, the firm will not want to move away later on, because it cannot take its unique local supply chain operation with it. Better to stay put and keep investing in the host location.</p>
<p>The race to win the new Amazon HQ should not be a quick sprint to the finish. It’s more like a marathon that needs careful, long-term planning if the full benefits are to be achieved for the winning city.</p><img src="https://counter.theconversation.com/content/91429/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Coleman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are 20 US cities bidding to host Amazon’s HQ2 – but the winner will have its work cut out to make the most of the prize.Jim Coleman, Professor of Professional Practice, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/736552017-02-26T19:05:08Z2017-02-26T19:05:08ZBusiness investment is weak, but an unfunded company tax cut won’t fix it<p>Eight years after the global financial crisis (GFC), economic growth remains weak in many rich nations. Australia has been an exception to the malaise, but growth has slowed as the mining boom winds down. </p>
<p>Business investment is vital to economic growth and to lifting living standards, but a <a href="https://grattan.edu.au/report/stagnation-nation/">new Grattan report</a> explores why Australian business investment is plummeting. Australia is now experiencing its biggest ever 5-year fall in mining investment, as a share of GDP. Non-mining business investment fell from 12% to 9% of GDP after 2009 and remains unusually low. Why is it low, and what should we do?</p>
<h2>The shift to services has reduced investment</h2>
<p>Most of the gap in investment between today’s non-mining investment rate and that of the early 1990s is due to long-term structural changes in the economy. </p>
<p>The non-mining market sector slowly became less capital intense, it shifted towards capital-light services, and it shrank as a share of GDP. Together, these factors have reduced non-mining business investment by almost 2% of GDP since the early 1990s. In the chart below, the decline in investment needed to offset “capital consumption” reflects declining capital intensity across the non-mining economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=431&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=431&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=431&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=542&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=542&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158410/original/image-20170226-22983-1ml9c3q.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=542&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Non-mining investment.</span>
</figcaption>
</figure>
<p>These declines are benign. Many non-mining industries now require less capital per dollar of output than they did in the past, because equipment is better and cheaper, in part thanks to the rise of China as a manufacturer. The shift to capital-light services largely reflects households choosing to spend more of their income on these services as their incomes grow. </p>
<h2>The role of output growth</h2>
<p>A less benign factor, slow output growth, has cut non-mining investment by about a percentage point of GDP compared to 1990, and about two percentage points since the boom years of the mid-2000s, when above-trend growth and buoyant financial conditions drove very strong investment. The role of growth can be seen in the chart above.</p>
<p>In turn, output has grown more slowly for two reasons: slower potential output growth, and a widening gap between actual and potential output. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=435&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=435&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=435&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=546&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=546&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158411/original/image-20170226-22983-e5tn3v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=546&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Actual and potential.</span>
</figcaption>
</figure>
<p>The potential growth rate of the economy has declined in recent years. The International Monetary Fund (IMF) <a href="http://www.imf.org/en/Publications/CR/Issues/2017/02/09/Australia-2016-Article-IV-Consultation-Press-Release-Staff-Report-Staff-Statement-and-44632">estimates</a> that potential GDP is now growing at just over 2.5% a year, about a percentage point below its pace between 1995 and 2004. </p>
<p>Potential growth (the rate of output if all resources are being used efficiently) has declined mainly because productivity growth has slowed and the working-age population is growing more slowly. Productivity growth was exceptionally weak between 2004 and 2010. It recovered in recent years, but remains weaker than it was in the 1990s and early 2000s. The working-age population is growing more slowly, mainly because of a decline in net migration since its peak in about 2012 and, in part, because the population is ageing. </p>
<p>In addition, actual growth has been a bit slower than potential in recent years. The IMF estimates the gap between actual and potential output to be about 1.7% of GDP, though it is difficult to estimate with much precision. Several pieces of evidence suggest that actual output is below potential. Inflation is relatively weak and there is some spare capacity in the labour market. The capital stock is ample given the current level of output: office vacancy rates are high, while business capacity utilisation is close to its long-term average. </p>
<p>Transition from the mining boom may have made it difficult for the economy to operate at potential. As mining investment falls, demand for construction, in particular, weakens. In theory, as the terms of trade and mining investment decline, the real exchange rate and other prices can change to maintain full employment. But in practice, <a href="https://grattan.edu.au/report/the-mining-boom-impacts-and-prospects/">slow output growth</a> is common after mining booms, perhaps because businesses and workers take some time to reassess their opportunities. </p>
<h2>What next?</h2>
<p>Looking ahead, if output growth remains subdued, the current level of non-mining business investment may be the “new normal”. If the economy continues to rebalance, non-mining investment is likely to increase. There are encouraging signs that non-mining investment responds to the exchange rate and other aspects of the business environment in the medium term: it has begun to pick up in NSW and Victoria. Output could even grow above potential for a few years, as the IMF and RBA both forecast. But investment is not likely to return to the levels of the mid-2000s.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=431&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=431&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=431&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=541&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=541&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158412/original/image-20170226-23004-s6q2f9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=541&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">States.</span>
</figcaption>
</figure>
<h2>Is a company tax cut the answer?</h2>
<p>The government has proposed cutting the company tax rate from 30% to 25%, largely on the basis that the competition for mobile capital has intensified (see chart below). That would attract more foreign investment and could increase total business investment by up to half a percent a year. But such a cut would also reduce national income for years and would hit the budget. Committing to a tax cut before the budget is on a clear path to recovery risks reducing future living standards.</p>
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<img alt="" src="https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=426&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=426&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=426&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=535&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=535&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158413/original/image-20170226-23036-1fnv1cq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=535&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Company tax.</span>
</figcaption>
</figure>
<p>Other company tax changes could help. An allowance for corporate equity would make currently marginal investment projects more attractive, though highly profitable firms would pay more tax. </p>
<p>Accelerated depreciation would encourage investment, as would moving from today’s model to a cash flow tax. Both of them help firms to reduce tax paid at the time they make investments. But they would hit the budget hard in the early years, and would have to be phased in slowly. </p>
<p>An allowance for investment (for example, permitting firms to claim over 100% of depreciation) would support new investment without giving tax breaks on existing assets, but may be costly to administer, as firms could be tempted to relabel some operating expenditure as capital expenditure. </p>
<p>Government should ensure any company tax changes are offset by other tax increases or spending cuts.</p>
<h2>What else should policymakers do?</h2>
<p>Government stimulus and interest rate cuts can encourage business investment if there is spare capacity in the economy. Australia does have some spare economic capacity. But there are constraints on both arms of macroeconomic policy. The RBA is reluctant to cut interest rates from their already low levels, as it is concerned about risky lending. Public debt has grown (though it is still not high by international standards), though bank balance sheets remain large compared to GDP, limiting the scope to expand public sector debt.</p>
<p>Monetary policy should remain supportive, and tough prudential standards can help limit risky lending. There may be modest scope to build more public infrastructure, if governments can improve the quality of what they build. </p>
<p>Broader policies to support economic growth would also lead to more and better private investment. They include reducing tax distortions, boosting labour participation, encouraging competition, improving the efficiency of infrastructure and urban land use, tightening regulatory frameworks, and more reliable climate policy. </p>
<p>No single policy is a silver bullet, but together, they can help make better use of Australia’s existing assets and make new investment more attractive.</p><img src="https://counter.theconversation.com/content/73655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Minifie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The current subdued level of non-mining business investment may be the “new normal”.Jim Minifie, Productivity Growth Program Director, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/661062016-09-29T00:46:20Z2016-09-29T00:46:20ZThe U.S. economy is in desperate need of a strong dose of fiscal penicillin<figure><img src="https://images.theconversation.com/files/139651/original/image-20160928-27054-17016pi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. could do with a shot in the arm too.</span> <span class="attribution"><span class="source">Bear syringe via www.shutterstock.com</span></span></figcaption></figure><p>Despite six years of “recovery” from the Great Recession, America’s middle class still struggles financially amid sluggish economic growth and middling job creation. </p>
<p>The <a href="https://theconversation.com/us/topics/fomc-12831">Federal Reserve’s near-zero interest rates</a> have helped stabilize the economy after it nearly went into freefall in 2008 and 2009, but that policy is coming to an end, with at least one quarter-point hike expected this year and more in 2017 and 2018. </p>
<p>So what will support the economy once the Fed’s largesse begins to disappear? </p>
<p>I’ve been exploring the key economic data – from productivity and housing to wage growth and consumer spending – to better understand where we’re headed and what is needed to get out of this no-to-low growth environment, a pernicious state some economists call <a href="http://larrysummers.com/category/secular-stagnation/">secular stagnation</a>. The data show clearly why serious attention is needed to foster faster growth, a more competitive economy and more opportunities for American families. </p>
<p>And only one institution, I would argue, is able to do something about it: Congress. </p>
<h2>Stagnant growth and productivity</h2>
<p>For most of the recovery, economic growth has been lackluster. </p>
<p><a href="http://www.bea.gov/iTable/index_nipa.cfm">Gross domestic product has expanded</a> at an average annual inflation-adjusted rate of just 2 percent since the <a href="http://www.nber.org/cycles.html">recession</a> ended in the second quarter of 2009, far below the rate of 3.4 percent from December 1948, when the first recession after World War II started, to December 2007, when the most recent recession began. And in just the past three quarters through June, the economy has barely budged, growing at an <a href="http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=1">anemic 1 percent or so</a>. </p>
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<p>Productivity growth, measured as the increase in inflation-adjusted output per hour, is key to propelling strong economic growth because it means that workers are getting better at doing more in the same amount of time. Yet <a href="http://data.bls.gov/pdq/querytool.jsp?survey=pr">productivity</a> rose only a total of 6.6 percent from the second quarter of 2009 to the second quarter of 2016. That amounts to an average rate of 0.9 percent a year, a fraction of the 2.3 percent we experienced from 1948 to 2007. </p>
<h2>Housing hasn’t recovered</h2>
<p>When considering what’s keeping the recovery from taking off, housing deserves particular attention since it <a href="https://books.google.com/books?id=MplpAgAAQBAJ&printsec=frontcover&dq=epstein+wolfson+handbook+of+political+economy+of+financial+crisis+oxford&hl=en&sa=X&ved=0ahUKEwjr3areorDPAhXELB4KHcKfA3gQ6AEIHDAA#v=onepage&q=epstein%20wolfson%20handbook%20of%20political%20economy%20of%20financial%20crisis%20oxford&f=false">generally boosts economic growth</a> after a recession. Not this time.</p>
<p>Sales of new single-family homes have been on the rise in recent years, but they’re still well below the historical average before the Great Recession, pushing homeownership down to a 50-year low. Sales averaged about 400,000 a year from 2011 to 2015, compared with 698,000 before the recession – from 1963 through 2007.</p>
<p>Although the pace has picked up in recent months – reaching an annual rate of <a href="https://www.census.gov/construction/nrs/pdf/newressales.pdf">609,000</a> in August – it’s still not enough to stop the slide in the homeownership rate, which was <a href="http://www.census.gov/housing/hvs/files/qtr216/tab5.xlsx">62.9 percent</a> in the second quarter, down from <a href="http://www.census.gov/housing/hvs/files/qtr216/tab5.xlsx">67.8 percent</a> at the end of 2007.</p>
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<p>And spending on housing fell <a href="http://www.bea.gov/iTable/iTable.cfm?reqid=9&step=3&isuri=1&903=141#reqid=9&step=3&isuri=1&903=141">7.7 percent</a> in the second quarter of 2016, compared with the first three months of the year.</p>
<p>One of the reasons housing has been slow to recover – the market’s collapse was the primary cause of the Great Recession – is that employment growth has remained mostly moderate. Many are still looking for good jobs despite the sharp drop in headline unemployment to an <a href="http://data.bls.gov/pdq/querytool.jsp?survey=ln">eight-year low of 4.9 percent</a>.</p>
<p>The average annualized employment growth rate from June 2009 to August 2016 was just 1.4 percent, well below the long-run average of 1.9 percent from December 1948 to December 2007.</p>
<p>While there were <a href="http://data.bls.gov/pdq/querytool.jsp?survey=ce">13.6 million more jobs in August</a> than in June 2009 – meaning that the economy regained all those lost during and immediately after the recession – these gains and the comparatively low unemployment rate obscure that many people still cannot find the jobs they want. The jobless rate means about 7.8 million individuals were unemployed in August, yet <a href="http://www.bls.gov/news.release/pdf/empsit.pdf">another 7.8 million</a> were either employed part time for economic reasons (they would have preferred a full-time job) or out of work and wanted a job but weren’t counted in the official rate because they hand’t looked in the preceding four weeks.</p>
<p>And communities of color <a href="http://www.bls.gov/news.release/pdf/empsit.pdf">still have higher unemployment rates</a> than whites. The African-American unemployment rate stood at 8.1 percent, while for Hispanics it was 5.6 percent, compared with 4.4 percent for whites. </p>
<h2>Wage growth, income inequality and debt</h2>
<p>These lackluster job gains have meant there’s less pressure on employers to raise wages. And sluggish wage growth has meant less consumer spending – which typically makes up <a href="https://www.stlouisfed.org/publications/regional-economist/january-2012/dont-expect-consumer-spending-to-be-the-engine-of-economic-growth-it-once-was">more than two-thirds of GDP</a>.</p>
<p>Wages, in fact, have barely kept pace with price increases. <a href="http://data.bls.gov/pdq/querytool.jsp?survey=ce">Inflation-adjusted hourly earnings of production and non-supervisory workers</a> – about 80 percent of the labor force – have increased only about 4.5 percent since June 2009. This amounts to an annualized growth rate of merely 0.6 percent above the rate of inflation over the past seven years. </p>
<p>Low wage growth has kept income inequality at very high levels. A recent report offered some good news: Real median household income grew at <a href="http://www.census.gov/newsroom/press-releases/2016/cb16-158.html">5.2 percent,</a> from US$53,718 in 2014 to $56,516 in 2015 – the <a href="https://www.whitehouse.gov/blog/2016/09/13/income-poverty-and-health-insurance-united-states-2015">fastest annual growth on record dating back to 1968</a>. But inflation-adjusted <a href="http://www.census.gov/newsroom/press-releases/2016/cb16-158.html">median income was still higher in 2007</a> than in 2015.</p>
<p>Middle-class Americans are only slowly gaining ground as wealthier ones had seen bigger gains, leaving <a href="https://theconversation.com/us/topics/economic-inequality-15917">income inequality</a> persistently high. In 2015, the <a href="http://www2.census.gov/programs-surveys/demo/tables/p60/256/table4.xls">top 5 percent</a> of earners captured 22.1 percent of total income, compared with 11.3 percent for the bottom 40 percent. In 1967, those at the top took home 17.2 percent, versus 14.8 percent for the bottom 40 percent.</p>
<p>This lack of wage growth also makes it difficult for households to dig out from under a mountain of debt, which further contributes to limited spending on housing and other items. <a href="http://www.federalreserve.gov/releases/z1/current/z1.pdf">Household debt equaled 105.2 percent of after-tax income in the second quarter of 2016</a>. While that’s down from a peak of 135 percent in the fourth quarter of 2007, the current level is still much higher than any level of debt observed in the 50 years before 2002. </p>
<p>Moreover, some especially costly forms of credit have grown. Installment debts – mainly student and car loans – have grown from 14.6 percent of after-tax income in June 2009 <a href="http://www.federalreserve.gov/releases/z1/current/z1.pdf">to 19.2 percent this past June</a> – the highest share since records began in 1968.</p>
<p>Unsurprisingly, consumer spending growth has been middling as a result, increasing an average of just 2.3 percent a year since the end of the Great Recession, far below the long-term average of 3.5 percent from 1948 through 2007. </p>
<h2>Companies on the sidelines</h2>
<p>With their consumers still mired in debt with little gain in their pocketbooks, businesses have very few reasons to invest. </p>
<p>Net investment – what companies spend on new capital assets rather than on replacing obsolete items – has averaged 1.9 percent of GDP since the recession started at the end of 2007. This is the lowest since World War II. </p>
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<p>To be clear, companies have the money. <a href="http://www.federalreserve.gov/releases/z1/current/default.htm">Corporate profits</a> recovered quickly toward the end of the Great Recession and have stayed high since.</p>
<p>So where is all that money going? Cash reserves and shareholders. </p>
<p>Nonfinancial corporations hold an average of <a href="http://www.federalreserve.gov/releases/z1/current/default.htm">5.2 percent of all of their assets in cash</a> – a high rate by historical standards. At the same time, they spent on average <a href="http://www.federalreserve.gov/releases/z1/current/default.htm">99 percent of their after-tax profits on dividend payouts and share repurchases</a> to keep their shareholders happy since the start of the Great Recession.</p>
<h2>Breathing room</h2>
<p>With consumers not spending money because they can’t and businesses not spending money because they don’t want to, the onus falls on Congress to bolster the economy and the labor market. </p>
<p>Yet <a href="http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=94">federal</a>, <a href="http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=94">state and local</a> government spending has been falling. Their total spending on goods and services as a share of GDP was 17.7 percent in the second quarter of 2016, the smallest share since 1998. </p>
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<p>Congress, though, now has room to maneuver. The nonpartisan Congressional Budget Office estimated in August that the federal government will have a deficit of <a href="https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51908-2016_Outlook_Update-2.pdf">3.2 percent of GDP</a> for fiscal year 2016. This is much smaller than in recent years, including 2009’s deficit of <a href="https://www.cbo.gov/publication/50974">9.8 percent of GDP</a> – the widest since World War II. </p>
<p>The shrinking deficit, as well as the government’s near-record-low borrowing costs, could provide enough breathing room to focus on targeted, efficient policies that promote long-term economic growth and shared prosperity, for instance, through <a href="https://www.americanprogress.org/issues/economy/report/2016/07/14/141157/an-infrastructure-plan-for-america/">investments in infrastructure</a>. </p>
<p>The economy and American families need Congress to use this breathing room to create real economic security.</p><img src="https://counter.theconversation.com/content/66106/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Weller is a senior fellow at the Center for American Progress. </span></em></p>Although the Fed delayed raising rates this month, it has signaled it intends to wean the U.S. economy off its unprecedented monetary stimulus. Now the question is whether Congress will take the handoff.Christian Weller, Professor of Public Policy and Public Affairs, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/424772015-05-28T20:13:10Z2015-05-28T20:13:10ZWhat the latest capital expenditure figures tell us about the economy<figure><img src="https://images.theconversation.com/files/83228/original/image-20150528-32202-7xv9y6.jpg?ixlib=rb-1.1.0&rect=24%2C21%2C953%2C596&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A 4.4% drop in business investment activity has caused alarm.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/glynlowe/6672845739/in/photolist-baE5yt-Edz-pmAysj-4HWP66-JA95d-6AV7d-mqEqiV-Axg9i-4nu3J8-8WgxQu-xc7HF-5nRd48-AxfbK-b9sWni-JLTzX-kB4r1X-kB3NYi-fg1VRy-c5iJbC-awwhhE-cXLFJq-dq845-sjHSXh-5PPi6w-qXLd3Q-5u8Yxk-5u8X6n-kUFSEt-4bJ8P-CExod-55oe4v-9p6zJK-7t9KZw-7t9USQ-fzCaZG-5nR4N1-iViEyP-c31mR1-aMnPS4-4jF2Ws-nWdbPJ-6U1jAP-9C85E1-5Bd3uB-qFSqqP-9oZXbF-8MEiqT-6hPTCr-gVd61W-5GPJEu">www.GlynLowe.com</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The latest <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">Australian Bureau of Statistics (ABS) Capital Expenditure Survey</a> revealed
that business investment is likely to have fallen significantly in the March quarter, which has caused some <a href="http://www.abc.net.au/news/2015-05-28/capex-data-abs-march-quarter/6503522">alarm among commentators</a>.</p>
<p>According to the survey, total real capital expenditure fell by 4.4%, with buildings and structures - which is heavily influenced by the mining sector - declining by 6.5%. Alternatively, expenditure on machinery and equipment decreased only slightly.</p>
<p>The so-called Capex survey is one of the main indicators of business investment in Australia. It’s currently of particular importance as it provides a signal of how well growth in the Australian economy is transitioning from mining to the non-mining sectors, and so its most recent weak figures are being closely scrutinised.</p>
<p>The Capex survey is a random sample of around 8,000 businesses each quarter. The ABS attempt to ensure the sample is representative across several dimensions, such as the size of the businesses and their industry.</p>
<p>The survey asks firms about both the actual investment that they did in the previous quarter and their investment expectations for the future. </p>
<h2>Other sources of information</h2>
<p>One of the reasons why the Capex survey is important is that it gives a timely read-ahead of the release of GDP in the National Accounts next week - of what business investment did in the most recent quarter. Relatively few other indicators exist for business investment, most notably business credit growth and surveys of sentiment. The Reserve Bank of Australia supplements these with an extensive <a href="http://www.rba.gov.au/publications/bulletin/2014/sep/pdf/bu-0914-1.pdf">business liaison</a> program.</p>
<p>It’s worth noting, however, that the Capex survey does not perfectly translate into business investment in the National Accounts. There are issues about coverage which are particularly important for non-mining investment, for example, it excludes the health care sector. </p>
<p>The ABS produces other surveys, summarised in the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8755.0">Construction Work Done</a> release, which also provide information on what investment did in the quarter. Here real engineering construction - much of which is mining - fell by 7.3%, whereas private non-residential building construction - admittedly a much smaller share of the economy - grew by 3.3%.</p>
<h2>The investment outlook</h2>
<p>The other main reason why the market pays considerable attention to Capex is its information on the investment outlook. By tracking successive surveys we can see how firms’ investment intentions change over time.</p>
<p>This survey contained the final estimate of investment intentions for 2014/15. These, for both mining and the non-mining economy, didn’t materially change, and point to a further fall in investment in the June quarter.</p>
<p>The main area of interest for the market, however, was firms’ investment intentions for 2015/16. These were weaker than many expected, with the outlook for mining investment being revised down, probably partially due to the current low commodity prices. </p>
<p>Investment intentions for the non-mining sector were broadly unchanged. Firms are surveyed up to eight to nine weeks after the end of the quarter, so it’s likely that many respondents did not know about the small business package in the federal budget and its measures to promote investment.</p>
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<a href="https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/83222/original/image-20150528-11315-cqu24n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Melbourne Institute, ABS</span></span>
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<p>Interpreting the investment intentions from the Capex survey, however, is somewhat of an art form. Firms tend to underestimate their investment at long horizons, and subsequently get more accurate as time passes and more information becomes available, so the ABS produce realisation ratios. </p>
<p>These are the ratio of actual to expected expenditure in the history of the survey. These can then be applied to the most recent investment expectations - for example, a realisation ratio greater than one, which is typical for the early estimates, essentially amplifies any expected growth.</p>
<p>The art is knowing which realisation ratio to use. Should it be last year’s, or a moving average, or adjusted for the state of the business cycle? Voluminous work has been done on this, but one <a href="http://www.rba.gov.au/publications/bulletin/2013/dec/pdf/bu-1213-1.pdf">recent study</a> suggests that simply taking the long-run average forecasts best. Even after all of these adjustments, the early estimates - such as those in this survey for 2015/16 - are not very reliable.</p>
<h2>Transition in sources of growth</h2>
<p>So, the recent Capex release suggests that the fall in mining investment in 2015/16 may be more sizeable. While that may mean there is a bigger gap for non-mining investment to fill, it is worth remembering that investment intentions in the non-mining sector did not materially change. </p>
<p>Outside of non-mining investment, evidence that the transition in sources of growth is underway remains. In particular, real residential construction work done increased by nearly 5% in the March quarter. More generally, the unemployment rate in April was 6.2%, a level it has fluctuated around for the last six months. Retail turnover volumes grew by a solid 0.7% in the March quarter. </p>
<p>Ultimately, a fall in mining investment will weigh on GDP growth in the March quarter, which is likely to be soft. However, the forces that will shape the Australian economy over the medium term remain qualitatively unchanged.</p><img src="https://counter.theconversation.com/content/42477/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tim Robinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Business investment fell by 4.4%, with non-mining sectors slow to take up the slack left by resources.Tim Robinson, Research Fellow, Melbourne Institute, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.