Published in The Australian, 14 January 2016
In just a few days Donald Trump will become President of the United States and leader of the free world. It’s high time for people everywhere to stop lamenting the rise of Trump and to start responding to it. If he does what he has said he would – and we have to assume he’ll try – economic policy here in Australia will need to respond fast. It will be a good opportunity for the government not just to talk about agility but actually to be agile.
Trump has made three big economic commitments: to cut the corporate tax rate to 15 per cent, to spend big on infrastructure, and to get a better deal for American workers on trade with China. Let’s take the optimistic scenario first: he does cut tax and the US economy picks up steam; he starts rebuilding America’s decaying infrastructure, and – because growth is picking up – investors are happy to keep buying US government bonds and companies to repatriate profits; and he secures a revaluation of China’s currency which helps US exporters as well as Chinese consumers. In the longer term, this will be good for the world – including Australia – but, in the short term, capital will relocate to the US so Australia will have more difficulty securing the investment we need.
Now, the pessimistic scenario: as company tax revenue goes down and spending goes up, the US deficit becomes harder to finance; and as trade barriers go up and trade volumes come down, the world is plunged into a deep recession. Only 13 per cent of America’s GDP is derived from exports and half of that is with Canada and Mexico. About 20 per cent of Australia’s GDP goes in exports and most of that is with North Asia. A world recession would hurt America but would be worse for us.
Good times make economic reform easier; but bad times make it imperative. Whether Trump turns out to be good or bad for the rest of the world, our economic reform challenge is becoming more acute. If Trump’s tax cuts work, we will need to cut tax too to stay competitive; if his tax cuts fail, we will need to reform fast or suffer a swift loss of confidence in a highly exposed economy.
As always, our challenge is to maximise economic growth. That means getting taxes down and regulation down so that we can get productivity and profitability up. But getting taxes down responsibly means a ferocious clamp on all new spending other than that with a clear growth (or necessary national security) dividend. It’s a pity that Prime Minister Turnbull abandoned the tax reform and federation reform white papers that had been well under way under my government. This process was the best hope of securing a shift from taxing production to taxing consumption and for making government more efficient. As well, the government’s commitment to repeal days and to deregulation more generally seems to have waned. Although the government is in a worse position now than it was 18 months ago to embark on a new round of major economic reform, there’s still no time like the present to do so!
The first rule of government should be to do no harm. Right now, the government must avoid all policy-induced hits on people’s cost of living and all policy-induced hits on the cost of doing business. It’s good that Energy Minister Josh Frydenberg has told the states to stop restricting the supply of gas, thereby hitting households and businesses with higher power bills. But the Commonwealth has to get its own house in order as well as telling the states to do so.
So the government’s first move this year should be to introduce legislation to protect existing renewable generation but to remove all further mandatory use requirements. Renewable power is great but only if it’s economic. Mandatory targets mean the compulsory use of renewables whether they’re economic or not. They mean that consumers and businesses pay more, sometimes much more for their power.
Despite the reduction that my government secured to the renewable energy target, Australia is still supposed almost to double renewable energy supplies over the next four years. This will very substantially increase power costs and further reduce reliability. If it goes ahead, it will be the death knell for the heavy industries of Whyalla and Port Pirie in South Australia and will almost certainly destroy the aluminium industry everywhere. In South Australia, which already gets more than 40 per cent of its power from renewables, consumers pay 50 per cent more for their power than people in other states.
But that’s the future for everyone if federal Labor has its way. Bill Shorten wants to boost renewable power from under 15 per cent now and 23 per cent in 2020 to over 50 per cent in the next 14 years. That will require the construction of $50 billion worth of unnecessary wind turbines which you, the consumer, will have to fund.
Ending any further mandatory increase in the use of renewables will mean a huge fight in the Senate but at least the government will be on the side of lower power prices, a fair go for consumers and more jobs; while Labor will be stuck on a dangerous limb with the Greens. Why should government force Australians to use more and more expensive and unreliable renewable power when we have some of the world’s biggest reserves of clean coal and natural gas? Why should higher prices be inflicted on households and employers when Australia should be the world’s affordable energy superpower?
The government’s second move should be to bring in a budget that reduces spending as a percentage of GDP and reduces the deficit as a percentage of GDP every year. But it has to be based on realistic assumptions about growth, not the fantasy figures that Labor always used to forecast a surplus just beyond the horizon. This will mean a renewed focus on finding savings and requiring the states – which are mostly in better fiscal shape than the Commonwealth – to resume more responsibility for public schools and public hospitals. It’s never easy to find savings, as Joe Hockey and I discovered in 2014, but by far the best time for a tough budget is the first one after an election.
Provided they’re responsibly funded, company tax cuts mean more investment and more jobs. Especially if Britain and Germany match Trump’s company tax cuts, as they’ve said they would, our announced cuts will be too little, too late. It would be so much better to bring in business boosting policies now, because we believe in them, than to be forced to do so in response to someone else.
Australia is certainly not the only country with unnecessary costs on households and businesses that’s been living beyond its means but we’re more vulnerable than many others with high standards of living. Whether he succeeds or fails, Trump is likely to make us more exposed so the sooner we do more to protect ourselves the better.