Yesterday, the national accounts released by the ABS showed that we had the fastest productivity growth in over a decade, in the year to the March quarter. You would think that this would give pause to the alarmists who claim that our current industrial relations laws are ruining the economy. You would be wrong.
At 11:30 this morning, the ABS published the Australian national accounts for the March quarter of this year. Among other things, they show that the rate of productivity growth has surged – in the past year, labour productivity in the market sector grew at its fastest pace in over a decade. I’m sure this will be a major focus of the news coverage tomorrow, just as the disappointing productivity numbers were closely examined in early 2011. Just in case The Australian doesn’t choose to highlight the issue, here’s a handy chart for your reference:
Labour productivity in the market sector – year ended growth
Source: Calculations based on ABS 5206, table 1.
While it’s true that you should be careful about drawing too many conclusions from the quarterly productivity data, that was just as true this time last year when various pundits leapt on the data to suggest that the Fair Work Act has damaged Australia’s productivity performance.
I told myself I wouldn’t write about the Fair Work Act for a while. I told myself this partly because it’s a topic I’ve done to death in recent weeks and months, and partly because no amount of factual analysis will dissuade the ideological warriors of the right from blaming the Act for all the nation’s economic ills, both real and imagined.
I told myself I’d lay off, but I can’t resist responding to Michael Stutchbury’s piece in today’s edition of The Australian.
The Australian keeps taking little pot shots at the Fair Work Act, and occasionally at unions, blaming the industrial relations system for the productivity slowdown and alleged “inflexibility” in the labour market. Today’s editorial claims:
…the downsides of Labor’s rigid, centralised industrial relations regime are becoming increasingly apparent.
Are they? In what way? The editorial doesn’t say. So, what might those downsides be?
Tony Abbott and Michael Stutchbury have called on the Government to adopt the Henry Review’s recommendation for a nearly-flat personal income tax system. The Review recommended abolishing all our current offsets and levies, including the Low Income Tax Offset and the Medicare Levy, and folding them into a simple structure with a high tax free threshold and a marginal tax rate of 35% for 97% of taxpayers. In case you’ve forgotten, here’s what the recommended income tax structure looks like:
The Henry Review’s income tax recommendation
It’s entirely predictable that the Right would favour the recommendation, as it involves massive tax cuts for high income earners. By my calculations, anyone earning between $35600 and $94100 would pay more tax under this system, while anyone earning above that amount would get a tax cut.
You won’t catch Stutchbury or Abbott directly arguing for the massive handouts to high income earners that would result from implementing the Henry recommendation. Instead, the argument is cloaked in the language of boosting workforce participation by reducing effective marginal tax rates for low income earners, which Henry’s recommendation does do to some degree.
However, the case has not been made as to why the improvements at the very bottom need to be accompanied by massive tax cuts at the top end. There is no reason why the two aspects of the recommendation need to go together, save for the fact that one gives political cover for the other. This is a cynical ploy to make the tax system less progressive under the guise of assisting low income earners.
The problem of high effective marginal tax rates (EMTRs) for low income earners (mostly part time workers who receive some income support payments) is a big one. These high EMTRs occur when a person starts to earn some money on top of their income support payment. The payment then begins to be withdrawn, often at the rate of 50c or 60c per additional dollar earned. On top of that, they pay tax on the additional dollar. So, when you combine the two, you get the effective marginal tax rate, that is, the proportion of an extra dollar earned that someone will lose in taxes and withdrawn income support.
The Henry Review’s solution for dealing with this longstanding problem is increasing the tax free threshold from $16000 (which is our current effective threshold when you take the Low Income Tax Offset into account) to $25000. Instead of integrating the welfare and tax systems, as some had suggested, the Henry Review recommended keeping them as far apart as possible, so that people don’t start paying tax until they’re earning enough to be clear of the income support system.
The big idea here is that by reducing EMTRs for low income earners, we’ll encourage people to work more hours, or to join the workforce in the first place. All the evidence suggests that sole parents and secondary earners are the most sensitive to changes to their after tax income as a result of working. If they’re only going to keep 30 cents out of an extra dollar they earn, it’s probably not going to be worthwhile earning that extra dollar. So, by reducing these EMTRs at the bottom end, we can help people (by enabling them to keep more of what they earn) and help the economy (by encouraging income support recipients to work more). A fine idea, and one that refreshingly relies on ‘carrots’ rather than the sadly more common ‘sticks’ in encouraging people to work.
The Henry recommendation, though, is not the panacea for low income earners that it’s made out to be. I’ve analysed the recommendation and compared it to the current system. It looks to me as if the Henry system would actually increase EMTRs on a lot of low income earners.
EMTRs for a single adult Newstart recipient
The part of the graph where the blue line (the current EMTR) is higher than the red line (the Henry EMTR) shows the area where people would see their EMTRs reduced under the Henry system. This covers the span of incomes from $6000 to $25 000. Where the red line exceeds the blue line, people would face higher EMTRs under the Henry system. This covers the span of incomes from $25 000 to $37 000.
According to my calculations (and this is not a definitive estimate by any means), the Henry system lowers EMTRs by between 7.5 and 10 percentage points for people earning up to $25 000. However, above that, it raises them by between 14.5 and 18.5 percentage points. To put these numbers in perspective, someone would earn $25 000 a year by working 24 hours a week (three full time days) at $20/hour. These are the very people who we’re supposed to be focused on in the effort to reduce EMTRs.
At the moment, someone who is on Newstart and not working at all who takes a job earning the National Minimum Wage will end up with a disposable income 2.22 times the Newstart rate. If we moved to the Henry system, their income would be 2.29 times the Newstart rate. This is not an earth-shattering improvement.
My point is this: while the Henry system would indeed deliver gains for some at the low end of the income distribution, it’s not the silver bullet that Stutchbury suggests. My real qualm with this system is that it unnecessarily pairs these gains at the bottom end with gains at the top end.
High income earners have already received massive tax cuts over the past decade. The level at which the top marginal rate kicks in has risen from around 1.5 times average earnings in the late 1990s to around 3.5 times average earnings today. The second-highest marginal rate has been cut repeatedly, with the result that our tax system has already become much flatter. High income earners are not suffering under a punitive personal income tax system.
High EMTRs for low income people need to be addressed. The modest tax bills of the well-off do not. There is no need for one to accompany the other.
Michael Stutchbury, Economics Editor of the Australian, dedicated his column in this weekend’s paper to warning of the economic dangers of multi-party democracy. Apparently minority governments mean “policy drift” as opposed to “decisive policy-making”. Stutchbury doubts that a “splintered duopoly” could deliver “the sort of reform agenda business leaders say Australia needs”. Setting aside the question of whether business leaders’ wishes should trump those of the people, it’s worth having a look at Stutchbury’s claim that multi-party government delivers poor economic outcomes.
New Zealand is held up as a cautionary tale; apparently “business fears a repeat of New Zealand’s policy drift will put us over the edge”. In Stutchbury’s account, New Zealand has “drifted” ever since mixed-member proportional representation (MMP) was introduced in 1996, as NZ has had minority governments that rely on the support of minor parties and independents since that time. I decided to have a look at the data to assess the veracity of his argument.
The first measure we’ll look at is real GDP per capita in Australia and NZ since 1975, expressed in 1990 $US converted at “Geary-Khamis” purchasing power parities, derived from the Conference Board’s Total Economy Database.
It looks to me as if real GDP per capita in New Zealand flatlined during the 1980s and early 1990s, and that’s when the real gap in living standards between the two countries opened up. Since 1996, the introduction of MMP in New Zealand, real GDP has grown at a similar pace to Australia; not closing the gap, but not continuing to fall behind.
Instead of looking at the level of real GDP per capita, let’s have a look at real GDP growth. This, presumably, will make the effects of Stutchbury’s MMP-induced “policy drift” apparent. These data come from the Reserve Bank of New Zealand, who in turn derive them from Statistics NZ.
The economic stagnation doesn’t look too apparent in that graph. You can see the global recession-induced dip in 2008-09; apart from that, NZ’s economy has been growing steadily since the introduction of MMP.
Let’s look at this another way. Here’s a chart of the quarterly “growth gap” between the two countries, Australian real GDP minus New Zealand GDP. Where the line is above zero, that means that Australia outperformed NZ in that quarter; when the line is below zero NZ recorded stronger growth. We’re still looking at the Reserve Bank of NZ data here.
From Q1 1991 to Q2 1996 (inclusive), the median quarterly growth gap between Australia and New Zealand was 0.4%. From Q3 1996 to Q1 2010 (inclusive), the median growth gap between the two countries was 0.3%. It’s hard to see the effects of the supposed “policy drift” there either.
Stutchbury goes further than just claiming that MMP itself has induced this supposedly disasterous “policy drift”. He claims that the National (centre-right) minority government of 1996-1999 was weakened by its post-MMP reliance on minority parties, and that the 1999-2008 Labour minority government was responsible for “backsliding” on policy issues. “Decisive policy making” has apparently now returned under a minority Nationals government.
So, let’s have a look at the average yearly real growth rates during four periods, again using RBNZ data.
|National (majority) 90-96||2.7%|
|National (minority) 96-99||2.1%|
|Labour (minority) 99-08||3.4%|
|National (minority) 08-10||-1.4%|
Stutchbury’s claims of economically disasterous “policy drift” in the post-MMP period, apparently particularly pronounced under Helen Clark’s Labour Government, aren’t apparent in the data. NZ recorded healthy average annual growth of 3.4% in the years of Labour minority government.
So, if Stutchbury’s claims are not based on actual economic performance, what are they based on? Well, it looks like “policy drift” really means “failure to implement policies of which Michael Stutchbury would approve”. His examples of poor performance under Labour include the re-nationalisation of railways and Air NZ. So, MMP and NZ Labour are not assessed by any objective criteria, but rather by the extent to which they’ve delivered policies that match Stutchbury’s own preferences.
The broader point of Stutchbury’s column is to warn of the risks of a “fractured Parliament”, which could allegedly “break us”. NZ is held up as a basket case, a nigh-ungovernable polity with a disastrous economy. The reality, as we’ve seen, is quite different.