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Turnbull's magic budget bowl is a fantasy

  • 07 December 2017


Many of us have grown up with Norman Lindsay's classic tale of the magic pudding; the pudding bowl that never empties no matter how often the pudding was eaten. It seems that the magic pudding bowl has been borrowed by the federal government.

The Turnbull government has raised the prospects of delivering new business and income tax cuts. While details surrounding the proposed cuts are limited, the government's rationale for them is clear. For businesses, the tax cuts are all about Australia remaining globally competitive and stimulating economic investment that will deliver more jobs and better pay for workers.

The proposed cuts to income tax has a different but equally compelling rationale according to the government. Income tax cuts will provide more money in the pockets of the average punter, who in turn will spend that money, which will encourage increased economic activity. Increased economic activity should lead to greater business profits; and to close off the loop, create more jobs and deliver higher wages. It is all very neat.

The economy rarely works as well as the theory might suggest. For the theory to work, people must be rational decision-makers or at least contemplative of the risks and benefits of every decision they make. Human beings are complex creatures who make as many emotional choices as they do rational ones. Most of us marry for love without having done a risk and cost benefit analysis of our future with a new partner.

So to infer such positive outcomes from tax cuts is to ignore the complex nature of our economy, the role it plays in our society and the motives and behaviours of the people who participate in it.

After some 25 years of consecutive economic growth we still have more than three million people living in poverty. Company profits in 2017 continue the march upwards while wages growth remains low. So low that even the Governor of the Reserve Bank, Phillip Lowe, has raised it as an issue for the Australian economy.

In 2015 the Coalition government introduced a range of tax measures including corporate tax cuts for small business whose tax rate is now 27.5 per cent, down from 30 per cent. Small business accounts for nine in ten businesses and 33 per cent of Australia's GDP. They also employ 40 per cent of Australia's workforce, and pay around 12 per cent of the total company tax revenue. Given the significance of the small business