“Future Fund backs financial hub tax breaks” – Australian Financial Review
We love newspaper headlines that talk of tax breaks. We love how the journalist, the special interest group and the government talk of the need to provide incentives to businesses by reducing taxes.
But it’s usually a flash in the pan. Before long the same journalists, special interests and governments then put forward their ideas about how everyone should be taxed so the government can give money out to their favourites.
But if a tax break will help with the growth of the financial sector isn’t it logical to not levy taxes in the first place? And not just the financial sector, but everywhere.
The government bribes last year were an admission that taxation is a burden on everyone. Cash handouts were made, businesses were given permission to delay tax payments, and tax breaks were offered to businesses if they bought certain items.
Now we’ve got Future Fund chairman David Murray saying:
“We have an incredibly sophisticated financial system sitting in an Asian time zone and we have an opportunity to trade off some tax revenues for genuine growth of that system.”
OK, that’s fine. But surely what’s good for one goose is good for other geese.
Why not cut taxes everywhere to encourage “genuine growth” in other sectors of the economy? What makes the financial sector a special case for a tax cut but not shoe manufacturers or paper plate manufacturers?
We’ll assume Mr. Murray is keen to get these tax breaks for other reasons. Not just to encourage more investment in Australian financial services, but to prevent what we have from going offshore to Asia.
In other words, he wants to avoid the export of financial services jobs to other countries. That’s very noble of him.
But as per usual, Murray and his cohorts have got everything muddled up – either unintentionally or deliberately.
Just remember, when these guys in the financial services sector speak, they aren’t doing so from a neutral position. They aren’t making an objective statement on the position of the entire economy. They are simply sticking up for their vested interest.
Take this ridiculous comment from the same article in today’s Australian Financial Review (AFR):
“Professor Harper pointed out that services make up 80 per cent of gross domestic product but only one quarter of exports. ‘Australia needs more high value-added service industries,’ he said. ‘What you’d like to do is export more high value-added services because that’s what generates high-paying jobs and generates income.’”
What is he talking about? By the way, Professor Ian Harper is a director at Access Economics.
We don’t think it would be possible to read more nonsense in a paragraph than that printed by the AFR today.
For a start, why does Australia’s GDP comprise of 80% of service sector activity? The economy hasn’t been specifically designed that way. It isn’t down to free market forces.
It’s down to excessive government regulation, including the job destroying minimum wage. Of course, plenty of so-called experts and trade unionists will try and tell you the minimum wage has no impact on unemployment.
Even though that argument goes against logic. And even though it goes against the fact of Australian businesses either sending manufacturing offshore, or going out of business because they can’t compete.
Yet Murray argues that tax breaks are needed to prevent financial services people going offshore and also to encourage more people to work here in the financial industry. It’s clear then that higher costs of doing business destroy jobs.
In other words, without this reduction in taxes, jobs will be lost or not created.
Extend that to the minimum wage and you’ve got the same principle. A minimum wage rate is effectively a tax on businesses. It arbitrarily increases the cost of doing business.
Therefore, a reduction – or preferably abolition – in the minimum wage would decrease the cost to businesses and also increase employment.
It’s logical and can’t be contradicted.
Anyway, the argument from Harper is not that the service industry is already outsized, it’s that it needs to grow even more by exporting more high value-added services.
We’re not exactly sure what that means, but we’ll assume he’s referring to the financial services sector.
Surely the opposite is the case. If these boffins agree that decreasing the tax burden on the financial sector will increase jobs and exports, why wouldn’t the same apply to businesses and individuals in less ‘sexy’ industries such as shoe and sock manufacturing?
Yet the same principle doesn’t seem to apply there. In the union dominated manufacturing sector it’s all about increasing the cost of doing business and therefore ensuring unemployment, or…
Seeing those jobs migrate to the service sector.
So with all these people moving into the services industry it makes you wonder what impact it has on the Australian economy. Professor Harper answers that question himself in the quote above and here again below:
“Services make up 80 per cent of gross domestic product but only one quarter of exports.”
In other words, the majority of services are ‘consumed’ domestically.
We’re not saying the service sector is bad. After all, what’s this newsletter if it isn’t a service?
But what we are saying is that government interference, excessive regulations and high taxes are causing the Australian economy to become lopsided. The export of natural resources is the only strong leg of Australia’s exports, and even that relies on the continued growth of China.
We seriously doubt that increasing the exports of financial services is a long term benefit to the economy. You only have to look at the UK, US and Dubai to see that pinning your hopes on financial markets for sustained economic growth is a disaster waiting to happen.
If Murray and his finance chums really were interested in giving a boost to the Australian economy and increasing exports they would champion the manufacturing industry. An industry that actually produces tangible goods that can be exported.
However, as you know, these jobs are seen as less desirable to politicians who prefer to legislate them out of existence in preference for clean white collar jobs. Especially those in the financial services industry.
The fact is, Australia doesn’t need to be an Asian hub for financial services. What it needs is an economy that produces products that can be exported, rather than an economy that pours everything into consumption.
Providing artificial incentives to the financial services industry at the continued expense of the manufacturing industry will only succeed in unbalancing the economy even further.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX 200 ended the day slightly higher, closing to 4,911.10, up by 11 points. All the major banks finished higher on Monday, with mining sector down a little on concerns of rising commodity prices.
The American market was closed yesterday for the Martin Luther King Jr public holiday.
It was the usual story overnight in the UK, if it’s not the banks dragging the Footsie down, it was the mining sector pushing the index higher. The FTSE ended the day higher by 0.72% to close at 5,494.39. Eurasian Natural Resources [LON: ENRC] was the big winner yesterday, ending the day up by 3.88%. Find out what else happened in the UK here.
The Nikkei dropped 127 points yesterday, closing at 10,855.08. The news of JPMorgan Chase & Co [NYSE: JPM] heavy losses spooked the Japanese market and raised concerns that the recent rally has been overdone.
The price of spot gold in Australian dollars is trading at $1,224.06 while in US Dollars it is trading at $1,133.60. The price of silver in Aussie dollars is $20.14 and in US Dollars it is $18.65.
The Aussie dollar versus the US dollar is trading at USD$0.9264, and against the Japanese Yen JPY84.09
Crude Oil closed at USD$78.25
For the biggest movers on the market yesterday click here…
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Fair Dinkum?! Japan has done that? Should this not be brought to Sayce’s attention? Or still better, why would Sayce ignore such a counterexample to his thesis?
BOOOOO!!!!!!!!!!!!!!! lol
Japan has very different structures- they may not have called it minimum wage, so it is harder to spot. Essentiallythey have removed a lot of the worker protection laws, and this has resulted in a lot of new underpaid part time jobs being created. A significant percentage of those japanese under 30 are in these types of jobs. this has not created the kind of boom that freeing employers from their worker entitlements was supposed to.
This is a long term thing, they started this type of cuts quite a few years ago, and it did produce a temporary improvement, but ultimately, when your consumer base has less spending power and no negtiating ability (to increase wages/conditions), the economy does not do so well, because consumers can barely meet their basic needs, let alone go shopping
K, zactly!!!!!!!!!! This is what I have been trying to hammer in my posts, something that is all too easily overlooked by simplistic supply – demand analyses of the labour market, employment and economic prosperity.
The concept of a free market and supply – demand analyses have their places in economic theory, but they also have their limitations. The joke goes, ‘Why did the dog cross the road? Economist’s answer: It must have been because of supply – demand factors.’
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