26
Feb
2017

How to stop Australia becoming a Stagnation Nation

by Jim Minifie


Australia risks descent into economic stagnation as the mining investment boom fades, according to a new Grattan Institute report.

Stagnation Nation? Australian investment in a low-growth world urges governments and policymakers to do more to ensure Australia remains a dynamic, growing economy.

Australia is experiencing its biggest ever five-year fall in mining investment, as a proportion of GDP. And non-mining business investment has fallen from 12 per cent to 9 per cent of GDP, lower than at any point in the past 50 years.

What’s needed is perspective, not panic. The shift to a services economy, and a fall in the price of capital goods, mean businesses can thrive with lower levels of investment. And there are some green shoots in the non-mining states.

But this is no excuse for complacency. A third of the fall in non-mining investment is a result of slow economic growth, and that’s a problem requiring concerted action.

The report says the Federal Government’s key policy prescription – a cut in the company tax rate from 30 per cent to 25 per cent over ten years – would attract extra foreign investment, but at a cost: it would also reduce national income for years and hit the budget. Committing to the plan now, before the budget is on a clear path to recovery, risks reducing future living standards.

Any cut in the company tax rate should be part of a wider package of reforms that explicitly funds the cost to the budget.  The package could include an increase in the GST rate from 10 per cent to 15 per cent, which would bring in about $11 billion of extra revenue a year, even after compensation for lower-income households. The tax treatment of capital gains, borrowing and superannuation could also be adjusted.

Federal and state governments should also introduce broader reforms to promote growth. They could invest more in infrastructure – but only if they can build better infrastructure. They should improve workforce participation, by ensuring tax, transfer, and childcare support do not impose high effective marginal tax rates on the second earners in households. They should improve the efficiency of urban land use, by permitting more density in the middle and inner suburbs of Australia’s major cities.

“There are no silver bullets for Australia, only tough choices,” says Grattan Institute Productivity Growth Program Director Jim Minifie.

“Australians cannot take economic growth for granted, and the risk is real: we could join the global low-growth pack as our mining boom winds down.”

Read the report

Further enquiries: Jim Minifie, Productivity Growth Program Director, Grattan Institute
T. 03 8344 3637 E. media@grattan.edu.au