Thread by @docbaty

JobSeeker/JobKeeper vs Business tax breaks

OR

Demand-side vs Supply-side economic policy

A thread...

I wanted to dive into this topic to add some context around why the proposed reductions to JobSeeker and JobKeeper make little sense when you take into account the state of the economy as a whole, and the way businesses think...

Let’s start with the economy. We have been experiencing a slowing in the Australian economy for the past six or so years, culminating in the recession coinciding with the economic fallout of our health response to the pandemic. (The recession wasn’t *caused* by the pandemic.)

Slowing business investment has gone hand-in-hand with stagnant growth in wages. That lack of wages growth has translated into strong profits. But overall, businesses haven't increased their productive capacity very much.

What we have, therefore, is a Demand problem. People don't have money to spend; businesses don't see the revenue and so try to throttle back on expenses, sandbagging wages further... and around we go.

What the government has attempted to do, over the past few years, is to stimulate Supply. Tax cuts to businesses on corporate profits; tax cuts to high-income earners - with the aim being that these groups will re-invest and generate jobs & growth(TM).

This has been the go-to conservative strategy for forty years and, for forty years it has failed to stimulate economic prosperity. Because it is hitting the wrong part of the problem... Why?

Imagine you're a business owner and demand (customers) is low. The government offers you an incentive to invest in your business. Do you a) invest to increase your capacity to supply (non-existent) demand; or b) invest in order to cut costs and increase profits?

Additional capacity when there's no demand is foolish. Having extra staff when the original staff weren't busy makes no sense. And so you'll invest to cut costs instead...

As part of the COVID recovery, the government has been allowing businesses to right off (i.e. get a tax break) any expenditure up to $150,000 on new equipment. The argument is that businesses will invest to add capacity. BUT: we know they won't...

Instead, they'll invest to reduce costs. That means automating services/production; or shifting work from people inside the company to customers (via digital services). And where are costs saved? By reducing the number of workers employed...

The other option for the government - if they must choose between demand or supply-side strategies - is to continue subsidising the wages of staff (JobKeeper) or pay the higher JobSeeker amount. This puts money into the hands of people who are otherwise struggling...

And that's money that, at a much higher rate than corporate tax breaks, finds its way straight back into the economy through the purchase of goods and services from small businesses across the country. And what do those businesses do? They hire more people...

They can afford to pay higher wages. They can think about advertising; expanding; increasing capacity to meet *actual* demand. Now they have a real incentive to invest in production instead of cost-savings... So now we have a cycle that drives the economy.

It would appear that ideology is driving the government's strategy. It is clearly not being driven by an understanding of businesses or how business owners make investment decisions. And it ignores 40 years of evidence about how economies work...

This is another example of our government not working for the majority of Australians. Through either ignorance, inexperience or wilful intransigence, they much prefer to enact policy that drives inequality and undermines our economy overall.

*end.