Economic vandalism

Tony Evans

Tony Abbott is looking after its mates and leaving everyone else to look after themselves. Pensioners, the sick, and students are amongst those targeted for harsh treatment in the budget, while tax breaks for the wealthy are left untouched. Worse still this government is sacrificing future growth for its own narrow, selfish ends. The $30 billion cut from education spending over the out years in the Budget projections will leave future generations underskilled. 

Equally important are the cuts that are little talked about – cuts to spending on science and research and support for industry development. Together these cuts equate to a further $5 billion that is pulled out of funding for the country’s future, leaving our industry structure reliant on the boom and bust mining sector, threatening the living standards of all Australians. 

This is economic vandalism of the first order. As prominent business specialist Goran Roos warns, future living standards at risk as Australia faces further de-industrialisation and loss of economic complexity.[1]  A tax system that cuts out unproductive rorts would enable genuine welfare needs to be met and fund a increase in government direct expenditure on R&D to improve long-term industry competitiveness in high value adding goods and services.

Since the election in 2013, reports from the Productivity Commission and the Commission of Audit have been used to justify a ‘flat earth’ approach to economic and industry policy. An alleged ‘budget crisis’ has been conjured out of nothing to justify the Abbott government’s proclamation that the ‘age of entitlement is over’ as cover for its cuts to welfare payments, support for science, and other industry assistance. ‘Overly generous’ workplace agreements were criticised as ministers sought to shift the blame for job losses in manufacturing onto the victims. Wage cuts are called for, for the young, for workers in depressed states, and for those working on weekends. It was suggested that workers who took time off to make blood donations were bludgers.

Abbott’s tactic of blaming the victim was working until the budget, but now iseems to be unraveling. Much has already been written about the government’s cuts to pensions (which would see people forced to work until they are 70), health, and education so these notes will concentrate on the reduced spending on science and research and support for industry development set out in the budget.

Industry

The cuts to research and science spending include reduced funding going to the CSIRO and other public sector research organisations. The funding for commercialisation of new ideas and processes is ended, as are ten different programs supporting apprenticeships and skills development, along with programs that sought to improve the financing of technology start ups, and support for the hundreds of local parts makers in the Automotive industry.

Australia was already under performing on support for Research and Development (R&D), now we will fall further behind, making it harder to grow exports of high value adding goods and services. 

All this will mean that as the Australian dollar eventually adjusts to reflect falling commodity prices for iron ore and thermal coal the price of our imports will rise, and we will not have the capacity to pay for those imports.

Perverse effects

The budget will strip the CSIRO of $111 million in funding over four years, meaning that 500 science support staff (10 per cent of all CSIRO employees) will need to be laid off almost immediately. Cuts to the Co-operative Research Centre (CRC) program will see funding fall by $80 million over four years. The Australian Research Council loses $75 million, Geoscience Australia $36 million. These cuts have the perverse effect of reducing private sector investment in research, with every dollar of public money given to the CRC program attracting up to four dollars in research funding from industry partners.

This is also true of the cuts to funding for the automotive industry, with around three dollars in private investment (often from overseas) resulting from each taxpayer dollar spent in programs to support the industry. The abolition of the Australian Renewable Energy Agency will see funding for renewable energy projects (which typically sees each dollar it invests matched by two to three private sector dollars) fall by more than $1.5 billion. Thus the $5 billion cut from industry, science, and research programs could result in the loss of an additional $10 to $15 billions in investment from other sources.[3]

This is not to run a modern, balanced economy. Instead of parsimonious cuts to industry assistance and education that are supposedly allegedly designed to fix a non-existent ‘debt crisis’ we need to be building a modern science and research base to match that of countries like Germany.

Lessons from Germany

Like Australia Germany is a high-wage country but, whereas other industrialised nations buckled in the face of competition from low wage economies, Germany managed to increase its manufacturing exports to China and the rest of Asia. While Germany has many large multinationals like BMW, Volkswagen, and Siemens its small and medium-size enterprises (SMEs) are its real strength, both as suppliers to multinational corporations and as exporters in their own right. These SMEs (better known as the Mittelstand) generally avoid mass markets, but they dominate niche businesses. They are rarely the cheapest producers, yet the superior quality and performance of their products enables them to command premium prices in export markets.

A key factor in Germany’s manufacturing success is the Fraunhofer-Gesellschaft (the Fraunhofer Society), an independent non-government organisation that provides high-quality applied research that small and medium-sized firms could not otherwise afford.[4] Fraunhofer operates more than 60 research institutes with more than 250 business focus areas and core competencies. The average institute employs between 300 and 400 people, though some are larger. Overall, Fraunhofer employs 22,000 scientists and research specialists.

Other factors that are also important to Germany’s successful manufacturing SMEs include:

  • Superior vocational education systems and high levels of investment in skill development;
  • An industry level collective bargaining system that delivers high productivity levels and job security;
  • Regional banks that are devoted to providing long term finance for independently-owned small and medium-sized firms.[5]

To follow in Germany’s footsteps governments must commit to reforming Australia’s financial system to free up development capital for growing SMEs.

Changes to industrial relations laws are required to drive co-operation and innovation in the workplace. But what is most needed is a bipartisan commitment to a substantial increase in funding for both education and applied research. More funding for the CSIRO and University research labs is required rather than less. The objective should be to lift government direct expenditure on R&D to at least 0.35 per cent of GDP by 2020.

Provision of this most of funding would need to be conditional on a private sector contribution of something like two or three dollars for each taxpayer dollar invested to deepen the level of collaboration between publicly funded research labs and industry.

While Germany’s Mittelstand are concentrated in machinery, electrical equipment, chemicals and automotive parts, and Fraunhofer accordingly centres much of its effort in those area,s Australia’s research priorities would likely centre on carbon abatement and other ‘green’ technologies like light weight materials and storage batteries, along with health solutions and medicinal products. How could this research effort be paid for, and how can we afford to pay reasonable pensions to our aging population at the same time?

Tackling tax avoidance

While the budget cuts much needed services, welfare payments and industry assistance, Abbott has turned a blind eye to evidence of tax avoidance by his rich mates at the top end of town.Tax advisers concede that many of their super-wealthy clients are able to have their incomes taxed at zero to 15 per cent instead of the top rate income tax rate of 46.5 per cent by using generous concessions and other “cracks” in the superannuation system.[6]

Australian Tax Office (ATO) data reveals that the richest 10 per cent of all Self Managed Superannuation Funds (SMSFs) hold nearly half (46 per cent) of all assets under management in such super funds, representing accumulated wealth of around $217 billion dollars. As one tax lawyer told the Financial Review “… these are people … who have funded their retirement several times over. They don’t need (tax) concessions,”

All up the accumulated wealth held by the largest SMSFs would have increased by about $120 billion in the last three years. If that $120 billion in income had been taxed at the top marginal rate rather than at the 15% concessional rate for superannuation contributions something an additional $30 billion in income taxes would have been paid by those 50,000 or so super-wealthy individuals and families.

This rough and ready calculation seems to be of the right order of magnitude given that the Treasury predicts that superannuation tax breaks will cost the budget $170 billion over the next three years. All the talk about debt and the supposed need to increase the GST are just scare tactics, what’s needed is a tax system that cuts out the unproductive rorts (negative gearing is another one) so that genuine needs can be met. Unlike Joe Hockey’s phoney medical research fund gimmick those less well off would not have to pay for the development of new health and pharmaceutical products every time they went to see a doctor.

The last word here should go to Roy Green, Dean of UTS Business School at the Sydney University of Technology, who warns that the cuts to industry assistance and science means that 'less R&D will originate in Australia, more of our start-ups and early stage ventures will go offshore, and fewer domestic firms will be in a position to … participate in international markets.' [7] 'Without world competitive knowledge intensive industries, including advanced and specialised manufacturing,' he continues, 'we face the prospect of our very own "Argentina moment", … when a first world lifestyle, dependent on the import of high value consumer goods, can no longer be supported by a third world economic structure, based on the export of unprocessed raw materials.'


Tony Evans is a research officer with the AMWU. During the 1990s he was a member of the Australian Manufacturing Council representing the ACTU.


Notes


[2] Small and medium sized enterprises

[3] The budget includes new spending totaling a bit more than $1 billion for business start-ups and skills but what these new programs will set out to do is yet to be seen

[6] ‘Tax leakage’ alarm over super-wealthy SMSFs, Australian Financial Review, 22 May 2014

See also:

Suggested citation
Evans, Tony, 'Economic vandalism', Evatt Journal, Vol. 13, No. 7, October 2014.<https://evatt.org.au/news/economic-vandalism.html>