Govt Should Reduce Tax Rates To Increase Productivity

Well, it's a good thing that the Reserve Bank of Australia didn't increase interest rates last week.  If it had, there may have been nothing for it to do next month.
 
Obviously our highly paid, full time monitors of monetary policy and the economy - namely the Central Bankers at the RBA - couldn't predict a further large fall in the unemployment rate.
 
In reality it doesn't really matter what the RBA does now; it has missed its opportunity.  The inflation snowball began rolling down the hill long ago.  By now it has grown to such a size that a 25 basis point rise would have no more chance of slowing inflation that a fly would have of stopping a 100kg snowball rolling down a hill. 
 
It has reached such a scale that we will soon have the problem of over capacity to deal with as well.
 
There can be little doubt that as inflation continues to rise, the argument for increased productivity will gain a greater share of the headlines - it has already done so to some extent.
 
The problem here is not so much increasing productivity but rather the way that “productivity” gets mistranslated into phrases such as “improving infrastructure networks” and “more public sector spending”. 
 
That is not increasing productivity.  That is just increasing spending - anyone can do that.  With the amount of money that is flowing into the resources sector it must seem an easy choice for them to spend more which in turn feeds down the economic food chain to other businesses who do the same thing - spend. 
 
But, as we said before, that isn't necessarily improving productivity.  Improving productivity involves getting more output for essentially the same input, only in a more efficient manner.
 
But that's boring.  And for most businesses and governments it doesn't attract nearly as much attention as a big round of spending activity.
 
And we can see that already, leading up to the next election.  More promises of higher public spending are already being thrown around.  The proverbial pork barrel.
 
It seems to have been a theme for this week, government interference in areas of the economy that it has no business in getting involved.
 
Now there is talk that the government should help private companies to build ports, and private railways between mines and ports in order to "increase productivity."
 
But surely it is up to industry to decide whether that infrastructure is built.  Maybe they don't want to increase productivity as it could increase supply and therefore reduce the price of the commodity.
 
And if the supply is increased through higher costs, not improved productivity, it may prove to be disadvantageous for these private companies.
 
Rather than the government suddenly becoming experts in the mining sector (or any other industry, eg. telecommunications) and deciding how the industry will benefit, it seems more sensible, if they are that concerned, to reduce tax rates and allow industry to make its own decisions on where the money should be spent.  If they get it wrong?  Well, tough luck.  At least one of their competitors will get it right which can only be good for the consumer. 
 
The alternative?  Ever increasing-surpluses of taxpayers’ money, leading to ever-increasing public sector wasteful spending.  It can only end in bad news.

Kris Sayce
The Daily Reckoning Australia

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