Creating jobs by stimulating business

by David Richardson

One of the main things the Treasurer stressed in talking up future scenarios was the support for business. There are two main programs designed to increase business incentives. Those are:

  • Full expensing which allows companies with a turnover of less than $5 billion to fully deduct the cost of investments rather than claim depreciation over the lifetime of the assets concerned, and
  • Loss carry back provisions which allows companies to get a refund of tax paid in earlier years if they make a loss in 2020-21 and 2021-22 [1].

The Treasurer’s speech mentions that “The combination of the immediate expensing and loss carry-back measures will create an additional 50,000 jobs across the country.” Budget Paper No 1 clarifies that this actually means a peak of 50,000 jobs by the end of 2021-22. GDP is expected to be $10 billion higher at that time. Budget Paper No 2 shows that the cost to the Budget is $14.5 billion in that year (2021-22). So that means the creation of 3.4 jobs for every million dollars spent on these particular tax cuts for business. The increase in GDP means that for every million dollars spent, GDP increases by $690,000.

By comparison, a million dollars spent on nurses creates 6.2 jobs based on ABS figures for health services supplied by the private sector. That does not account for any indirect or multiplier effects.

We think the Government’s estimates of job creation on this account is optimistic. Businesses tend to be hard-headed about investment and wait for an increase in demand to validate investment decisions.

These measures and the estimated employment effects are exactly what is meant by “trickle-down economics”. John Kenneth Galbraith once used the imagery of feeding hay to work-horses and watching birds forage through the horse droppings in search of undigested seeds.

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[1] Normally losses can be carried forward and offset against future profits, but this allows losses to be carried “backwards” as it were.

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