Trump’s US tax cuts mean lower GDP and fewer jobs here

6 March

Luke Sayers - PwC Chief Executive Officer. This article first appeared in the Australian Financial Review, 6 March 2018.

In the rapidly changing world we find ourselves in, risks to Australia's growth have taken a worrying turn in the past six months. At the top of the list of worries, is the widespread tax reforms delivered by the Trump administration in the US. These not only include a dramatic cut to the headline corporate tax rate, but a range of incentives designed to encourage on-shore manufacturing and innovation, as well as repatriating a significant proportion of the $US2.6 trillion in offshore earnings back to the US.

The biggest risk to Australia from these reforms is the loss of domestic and foreign investment to the US. PwC has modelled the potential impact and for every 5 per cent fall in foreign and domestic investment in Australia (excluding investment in mining and property), we will see a $3.3 billion hit to gross domestic product and the loss of 29,000 jobs in the current year.

As a consequence of these economic shocks, the 5 per cent decline in investment would increase the commonwealth budget deficit by $1.47 billion in the first year.

While Australia has been hotly debating our tax system for the past decade, we have made very few changes and certainly nothing that resembles wholesale reform. While we've been debating, running models, and writing white papers, other countries have been taking action. The result: Australia's tax system is seriously out of date and far from globally competitive.

The US reforms are not just a risk to the future prosperity of our current businesses, they almost guarantee Australia will not be the destination for tomorrow's businesses.

Australia's prosperity is dependent on foreign capital. Our savings don't meet our investment needs and we have been a net importer of capital in nearly every year since Federation. Australia competes in a global market for capital and we should not assume we are entitled to a share. The proposed drop in the Australian company tax rate to 25 per cent over a ten year period, while now more critical than ever, is not enough.

Australia's weaknesses – anaemic wage and productivity growth, one of the highest corporate tax rates in the OECD, high energy prices and a challenging industrial relations regime – means Australia's growth prospects are in jeopardy. We have to reform our tax system to create the conditions that encourage long-term business investment, with the aim of driving growth in productivity, as well as, ultimately, jobs, wages and the size of Australia's taxation base. If we want to continue to be a place where businesses want to invest, doing nothing is no longer an option.

Another emerging risk for Australia is our relationship with China. We have recently seen the Chinese government reacting to the Australian government's public stance on a range of issues, from territorial claims in the South China Sea to growing concerns about foreign influence in our domestic politics.

In February, the Chinese Ministry of Education and Chinese Embassy in Australia published an alert warning students to be vigilant about their safety while in Australia. This was widely interpreted as a first step in China pushing back against what it regards as unfriendly actions taken by the Australian government on a number of matters and could have far reaching implications for our education system.

If the relationship between our respective governments continues on this path – in the short term at least – there's a very real risk that China could express its displeasure through economic channels. One of the ways it could do that would be to limit student and tourist visits in Australia which currently make a $9.2 billion annual contribution to our economy. The consequences of such an action would be sudden and substantial with GDP falling by $2.3 billion in 2018 and 20,000 full-time equivalent jobs disappearing.

Six months ago, both of these scenarios looked unlikely but if you look back on global events over the past five years, what we have often thought could never happen, is increasingly becoming reality. This requires our policy makers and business leaders to be more agile and more courageous than ever before. What I hear from CEOs every day is a desire to transform their businesses, adopt new technologies, and embrace change. What I see from our policy makers is debate stuck in a quagmire and focused more on political point scoring than what's in the best interests of our country.

While I am an optimist by nature, when I look at the geopolitical and competitive forces we are facing, I start to feel nervous about our future. Business and government must work together to prosecute real change that will deliver benefits for all of society. We need policies that drive innovation, investment and jobs growth, and a tax system that is competitive and aligned to the businesses of tomorrow, not the past.

Our new modelling looks at three risks for Australian growth - US tax reform, deteriorating relations with China and a cyber attack on a major payments system. Read more in our report here: https://www.pwc.com.au/publications/imagine-the-unimaginable.html

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