The hope of economic growth
The narrative of endless economic growth delivering society’s needs is questioned by this revealing graph on the classical components of GDP, released in Prosper Australia’s Trickle Up Economics report.
The national accounts provide detailed analysis of who gets what. But when the gross figures are broken across the three factors of production, the streamlined perspective reveals what many feel deep down.
The chart delineates the distribution of GDP to the three factors of production — land, labour and capital, net of the tax take. It shows that the growth of land rents has accompanied an ever increasing tax take, leaving precious little for the “productive” sector. The productive sector — workers and businesses — are the engine of economic growth.
In 1910, land only accounted for 5% of GDP. The tax take was just 6%, leaving some 89% of GDP for labour and capital.
Jumping forward to 1980, the twin pressures of land price increases and a more rigorous tax and transfer system reduced net GDP by an additional 35%.
Even during Australia’s ‘Great Economic Miracle’ (1994 — present), record economic growth has failed to deliver its promises. In 1994 land rents and taxes accounted for 37.5% of GDP, with 62.5% left for the productive sector.
The halving of the Capital Gains Tax in 1999 saw the pie shrink again. Only 57% of the nation’s wealth remained on the table for workers and business.
Today, there is just 50.5% of the wealth left for labour and capital to contest.
Economic analysis still focuses on the battle between labour and capital. Few countenance the sliding share of income available for the productive sector. As the commodification of housing ramps up, this damaging trend will accelerate without root and branch tax reform.
Economic growth is not only failing the environment, but it is failing those who believe the harder you work, the luckier you get.
Policies that promise to increase economic growth are often held out like an olive branch to wage earners and small businesses. ‘Don’t worry, it will be better tomorrow.’ The lure of ‘hope prevailing’ distracts away from the manner in which income is sourced.
Growth is the carrot society chases, as the wealthy sit back and watch without sacrifice.
Since the Reagan/Thatcher era, policies aimed at increasing economic growth have been gilded with the promise that growth will “trickle down” into higher wages and profits.
The Trickle Up Economics report shows how any improvements in life — including a reduction in taxation — will be hard baked into higher land prices. Higher land prices mean bigger mortgages, and higher household debt. Debts infer interest payments — money that slips through the fingers of consumer demand.
As the problems mount in a society where people no longer have time to grow their own food, to look after their kids or get to know their neighbours, the costs to society grow. The spiral of welfare reliance is triggered by the weight of ever higher land prices and poorly directed taxation.
The latest policy distraction is of course company tax cuts. But these will do little to address the twin creepers of land rents and a tax system chasing its tail.
Any cut to the company tax rate will only increase commercial rents. Why? The potential spending power that company tax cuts enable will be absorbed by higher rents over time. Commercial land rents are already accelerating, with some expecting an 18% increase in Melbourne this year. Many businesses are toiling under the weight of $100,000 yearly rents, leaving less for wage increases.
Not only does the secret to inequality reveal itself in the graph, but so too do the greatest economic calamities of the last century.
The “Global Financial Crisis” in 2008 and the recession of the early 1990s were preceded by notable squeezes on the percentage of GDP accruing to labour and capital, as distinct from land. Similar trends were evident in 1929.
Contrary to the public narrative, gushing news reports of lucky landowners taking millions in capital gains should be concerning. Land price gains constrict the Australian economy by 0.124% for every 1% increase in land rent (as a share of GDP).
Land has long been dismissed as an insignificant player, with many economists claiming it constitutes less than 2% of GDP. However, since 2003 the economic rent of land has consistently exceeded 15% of GDP.
Looking at this chart, it’s as if the real estate induced economic downturn of 2008 never occurred. Australian land prices have continued to accelerate upwards to now soak up more than 20% of GDP (2017). On current trajectories, land and taxes will soon devour some 60% of GDP.
The olive branch could be transferred to landholders. They would be better off in absolute terms if a higher tax liability was placed on their holdings. Higher taxes on land and natural resources would see the lower tax burden on the productive sector trickle up as demand for prime locations. The resultant land tax redirects the competition for location away from higher mortgage debts, and towards giving the economy’s engine room a tax cut.
Growth could then be more meaningful when incomes are based on positive economic contributions. Policy makers must adopt a bird’s eye view of the economic pie to grasp the long term trends before society is radicalised rather than filled with genuine hope.