Investment allowance too small
letter published in The AFR , 16 Dec 2008
The announcement of a 10 per cent investment allowance is a welcome recognition of the importance of encouraging the business sector to look beyond the gloomy short term outlook for both domestic and overseas demand.
There is, however, a question of the likely effectiveness of such a small allowance (and for such a short period) in circumstances in which, among other things, deleveraging and limited access to credit now appear almost certain to involve recessed demand for a considerable period.
The One Nation measures introduced in 1992 by the Keating Government also included a 10 per cent investment allowance but in circumstances in which there was a less discouraging demand outlook. More relevant, perhaps, is the situation that faced the economy in 1976 when, after 5 years of stagnant business investment and no indication of recovery, the Fraser Government introduced a 40 per cent allowance that produced such a quick response that it had to be scaled back to 20 per cent in 1978.
Particularly having regard to the relative importance of private investment (more than five times larger than investment by the government sector), the government would be well advised to reconsider the allowance rate for business investment and the period for which it might apply.
Whether on (much touted) infrastructure or other investment, there is relatively limited value in adding to government investment unless the private sector is able to expand.
Des Moore
Director
Institute for Private Enterprise
South Yarra, Vic