LBS economist Jan Libich has a mission. He has been determined to show that economics, often referred to as the dismal science, can be very useful in helping us improve our lives. His newly published book ‘Real-World Economic Policy: Insights from Leading Australian Economists’ is a culmination of his effort so far. It bridges the gap between academic economists, policymakers, students and the general public by exploring how influential economists – including four former central bank Governors/Board members, an ACCC Commissioner, and a current member of the federal parliament and Shadow Minister – use economic research to develop and evaluate policy.
When asked what constitutes this gap between economists and the general public, Jan Libich’s passion for economics shows: “Economics is often portrayed as divorced from the real world; it is criticized for being about boring curve-shifting, equations and heartless definitions. The book attempts to show that such image is not accurate, that economics can help people and policymakers to make better decisions and thus improve their prosperity.”
Real-World Economic Policy: Insights from Leading Australian Economists is based on a series of one-hour video-interviews the author recorded from 2011–2014 , aiming to help the reader identify welfare-improving policies in areas including healthcare, education, retirement financing, monetary and fiscal policies, banking regulation and climate change. Libich explains: “We all make hundreds of decisions every day. Economics attempts to understand how we make them, and whether we can perhaps improve on our decision making to achieve our goals (whatever they may be: economics does not prescribe that money is all we should care about). The same is true at the country level, whereby the quality of public policies can have a major impact on people’s wellbeing.”
In Jan Libich’s eyes, research in economics has been getting more mathematical over time to enable a more rigorous and objective examination of the economy: “It is about discipline, it is easier to see a flaw in logic when one has to clearly state all the assumptions rather than just use verbal arguments. Together with improvements in computing power this enabled exploration of more complicated models and environments.”
However, these developments have also created a gap between what academic research can teach us and what policymakers in government and the general public can understand. “To me, this implies that academic economists need to pay more attention to communicating their findings and recommendations in an understandable and convincing fashion. And to be honest, we have not done that as well as we should have,” Libich says. “My book is a humble attempt in this direction.”
More information on ‘Real-World Economic Policy: Insights from Leading Australian Economists’ can be obtained here.
ISBN: 9780170364386, Published by Cengage Learning Australia, Pub Date: November 2015, © 2016
“Near Enough is Good Enough”
By Mark Morris
It’s not often that I intuitively align the laborious machinations of industry policy deliberations in Canberra with the wise intonations of the Rolling Stones but that is exactly how I responded after I digested the Federal Government’s National Innovation and Science Agenda report issued on Monday 7 December 2015.
As Mick and Keith once sagely wrote ‘You can’t always get what you want but if you try sometime you find you get what you need.’ This pretty much sums up the overall impact of the myriad of changes announced which collectively makes Australia a far more attractive place in which to invest in innovative businesses. This is the case even if the report falls short of the cutting edge vision of economies like the United Kingdom.
On the plus side it is clear that the Federal Government has commendably adopted a multi-disciplinary approach to improving research and development (R&D) and related commercialisation. It has done this by proposing measures that enhance access to venture capital, drive closer collaboration between universities and industry, improve educational outcomes in science, technology, engineering and maths, ensure digital by default delivery of government services and capitalises on the growth of big data and the need to leverage it for the benefit of the economy through advanced data analytics.
As such the Federal Government is seeking to apply a more holistic view on innovation policy along the lines championed by the Cutler Review of the National Innovation System way back in 2008. This was before the Global Financial Crisis derailed the process to the point where we did not need a Minister for Science as if that distracted us from the fixation of repairing the Budget Deficit.
Crucially the tax settings of the new innovation regime are also a considerable improvement over the status quo. Tax incentives are not only available for companies undertaking R&D but also for investors who provide the venture capital to fund the commercialisation of any resulting R&D.
Accordingly, the Federal Government has finally recognised that tax breaks need to be provided over the life cycle of a business to encourage entrepreneurs to conduct and invest in risky projects which may ultimately not be viable especially in the new rapidly dynamic and volatile digital economy.
As a case study to the Report highlights the retention of the existing refundable R&D tax offset allows start-up companies to leverage tax credits to help finance eligible research and development. This is so, even if it appears that the offset will be retrospectively cut from 45% to 43.5% from 1 July 2015).
This has been augmented by new tax breaks which allow individual investors a 20% non-refundable tax offset for investments in certain start-ups, and a capital gains tax exemption where investments held in such companies are held for more than three years but less than 10 years. In addition, partners in early stage venture capital limited partnerships (ESVCLP) will get a 10% non-refundable tax offset on capital invested in the partnership which can now raise funds of up to $200 million in early stage development of eligible activities.
Taken collectively there is therefore much to be praised in the new package.
So where does it fall down?
Firstly, the Report flags that there will be yet another review of the efficacy of the R&D incentive by the newly created Innovation and Science Australia Board. This concession has been around in various forms since 1985 and has had almost as many reboots or variants as the James Bond franchise. The last thing that an innovative entrepreneur wants to see is uncertainty as to whether it will still be around to help finance their initial R&D so let’s hope it is enhanced and not diminished.
Secondly, the take up in ESVCLP has tended to be relatively low as high wealth investors with surplus cash want some control over their venture capital investment. This is not the case with this investment vehicle where your investment is generally capped to a maximum 30% interest. I do not see that radically changing because of the prospect of a 10% non-refundable tax offset. And the proposed rules on other investors are typically over-restrictive.
Thirdly, and perhaps most importantly, the Report does not address our internationally uncompetitive corporate tax rates of 28.5% and 30%. Additionally, the demarcation between those tax rate regimes can itself be a practical nightmare to navigate.
How does this compare to the United Kingdom’s 18% corporate tax rate to apply from 1 July 2020, and particularly to royalties and capital gains arising from intellectual property subject to their patent box regime which will likely be subject to further concessional tax treatment?
I would suggest not that well even if it is not an apple to apple comparison.
It’s true that businesses don’t do things solely because of a tax break but a whopping differential in tax rates could be a deciding factor in a mobile digital world as to where you want to invest your capital in innovative products and processes.
However, even if the proposed changes fall short of addressing all facets of our international competitiveness they do signal that our Federal Government is finally serious about instilling an innovation mentality and culture in our businesses, universities and the broader community.
Which leads us back to Mick and Keith.
Maybe the announced changes are not what we ideally want in becoming an international trendsetter on innovation but maybe it’s what we need to allow us to nationally lift our head and embrace being part of the new innovative digital economy.
And given where we have been perhaps that is enough at this point.