Tuesday, April 7, 2015

Structural Change in the Australian Economy

This employment graph is typically used to illustrate the change in the Australian economy over time.  But the services industries are very labour intensive, and there have been significant changes in the mix of services included in the data. The graph below shows the long term change in percentage contribution to GDP.  ( Note: Service and Distribution are grouped as Services in employment data )

The large growth in Services ( excluding Distribution ) reflects three trends.
Firstly - the growth of two income families has created demand for services that previously were conducted in the home - child care, pre-schooling, home maintenance and servicing, aged care, and cooking - and hence not previously included in the GDP data;
Secondly - there has been an increased demand for health, educational, recreational and financial services with increased incomes, and pressure for employment;
Thirdly - many activities that used to be run in-house in manufacturing, agriculture, mining, construction, and distribution, are now outsourced and re-classified as services.

So from a structural change view, the growth in services is not as dramatic as it first seems, but from a taxation or government finance point of view, it is a significant change with long term consequences.

Around 1900 - it made sense to tax goods as this collected the bulk of the financial activity in a format that made assessment easy and collection efficient.

Around 1950 ( and later ) - the growth in combined services encouraged the additional of a VAT or GST to both goods and services, as a practical way to tap into the increasing share of financial activity that was service based.

Around 2000 - it seemed appropriate to increase the VAT/GST rate, and/or extend it to include previously exempt services and goods - typically education, fresh food, and some health services.

However, Finance and Insurance currently contributes about 10% of GDP ( and is growing at around 3% ) and a VAT/GST typically fails to collect tax revenue from this activity. Part of the reason is the strong political lobbying from the industry in general, and the small number of powerful and wealthy individuals who benefit from the trading in finance. Part is also the difficulty in defining the service that should be taxed.

This problem has encouraged proposals for an alternative tax on the use of money - a tax that would replace all current taxes - VAT/GST, sales taxes, and levies - and be based entirely on the interface of money exchange. ie: levied at the point of deposit and withdrawal at financial institutions.

The argument is that this captures the true overall economic activity as based for taxation ( as revenue for government ) and is capable of responding to any future structural change in the economy.

There are also moral and environmental arguments for such a tax on the use of money, and these will be discussed in later posts.

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