Pandemic-era tax breaks did not lift investment: RBA
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The news: New research from the Reserve Bank has found that pandemic-era investment tax breaks, such as the extension of the instant asset write-off, did not result in an uptick of investment.
But similar investment tax breaks during other economic downturns, such as the global financial crisis, did have a measurable and significant benefit.
Unincorporated businesses were found to respond more to investment tax breaks than incorporated companies.
The context: The non-technical summary of the research noted that this research helped understand whether costly government policies were having intended benefits and what the likely impacts might be of future policies on the economy.
The RBA compared firms that were and were not eligible for policies to “tease out the effects”.
One of the reasons the pandemic policies may well have not led to increased investment was the nature of the disruptions in the economy, leading some businesses to perhaps not want to invest or to have faced difficulty getting new equipment installed.
What they said: "We find strong evidence that the policies implemented during the GFC increased investment ... However, there is little evidence of other policies implemented during the 2010s, or the COVID-19 pandemic, having a substantive effect on firm investment," the paper said.
"These findings suggest that investment tax breaks can be an effective countercyclical tool, but their effectiveness is likely to be highly dependent on the nature of the economic downturn. For example, they seem more likely to be effective in a downturn caused by a dislocation in credit markets, compared to a pandemic where the economy is partly shut down.
"Investment tax breaks can be effective tools for stimulating the economy during a downturn — but this is highly dependent on the nature of that downturn."
The source: Reserve Bank Research Discussion Paper
