During the past 30 years, the rural sector has shown an upward trend in total factor productivity (TFP) and in 2010 TFP was around 50pc greater in relative terms than in 1980.
The progressive increase in TFP demonstrates that the rural sector has embraced innovation and technological change which has driven progressive improvements in the efficiency of production.
While there was some stabilisation of TFP in the period 2000-2010, the capacity of the rural sector to embrace innovation and change is important and needs to be acknowledged.
During the same 30 year period from 1980 to 2010 terms of trade (ToT) underwent a downward trend and the relative ToT in 2010 was around 40pc lower than in 1980.
This illustrates the reality that there are off-farm factors (e.g. ToT, tariffs, free trade agreements, value of the Australia dollar) that have a major impact on the profitability of rural enterprises. It also demonstrates that the future profitability of the rural sector will not be determined solely by more innovation or indeed more gains in productivity.
There are other fundamentals in the rural sector that require urgent attention. Rural debt is one example that has received a lot of attention lately and the sector is clearly struggling to find solutions to rural debt that do not include the forced closure or transfer of enterprises.
Less well known is that at present a large proportion of the rural sector is carrying an accumulated loss. This is incurred in years that do not return a profit.
Accumulated loss is ‘held’ by the Australian Taxation Office and, under normal circumstances, accumulated loss would be used to offset tax on future profit. But the reality for many rural enterprises is that the opportunity to use what could be regarded as tax credits will not be realised if the enterprise is lost.
We would like to propose that conditions need to be created to enable accumulated loss (tax credits) to be traded or transferred. The transfer of tax credits could occur between rural enterprises and lending institutions, or among rural enterprises.
The transfer of tax credits would provide an immediate injection of cash into the rural sector. The cash could be used strategically to service debt and/or implement changes in farming enterprises, such as investment in infrastructure or innovation.
This would create the opportunity, which presently does not exist, for some enterprises to transition to profitability. The history of the rural sector in embracing innovation, as noted above, gives confidence that positive change can be achieved for many enterprises, although not all.
Government has an important role by introducing legislation to enable the transfer of accumulated loss (tax credits). The degree of control on how tax credits might be traded and the price setting would need to be carefully established to avoid unintended abuse. This is especially important as in this case, tax credits would be associated with losses already incurred, whereas typically this type of program would only apply to new investment.
The concept of transferable tax credits is not radical and there are international precedents, both in North America and the European Union. The use of tax credits as outlined above is however new, but we believe that this is part of framing new thinking towards a broader set of initiatives that are supportive of the rural sector.
We are not suggesting that transferable tax credits will solve all rural debt as undoubtedly poor financial choices have been a major factor in some enterprises and other approaches will also be necessary. Transferable tax credits do, however, offer something new for government and industry to explore as part of addressing rural debt.
* About the authors:
Michael D’Occhio (pictured) is Professor of Food Security, The University of Queensland.
Flavio Menezes is Professor of Economics, The University of Queensland.