What is ahead in 2025?
So it appears I never wrote the promised forecasts for 2024, with our sole forecast in the podcast not really coming to pass. Yes, Chinese economic growth slowed and commodity prices did decline a fair amount – but it wasn’t the housing bust slump transitioning to a sharp drop in international demand for Australasian products that was discussed.
As a result, Gulnara has told me I have to make some 2025 projections right now, before I get lazy!
With a Trump presidency, Australian elections, geopolitical and technological change, and a possible fraying of the social contract in New Zealand (at least from the media in Aus) all topics on the horizon, I might as well highlight some of the key things I’ll be keeping an eye on.
The Trump effect on global corporate tax
Everything about Trump’s rhetoric and view of governance I find insulting – and I’d gladly live in a poorer world with less othering than a materially rich world obsessed with grouping and ranking groups of people.
However, instead of placing our concerns with Trump in his fundamental disrespect for the freedom of the individual many of us economists instead simply point to the economic costs of his suggested policies – especially tariffs.
Cart-blanche tariffs were a significant driver of the Great Depression, would involve some of the largest tax increases in US history, and are fundamentally unequitable.
But I have a funny feeling that Trump will do something else that he will call a tariff – but that will actually support the OECD BEPS program to reduce tax avoidance, and push the world to a more stable and potentially equitable corporate tax base.
A destination-based cash flow tax (DBCFT).
As we chatted about recently, a DBCFT is a type of tax system designed to tax economic activity based on where consumption occurs rather than where production or income generation takes place. It combines a tax that looks like a value-added/goods and services tax but on a full cash-flow basis - taxing net cash flows in the jurisdiction where the product is sold.
This sounds like the protectionism Trump wants to sell - exports are untaxed while the imported price of products is taxed (Border Adjustment Tax). However, if this is implemented across countries all that happens is that exchange rates adjust and the distribution of taxable corporate income switches to consuming countries.
Such a reform will become evident during 2025 – and will force countries like Australia and New Zealand to significantly rethink both their income and consumption tax systems. However, once initial disruption is worked through this may be a globally positive move.
As I said at the start – I’d rather be in a poorer world without the socially poisonous rhetoric of Trump and all the other groups of wannabe strongmen/strongpeople. There is no economic benefit that makes totalitarian suppression of individual freedoms acceptable in my mind.
The problem with economics, and how we as economists communicate it, is that such economic benefits and costs sound as if they are everything – a reason why someone like Trump will look to policies like this to cut such comments out of the debate.
Teals as KingMaker and the return of tax-transfer reforms
With an Australian election likely sometime in the middle of 2025, it is probably a bit early to predict what will happen – especially as I don’t understand politics here yet.
But a lack of knowledge doesn’t stop me from saying what I think – as regular blog readers can attest to.
So my prediction is that neither the Coalition or Labour will be able to govern alone, and there will need to be changes made to bring independents onboard.
Although the shared focus of Teal politicians has been concern about climate change, I am not expecting the driving factor to be a push for a carbon tax or climate regulation. Instead it is going to be tax-transfer policy changes.
Recently Alegra Spender released a series of tax reform proposals while David Pocock has been strongly discussing changes to the JobSeeker payment rate.
Given this prediction I’ll likely make it a priority to go through these platforms and do a bit of writing on the trade-offs involved from different reforms.
The death of a major piece of “internet infrastructure”
With interest rates higher and technological disruption ramping up, it is clear that major technological companies are starting to feel significant pressure to find a way to maintain market share and maintain a sufficient rate of return.
Two major products are showing this stress – Google Search and the Youtube/Twitch environment.
Google Search is facing competition - lets be frank, for all of the talk ChatGPT and the such are really an advanced version of Google Search. Either because of this competition, or because the search engine is falling apart due to excessive advertising, using Google Search just isn’t as enjoyable anymore.
But there may be few more years left for search. The real pressure looks like it is on the free streaming platforms. Youtube switched to less frequent - but longer unskippable ads - during the year. However, it now feels like the frequency has returned and the ads are simply longer.
While standard TV shows are built with ad breaks in mind, Youtube videos are not, making the jarring effect of adverts even worse. This has also led to an arms race about ad blockers, and a situation where Youtube Premium - with a distinct lack of high quality content - costs more than Netflix.
The main take-away from this is that Alphabet is facing significant risks at the same time that government regulation on the company is ramping up. By the end of 2025 I expect one of these products to be under serious threat of being shut down, with a clear and present competitor taking over.
Conclusion
These are my three predictions for the year.
Trump will introduce a destination based cash flow tax.
Neither Labour or the Coalition will win a majority, and the Teals will determine the next government.
An Alphabet product will be on the verge of dying, or will have largely been replaced by a clearly superior competitor – generating significant disruption to the SEO infrastructure globally.
Chatting with people in New Zealand it is a very uncertain time there, but I don’t want to make any predictions about the homeland and hope that people are able to work through their differences and simply go back to enjoying the world’s best coffee.
As we move into 2025 I hope everyone has a wonderful New Year, and I’ll catch you all on the other side!