NEW REPORT OUT NOW
03/06/2014
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At CEDA's annual dinner last November, I gave my first speech as chair of the Prime Minister's Business Advisory Council.
My address was titled, Working with government to drive economic growth and a thriving business sector. I drew attention to the structural distortions and the misallocation of resources which the former Rudd-Gillard-Rudd governments left behind and the urgency of restoring fiscal balance. I said the task of the Coalition could not be over-estimated and that it would take at least a decade to fix. I predicted that many comfort zones would be disturbed which would make the necessary reforms difficult to implement.
My narrative was simple. If Australia is to be a prosperous, efficient world class competitor, then we have to change our ways.
That speech drew a great deal of criticism, especially from the Fairfax press, the Guardian and the ABC. The Canberra Times declared it "dated ideology". Adele Ferguson, writing in The Sydney Morning Herald, claimed I was "trapped in a time warp" for pointing out that Australia's average wages were too high and that our workplaces lacked flexibility.
I was accused of wanting to cut workers' wages and entitlements and criticised for suggesting competition laws be reviewed to allow Australian companies to amass scale so that they can compete more effectively in a global market place. My characterisation of the "better schools" plan and the National Disability Insurance Scheme as worthy, but recklessly unaffordable in the form they were proposed, brought the charge that I failed to understand "that a better educated society improves productivity and creates a stronger economy in the long run". I don't question that better education improves productivity, but I do stand by my analysis.
As it turns out, my critics may have been a little hasty and let their emotions run away with them. Since that speech, we have seen the demise of our auto industry and the closure of Alcoa's and Rio's aluminum refineries and BP's Brisbane petroleum refinery. Numerous other companies have announced downsizing and threatened exits.
Yet, defenders of the status quo remain unreconstructed and continue to argue that high wages, inflexible work practices and emission abatement policies are of little significance to Australia's competitiveness. When Qantas and SPC Ardmona lined up for taxpayer support, it was due to bad management, the high Australian dollar, lack of scale or whatever other reason could be found, so long as it didn't challenge work pay and conditions. As Ferguson said, "There are many ways to boost the economy and the standard of living without resorting to wage cuts. Try telling that to the two million people of working age priced out of the jobs market and who survive on welfare benefits.
Of course, issues of management, the dollar and critical mass, are important to competitiveness. But they are not the full picture and we shouldn't let propaganda hide the fact that the Australian workplace is in urgent need of reform.
If you doubt me, listen to Akio Toyoda, CEO of Toyota Motor Company, who described the closure of Toyota's Australian operations as "one of the saddest days in Toyota's history". He is reported to have told a business lunch, "Two years ago, we were working so hard to create conditions whereby we could stay in this wonderful country and continue to produce cars. We had restructured our business and, despite union wage demands for even better wages and conditions, we were seeing a dim light flickering at the end of the tunnel. We were honest with our employees and had explained the seriousness of the company's economic plight. They had assured us of their cooperation so we determined to all pull together in a desperate attempt to keep the company viable. There was an air of camaraderie and a feeling of hope. It was Australia Day that week and it fell on a Thursday. On the Friday, 30 per cent of our work force didn't turn up. 30 per cent called in sick. That's when I finally realised we were finished".
Australia's minimum wage is around 40 per cent higher than comparable competitors. And, that's not even counting 10 per cent workers compensation insurance, 9.25 per cent compulsory superannuation, sick leave, penalty rates, holiday loadings and shorter working hours. While Australian wage rates and benefits have always been relatively high, in the past, they have been offset by compensating savings, particularly cheap energy. But, with the introduction of the carbon tax and emission abatement schemes, this is no longer the case and now Australia has electricity prices which are among the world's highest.
Is it any wonder that the World Bank found Australia the most expensive country in the G20 and the fourth most expensive in the world? In the just released IMD 2014 Competitiveness Year Book, to which CEDA contributed Australian data, Australia was shown in 17th place, a drop of 12 places in just five years. Last year, the World Economic Forum found us slipping six spots in three years, down to 21st place. This is a disturbing trend and, while a lower Australian dollar would help, the devaluation required to offset such a huge cost disadvantage would risk serious inflation and high interest rates. Regrettably, there are no silver bullets.
Successive governments in Australia have emphasised social redistribution and the role of government. It is easy to see why. With more than a decade of improving terms of trade and 23 years of uninterrupted economic growth, wealth creation was taken for granted and rent seekers and others claiming entitlements from government, could be generously accommodated. Expectations were raised at each election of ever more government largesse. To quote George Bernard Shaw, a government which robs Peter to pay Paul, can always count on the support of Paul. But, as Margaret Thatcher famously warned, the trouble with this is, that eventually, Peter, or, Tony Abbott, runs out of money.
After six years of spending at the fastest rate of 17 comparable countries surveyed by the IMF, Australia is risking a $670 billion 10 year debt bomb and a AAA rating downgrade. But the entitlement culture is deeply imbedded and there is enormous resistance to winding it back.
As Treasury Secretary, Martin Parkinson, says, "Restoring Australia's fiscal sustainability cannot be wished into being, nor can we rely on growth to drive us into surplus - the underlying momentum of expenditure, both actual and promised, is too rapid. And, we cannot simply hold on to fiscal drag over the coming decade and beyond as that will cruel participation rates". While our public debt is rising quickly, by international comparisons, it is still low. However, our total debt, which includes household and financial institutional borrowings, standing at 328 percent to GDP, is high. To fund this debt, we rely on foreign lenders who finance two thirds of it. With our terms of trade expected to fall for a decade and with a narrow tax base where 64 per cent of the personal tax collected comes from only 17 per cent of taxpayers, we should be anything but complacent.
The fact that the OECD identifies Australia as the third-highest taxing country of the 34 member states won't be lost on foreign bankers or the ratings agencies. But apart from that, achieving structural balance is critical if the government is to meet its objective of dropping the corporate tax rate from the current 30 per cent to 28.5 per cent by 2015.
This will bring us closer to the OECD simple average of 25.5 per cent and make us more internationally competitive. In the forward estimates, the latest budget assumes a cap on tax-to-GDP at the long average of 23.9 per cent. But if the budget isn't passed, then these tax cuts are unlikely.
Since 2003, multi factor productivity has basically flat-lined from the over 2.0 per cent we averaged in the mid-1990s. With the mining investment boom winding down, productivity should improve as production from the capital invested comes on stream. But, a lot of improvement is needed. The Economist Intelligence Unit rated Australia's productivity second worst out of 51 countries. An ageing population is a factor.
Since its peak in 2010, we have lost the equivalent of 200,000 workers and a further 250,000 workers are expected to go over the next 10 years. This amounts to a 3.9 per cent reduction in the workforce, and will wipe around 0.3 per cent off productivity growth. Unless we deal with this decline in the work force, by 2050, the number of traditional working age people to support each retiree will fall from the current five to under three.
Reflecting Australia's high labour costs and industry's quest for savings, employment growth outside of public-related sectors, has been soft.
Business, where possible,is investing in labour substitution. Applying the 2010 participation rate, current unemployment is closer to seven than six. In a measure aimed at countering the retrenchment of resources in the mining sector, the government is planning vital infrastructure projects. To the extent that this investment leads to economic efficiency, it should also benefit productivity.
Despite the government providing incentives to employers to keep older employees at work, we will continue to lose experienced workers as the workforce ages. This deficit will have to be made up. Immigration, in particular, skilled migration, is one way.
Mutual recognition of qualifications in developed economies, easing spousal entry, using 457 visas as an avenue for ultimate permanent residence and recruiting the best and brightest from international universities should be actively pursued. Educating our young so that they are job-ready, is a critical element. A recent COAG study found 27 per cent of people between the ages of 17 and 24 are not in full time study or full time employment, with peak industry bodies saying that too many in this cohort are just not up to doing the jobs that are available. This is a damning indictment of our school system and suggests we should consider tying teachers' careers and compensation to outcomes.
The global competitiveness debate is too often dismissed on the grounds that we shouldn't and, cannot, expect to compete with low wage countries. True. But we are now struggling to compete with economies like our own. Ford says it can build a car in Europe for half the cost of building one here. The shale gas industry says drilling wells in Australia is likely to be three to four times more expensive than in the US. And, it costs as much to ship by sea from Hobart to Brisbane as it does from Amsterdam to Brisbane.
This point is emphasised by CEDA chief executive, Professor Steven Martin, who pointed out in remarks accompanying the IMD rankings that "emerging economies are not the only threat to Australia's competitiveness". He said that, "Improvements in the economies of the UK and Ireland who are still recovering from the GFC, have pushed Australia further out in the rankings in the last two years."
Spain has just announced it is lowering its company tax rate to 25 per cent as it struggles to regain its feet after years of austerity following the EU bailout of its banking system.
As the Treasurer pointed out following the annual Spring meetings of the IMF and World Bank, "There is a universal recognition that neither accommodative monetary policy nor lax fiscal policy can drive future growth. From now on we must earn economic growth through structural reforms within and across our economies".
Australia is a creative and innovative country. Our Nobel Laureates in science and medicine alone are quite disproportionate to our population. Companies like Cochlear and CSL are testament to our capabilities. Yet, when it comes to translating patents into commercial success, we are ranked 116th out of 142 countries. According to the OECD, we are also last out of 23 countries for collaboration between researchers and business. This is a concern because innovation is a major driver of productivity.
Australia currently spends around 2.2 per cent of GDP on research and development but, according to the Chief Scientist the percentage is falling. If the proposed Medical Research Future Fund is established, this decline should at least be arrested. However, it is clear we must get a bigger bang for our buck. Too many taxpayers' dollars seem to find their way into fundamental investigation and not enough into business facing research.
The gatekeepers responsible for awarding grants must re-order their priorities.
The approach of successive governments to R&D has been unhelpful to the process of local innovation. Tax incentives have waxed and waned depending on the government and the fiscal circumstances of the day and execution has been fragmented. Projects have been started and cut before they have a chance to complete. Regulatory barriers have added to costs and deterred commercialisation. Time taken by agencies to validate discoveries is often the difference between success and failure. It also serves as a disincentive to other researchers. The culture of regulatory agencies is in need of radical reform. They, too, need to be more economically aware and must understand that they play an important and, at times, critical role in Australia's international competitiveness.
The Treasurer is right to point out that R&D allowances have been a form of corporate welfare and that business tends to default to government funding if taxpayers' money is available. However, Australia's venture capital market urgently needs a jump start to leverage its repository of creative human capital and until the infrastructure and cultural arrangements are in place, government may have to pro-actively lead the way.
By any measure we are off the pace wherever we look and, unfortunately, at a time when the world outlook, despite trillions of dollars in stimulus, remains fragile. Internationally, we are seen as a proxy for China which will drive investment sentiment. It is hard to get a fix on the direction of that economy. Its primary data is flawed and often official and unofficial reports are contradictory. Some credible analysts see China as in the late stages of a debt bubble. Perhaps, but as HSBC recently reported, "There are still a lot of structural headwinds ahead .... don't expect too sharp an acceleration from here".
Unlike last time, Australia is now especially vulnerable on a number of fronts, to a global downturn, in particular one made in China.
In the meantime, declining terms of trade seem likely to keep pressure on growth, government revenues and, eventually, on the exchange rate. This will decrease household purchasing power and help bring Australia's high cost structure more into line with its peers. It should also open up investment opportunities outside of the resources sector, but such adjustment periods take time and a consistent approach from the federal government.
Let there be no mistake. A lot is riding on the passage of the budget through the Parliament. It marks a break in the tax, borrow and spend formula which has become imbedded in the election cycle. As well as bringing the fiscal position into balance, its basic purpose is to shift government spending from transfer payments that flow into consumption, to support for infrastructure investment.
As Treasury Secretary Martin Parkinson says, "This places the Budget squarely in the post-GFC international consensus (not often followed in practice) of how fiscal consolidation should be conducted". Treasury calculates that when completed, the infrastructure projects will add 1.0 per cent to GDP over the longer term.
If we are serious about fulfilling our potential and leaving to our children a free and prosperous society, we must urgently embrace what the IMF, OECD and G20 have identified as the necessary requirements for a competitive economy, namely, macro-economic stability, low and stable taxation, openness to trade, investment and competition, skilled and flexible labour markets, and an efficient and effective regulatory system. ,That's easy to say, but clearly, hard to achieve.
Time is running out. We are on a collision course between economic reality and feel-good politics. Europe opted to stay with feel-good populism and the predictable crises ensued. It is to be hoped we choose a more sensible course.
It's a tough message to sell but, Australia's future in a competitive world depends on it.