NEW REPORT OUT NOW
10/11/2013
Check against delivery.
Thank you for the opportunity of speaking to you this evening. It is the first time I have spoken publicly about the Prime Minister's Business Advisory Council and, as a CEDA patron, I can think of no better place to do it. After all this is what CEDA is about. It is above all a forum for contemporary issues, for discussion and debate. Sometimes we agree with our speakers, sometimes we don't. That's what our trustees value. Argument. Hopefully when we leave a CEDA meeting we are all better informed.
The views I express tonight, are mine and mine alone.
When Opposition Leader Tony Abbott asked me last year if I would chair an advisory council to offer advice to him and his government, should the Coalition succeed at the next election, I was naturally honoured and flattered. It is a unique and privileged position. However, as someone who had voted for and worked for both sides of politics but never joined a party, I felt that in a sense I was losing my political virginity. Openly declaring support for one side before an election shows clearly where your sympathy lies. However, having watched five long years of reckless spending, economic waste, class warfare, particularly aimed at business and, the mindless destruction of Australia's international competitiveness and, the reintroduction of workplace rigidities, I thought I had a civic duty to stand up.
I have seen and heard nothing since the election to question that judgement. Indeed I am shocked that so much economic damage can be inflicted in just six years. While the full effect and extent of it is mainly invisible to most Australians, as Henry Hazlitt once observed, "The long run consequences of some economic policies may not become evident for years. Still others may not become evident for decades. But in every case their long run consequences are contained in the policy as surely as the hen was in the egg." Think, six years to create, more than a decade to repair.
In establishing the Business Advisory Council, Prime Minister Abbott has recognised that government and business have a shared interest in Australia's economic prosperity. The Council will meet three times a year with senior members of the government and will include experienced business representatives from manufacturing, agriculture, resources and small business sectors. It's an excellent group. The Prime Minister affirmed that he wants to "restore a working relationship between government and Australian business." He said that "The previous government's class war on business and sectors of our economy did little to engender confidence and economic opportunity." While true, the harm done is more than dented confidence. It is real and worse, structural. But it is refreshing to know that at last we have a prime minister who takes a positive interest in wealth creation.
It is not possible for me, before the Council has even met, to lay before you our agenda. However I can say that we will provide the Prime Minister with dependable and fearless advice. Our interest will be strategic from a whole-of-government, national interest, perspective. Hopefully we will also broaden the economic and public policy debate and bring a dose of reality to the people's understanding of our true economic situation rather than perpetuate the blissful detachment we have been living in for the past six years.
You may think in my criticism of the Rudd-Gillard-Rudd governments I am being harsh. But, please understand that today's deteriorating economic situation was entirely predictable and avoidable. The warning signs were there for all to see, yet Labor decided to ignore them. For example, Labor's commitments to its "better schools" plan, and the National Disability Insurance Scheme, which alone come to $22.5 billion in 2019/20, were made in the clear knowledge of a budget already under serious and continuing pressure. There's no point in beating around the bush, worthy though the causes may be, in the circumstances, it was reckless.
Labor's justification for its unbridled spending was the Global Financial Crisis. A temporary stimulus may well have been justified, but, thanks to China, it should have been short lived. Today's problems were not made in New York, Athens, Dublin, or, Madrid, but in Canberra.
While debts and deficits will be addressed by the National Commission of Audit, and are unlikely to occupy much of the Advisory Council's time, they are still the ever present elephant in the room. When governments run deficits, the shortfall becomes a surplus elsewhere in the economy. When governments rein in their spending, it operates in reverse. This is the Government's dilemma. Reducing debt and deficits too quickly may temporarily slow activity. With three year election cycles it's a tough political call. But the lesson from Europe, the UK and the US is that there will never be a good time. And, even though we have been constantly reassured that when compared to basket case countries and, even the United States, as a percentage of GDP our borrowings are small, the worry is less the amount and more its steep upward trajectory. Our public debt as a percentage of GDP has risen from 13.9 per cent in 2008 to 29.3 per cent in 2012. And, to the concern of the new government and all thinking Australians, it continues to grow. Countries with small populations have low tipping points.
As part of its remit the National Commission of Audit will review government spending and make appropriate recommendations. The Advisory Council will watch with interest. Of course any suggestion of cuts is likely to receive a hostile reception from the Opposition and the various vested interests who benefit from this protection and patronage. The easy option will be to bend to these howls of outrage and to postpone the evil day. The Coalition, before the last election, limited its options by promising to spare health, education, defence and pensions from the budget axe. And in government, it has agreed to defer any controversial fiscal measures like tax reform, until after the next election. Perhaps with hindsight this was hasty, but Tony Abbott is right to keep his word and to favour trust over expediency. The people need to be brought along and have their faith in the political process restored. But, balancing the urgency for reform against keeping the people's trust, all the while risking another external shock, is a fine political judgement.
It is understandable that Labor and its fellow travellers will try to characterise the intention to lift the budget ceiling to $500 billion as an admission by Treasurer Hockey that things are not as urgent as they seemed when in opposition; that "there's nothing to see here." The subtext reads that Labor's borrowings for recurrent purposes was fine. This is nonsense. The economy is running on empty. Forward estimates indicate that on present projections, gross debt is likely to peak at around $440 billion. This is why the debt ceiling has been raised: out of necessity not equanimity. So being loyal to the former government is one thing, but defending the indefensible is misplaced, misleading and, dangerous. As Standard & Poor's reminded us last April, without demonstrable progress with debt reduction our triple-A credit rating is at risk. Indeed, already the yield on Australia's five year government bonds is the highest of any triple-A sovereign borrower.
The Business Advisory Council will begin its deliberations in the knowledge that growth in real gross national income (GNI) will slow significantly. Indeed, absent any success in reversing the trend, GNI is likely to fall 1.0 per cent over the next decade. This was inevitable. As our terms of trade have already fallen 15 per cent since the 2011,140 year peak, no-one should be surprised. However, the fall has translated into a $32 billion drop in our GNI and, our terms of trade are projected to fall by a further 20 per cent by 2025. This is what makes balancing the budget such a difficult task. An expanding national income is key to rising living standards. It is true a return on the massive mining investment of recent years will begin to become apparent, but it is unlikely to be sufficient to counter the downturn in our terms of trade. Having become accustomed to better than 2.0 per cent annual growth for 22 consecutive years, we are now facing the prospect of growth with a zero in front of it. That will feel like hitting a brick wall.
Business also confronts the fact that workplace participation is falling. Since its peak in 2010 we have lost the equivalent of 200,000 workers. At 64.8 per cent it is at its lowest level in seven years. Had the participation rate remained at 2010 levels, unemployment would now be over 6.5 per cent instead of the 5.7 per cent reported for October. The economy is likely to lose a further 250,000 workers by 2025 as baby boomers retire in greater numbers. Collectively, this is equivalent to a 3.9 per cent reduction in the workforce and, without action to arrest the decline, strong growth will be harder to achieve.
Unfortunately, our self-inflicted economic and financial headwinds are occurring in a still uncertain global economic environment. Next time round, there may be no China to save us. While there are some bell-weather indicators which point to improvement, Finland, Greece, Italy, Japan, Portugal and Spain, are not out of the woods. France too has stopped expanding and Germany is decelerating. The United States is enjoying an uptick, albeit at tepid levels, while debts are climbing again as the Fed continues to monetise.
And, thanks to the Fed, the stock market has detached itself from economic reality leaving it exposed to a major correction. In nominal terms, margin loans on the New York Stock Exchange are at an all time high, indicating rarefied levels.
In framing its work schedule, the Business Advisory Council must have front and centre that Australia is a high cost over-regulated economy. According to the World Economic Forum, our ranking has dropped from 15th in 2009/10, to 21st in 2012/13, the first time we've been out of the top twenty. The IMD World Competitiveness Centre has Australia slipping from 5th to16th over the same period.
Some may put their faith in a falling Australian dollar to bail us out. A lower exchange rate may help, but in any realistic scenario, it alone cannot make us competitive. Not only are many other countries also looking to weaken their currencies, but rarely are the benefits of currency devaluations fully harvested due to inflation and higher capital and labour costs.
Right now, one of the issues even for efficient producers is the high cost of getting goods to market. For example, the cost of sending products from Hobart to Brisbane is the same as transporting them from Amsterdam to Brisbane. This is largely due to anti-competitive coastal shipping arrangements in Australia which the previous government strengthened under union pressure and, relatively high wage costs. For example, some dockworkers can earn more than $150,000 a year while harbour pilots take home $250,000 a year for three days work. Locomotive drivers in Queensland are paid three times what their American counterparts receive. These examples are random and anecdotal but they do make the point. And if you think I have been selective, consider Australia's minimum wage at US$33,355 for a 38 hours week against other countries with mature economies. For instance, Canada, our closest competitor has a minimum wage of US$22,766, for a 44 hour week. The European minimum is around $US 22,000, New Zealand is US$ 23,000 and the United States, US$15,000, all rounded and for 40 hour weeks. A British worker receives about US$20,000 for a 38.2 hour week. On top of our minimum awards Australian employers must pay 10 per cent of their payroll in workers compensation insurance premiums, a 9.25 per cent compulsory superannuation surcharge, sick leave, overtime penalty rates and holiday loadings.
While any discussion in Australia about industrial relations evokes screams of outrage and the spectre of work choices, we cannot hide from the fact that Australian wage rates are very high by international standards, and our system is dogged by rigidities. We have long since breached our salary cap, not just by the standards of our low cost regional neighbours, but also our peers. In the end, regardless of union pressure and criticism from political progressives, relative international wage alignment will occur, either through exchange rate adjustment, unemployment, technology inflation, or, a combination.
The workplace is an important area of reform, but it is one more piece of the jigsaw, albeit a very important one, which requires attention.
Logistical efficiency is urgently needed. Investment in roads, rail and ports which can show commercial returns within a realistic timeframe, should be encouraged and fast tracked. Current estimates put the critical infrastructure deficit at around $200 billion. Given that mining investment will be winding down and employment prospects may become challenging for displaced workers, early commencement on commercially sound infrastructure projects could be very well timed. If the investment includes private equity and debt supplemented where necessary with judicious government guarantees, it should be manageable even within the constraints of the debt ceiling.
Any review of international competitiveness must also include our approach to emissions abatement. We have arguably one of the world's most expensive and complex policies, involving some 130 federal and state regulations. In a comparison of electricity prices in 91 jurisdictions, the Energy Users Association reported in a recent paper that "Australia's electricity prices are very near to the highest in the developed world and seemingly set to reach the highest". It continues, "Electricity is becoming a lot less affordable for both households and businesses and our prices are now a source of national weakness rather than strength". Network charges and renewable energy subsidies are largely to blame. Victoria's Auditor General assesses the cost of wind power at three times and solar power five times that of brown coal. Yet we continue to invest billions into these costly and unreliable energy sources. For those still keen to reduce CO2 emissions, the Coalition's Direct Action Plan mirrors similar schemes in other countries and has merit. Importantly, it is capped at $3.2 billion, and potentially, provides something tangible for the money. More importantly it eases pressure on the budget and helps to reduce power bills. Meanwhile, the Opposition's decision to keep the carbon tax unless the Coalition agrees to an emissions trading scheme is an unwelcome development for a slowing economy in need of cost reductions. It panders to the world-wide politics of climate change, not to the climate itself.
In almost every field of activity these days regulators are extending their reach. It increases costs and adds risks to businesses. It also stifles initiative and innovation. An anti-business attitude is pervasive and, too often, regulations are introduced which, while relatively costless to the introducing agency, are expensive for business. They fall particularly hard on small business. Some 21,000 new regulations were introduced by the former government over six years. No wonder non-mining investment is so low. The new government has already signalled its intentions to unwind "nanny state" agencies and make cuts to research funding saving around $100 million. But more needs to be done, like minimising administrative complexities between federal and state jurisdictions. These increase business and consumer costs for no obvious purpose other than jurisdictional protection. A "no exemption" policy under the Mutual Recognition Act would streamline this process and improve efficiency. I expect deregulation to be a productive area of concentration for the Business Advisory Council.
Another area of interest is likely to be corporate welfare. We have seen in the car industry and in regional areas where food processors are going to the wall, the results of being internationally uncompetitive. Giving taxpayer subsidies to ailing companies has proved to be like giving aspirin to the terminally ill. It temporarily relieves the pain but does nothing to combat the underlying disease of being uncompetitive. In this regard, it may be timely to review Australia's competition laws. It is clear, in a global sense, we are lacking economies of scale and that Australian companies find it hard to acquire the necessary critical mass in a small domestic market without running up against trade practices issues. If we are not ultimately to become a branch economy, the opportunity for Australian companies to become national champions at home must be considered by re-balancing the interests of consumers and businesses. To do otherwise is to encourage companies to shift to more friendly domiciles, sell to foreigners, or, if all else fails, to close their doors.
After 22 years of consecutive growth it is perhaps understandable that many Australians have been lulled into a lazy and complacent mindset, one where critical review has given way to fuzzy feelings. For example, this complacency has allowed the structural fault lines in the budget to be papered over. The size of government, its efficiency and reach, have broadly escaped scrutiny, but not from business. It has had a subtle influence on its attitude to risk-taking. While Australia is richly endowed with the necessary human capital to innovate, if business is over-regulated, or conditions are uncertain, then imaginative impulses tend to be still-born. Nearly all innovation carries extra risk and requires a positive business environment to flourish. A more business friendly environment is essential and the culture and charter of all regulatory agencies should be reviewed with this in mind. Likewise, sunset clauses must mean what they say and any renewed mandate should require an up-dated and rigorous business case.
As I said at the outset repairing the recent distortions to the Australian economy is a long term project. The Coalition's task and that of its business advisers cannot be overestimated. The required direction will disturb the comfort zones of many. But the consistent narrative is simple. It is to make Australia an efficient world class competitor. Defiant rejection along the lines that we won't compete with low wage countries don't stack up anymore. As I have demonstrated, we don't even compete with developed countries. The mantra that we should be in high value manufacturing and services is fine. But everyone wants to occupy this space, so it won't fall into our lap unless we create the necessary conditions.
Speaking immediately after the election, Tony Abbott said, "Australia is under new management and open for business." Those words were music to the ears for the many of us who had despaired as the shutters went up on former Australian business icons, or had watched many profitable activities of some of our largest companies, migrate silently to Singapore.
I have been very frank this evening. There is no point pretending or mincing words. I hope I have made the case that this is not only a job for government. Governments can liberate the economy from its straight jacket but it won't happen without the support of the majority of Australians. This is why, in the final analysis, we must respect the political judgement which decides what is possible now and what must remain aspirational.
The Prime Minister's Business Advisory Council will be doing its best to bring rigour to the process.
Thank you.