Australia's economic reform agenda

Economic reform is a function of deciding what has to be changed to make the economy more productive and more competitive. You reform not for the sake of reform, you reform to produce a more wealth laden society, a better society for our citizens.

In order to achieve and discuss economic reform in Australia we have to understand not only the economic context but also the political context.

The atmosphere in which politics has developed in the western world, in Australia, New Zealand, Canada, the United States, Great Britain, has changed.

The political environment has not produced continuity over the last 30 to 40 years. It has changed a great deal.

The whole political environment is more fragmented and there are far more single issues that determine how people vote.

Political parties must grapple with this change.

We need to be mindful of this new political context, when we think about economic reform.

Australians will support economic reform if it meets two conditions. They have to be satisfied that the reform is fundamentally in the interest of the country and that it is fair. One of the take outs that I had from 11 and a half years as Prime Minister is that Australians definitely believe in a fair go.

Agreement between the Coalition and the Labor Party on major economic issues is rare. Without a degree of bipartisanship reform is challenging. There was a period in the 1980s when the Labor Party was in power, and to his credit as Prime Minister, Bob Hawke introduced along with the support of his then Treasurer Paul Keating, a number of significant and long lasting economic reforms. Most, but not all of those reforms were supported by the then Coalition.

I remember for example the very day that Paul Keating announced that the Australian dollar would float.  This was, in my view, the most profound economic policy change in my lifetime. The floating of the dollar opened up the Australian economy to the world in a way it had not previously.  It wasn’t the hardest economic reform of that long period of economic reform to introduce.  The harder one I have to say was the GST, because the GST affected everybody’s lifestyle.  I mean, the value of the dollar changed before the float, but instead of the change being implemented by the market, it was implemented by government fiat, which of course came to be seen as a wholly imperfect way of regulating our exchange rate.

I was interviewed that evening and said on behalf of the Coalition in opposition that the government had taken a correct and courageous decision.  We were able to support a number of major changes, including I think the most courageous economic change of all that the Labor government introduced, reducing tariffs.  That was a tough call for a party that had its whole political base in the trade union movement.  But we saw the wisdom of that, and we gave them support. 

When my government won office in 1996 the bipartisanship that we extended when we were in opposition was not to be repeated, and all of our changes, including of course the massive change in the tax system were opposed tooth and nail. 

The other thing to bear in mind when we are addressing economic reform, is that the world economic environment is very different from previous periods of reform.

Deflation, not inflation is now the challenge - it is certainly the challenge in Japan and in parts of Europe. That is not to say inflation won’t return.

There are signs now that we are heading for a new economic paradigm. We’ve had years of quantitative easing or money printing.

You have had central banks, not in Australia but around the world, printing money. The system is awash with liquidity but there hasn’t been the response to that that I might have expected 20 to 30 or even 10 to 15 years ago. That is a sign that there is a new economic paradigm.

There is no doubt that we are in the process of transitioning in Australia from a heavy reliance on our resources industry to a more diversified economy and that transition is essential. However, we should not imagine that we are not for years into the future going to rely very heavily on resources.

The resource industry has been the economic saviour of Australia’s economy for the last 20 years.

I look back in almost disbelief on a World Economic Forum conference held on the eve of the Sydney Olympic Games. The take out from that conference of many people was that Australia had a problem because it relied on old industries, like mining and agriculture.

We were berated, told that if we didn’t create new industries to replace those old industries that we faced a bleak economic future.
In terms of economic reform, we’ve got to be certain that in the process of transitioning we don’t do any gratuitous damage to the economy.

This applies to climate change policy, in that we don’t do any damage to our resources industry.

The other exhortation I would make to our economic managers is that we’ve got to keep a sense of balance about the economic challenges we face.

One of the reasons Australia has been a successful country is that as a people and in relation to policy, we have always achieved a sense of balance.

We have more balance in our social policies including education, welfare and health than most European countries and the United States.

Our welfare policies are often attacked but are much better than many people would allow for.

If you think our social welfare policies are too indulgent, and in certain areas they are, may I turn your attention to a statistic from a 2014 OECD Report. Of all OECD nations Australia has the highest proportion of its cash welfare payments going to the lowest quintile of earners and the lowest proportion of its cash welfare payments going to highest quartile of income earners.
 
That indicates by broad international comparison that our welfare system, with all its faults (and it’s got plenty that can be reformed), is certainly lean but not mean.

Having said that Australia does have a spending problem.

The biggest challenge we have on the budget front is still the level of expenditure. While we can’t be complacent about debt, although we are still below the OECD average on a debt to GDP ratio, we have slipped when compared internationally in expenditure rankings.

A community debate on taxation reform is now underway. These debates take a long time to work through.

I’m not suggesting this debate take as long as the debate on the GST. I don’t think it will take 25 years, but it may take 25 months.

Tax reform should not become a lazy way of increasing revenue and an escape from making difficult decisions on the expenditure front.

Tax reform should be about creating the quality, the fairness and the effectiveness for the necessary services of government.

There are a number of things that are fundamental to reform; we still rely too heavily on personal taxation as a source of revenue. Our corporate tax rate does not compare well to the rate of our competitors, it is too high.

Our marginal tax rate is far too high, the top tax rate is too high and it also cuts in at lower threshold than many countries with which it is fair to make comparison.

It is fundamental to any sensible tax reform that there must be a further shift in the mix between direct and indirect taxation.

We should preserve both the horizontal and vertical equity of our taxation system.

I have long believed that in the personal tax system those who support people other than themselves should get recognition in the tax system and that has been a cornerstone of our system for decades.

For example, the family tax benefits my government implemented are not welfare payments, they are tax breaks for the cost of having children. A cost that starts from the day children are born and never ends.

It is important we bear some of those things in mind. Any reform of the indirect tax system must not produce an increase in the overall taxation burden.

We were reminded in the Ipsos poll in the Australian Financial Review and Sydney Morning Herald of just how sensitive the electorate is to any connection between personal income levels and changes to the income tax system.

It is also important to understand the role of the states given all GST revenue now goes to the states.

I applaud the fact that the government and Prime Minister in particular have encouraged a debate on this issue.

You can actually debate these issues in Australia without the world falling apart. It is a good idea as the Prime Minister said that we don’t get into the rule in, rule out debate in relation to tax reform.

There is something else in regards to reform that needs to be mentioned and that is industrial relations reform.

I do think we have to return to this. We’re deluding ourselves if we can persist years into the future with an industrial relations system whereby an organisational structure that only represents 15 per cent of workforce still has a monopoly on the bargaining system. This is particularly important in regards to small business.

To borrow a quote from Mother Theresa, when asked once how do you cope with all of these problems, she said just one at a time.

There’s a message in that for economic reformers, we should isolate those economic reforms that we need to focus on and deal with the most important ones first, one at a time.

The economic reform people regard as most important at the moment is taxation reform.

Australians will support change and taxation reform if it can be demonstrated that it is in the public interest and it is fundamentally fair.

I am optimistic that conditions for reform are returning and adopting the principle one at a time will promote reform in the years ahead.

This is an extract from Mr Howard’s speech to CEDA’s 2015 Annual Dinner. Click here to watch Mr Howard’s address.