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ICAA Breakfast Briefing

“Renewed Reform: Why it’s an Imperative”

8 November 2005

Good morning Ladies and Gentleman.

I wanted to take the opportunity this morning to talk about the

importance of continuing microeconomic reform if Australia is going

to maintain its position as a prosperous nation.

This is a very topical subject at the moment, of course, given the

debate in our community about the Federal government’s proposed

workplace reform legislation. There is a danger, I believe, that this

issue is seen amongst the public as one of the government versus the

unions - as some sort of ideological battle - when in fact it is a

critical issue for Australia’s future welfare.

For me the protest about workplace reforms is very reminiscent of the

criticisms we had about reform during the nineties, whether it was

tariff reduction, introduction of employment contracts, floating the

dollar, privatisations or whatever.

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It’s instructive to look back at the state of our economy in the early

nineties and reflect on what has happened since then.

In 1992 I attended a 3-month Advanced Management Programme at

the Harvard Business School and was interested to find that one of the

case studies we looked at in the segment on international economics

was on the Australian economy. In fact this might have been better

termed a ‘basket’ case study, given that the message was that

Australia had squandered its good fortune in the eighties,

accumulated an enormous level of external debt because of over-consumption and was headed for either a depression or years of

penury. As the Harvard professors observed, Australia had been left

behind in an increasingly sophisticated world, relying on its natural

resources, over-consuming and borrowing the savings of foreigners in

order to make ends meet. The nation was encumbered by a highly

regulated labour market and protection of local industries which

prevented it from recovering its economic fortunes.

It is instructive to reflect on the fact that since that time, Australia’s

growth rate has been the highest of any developed economy and to

consider how that has happened.

In 1992 the Business Council of Australia held a Debt Summit to

draw public attention to the problems we faced as a nation. It is

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instructive to look now at some of the material put forward then by

the BCA on Australia’s foreign debt problems and on the solutions

the organisation suggested.

This first chart shows how Australia’s level of foreign debt had risen

from almost nothing at the start of the eighties to over 35 percent of

GDP ten years later.

Slide 1

This debt had arisen because we had failed to keep pace with our

competitors in productivity terms, with the result that our exports had

not kept up with our imports. We were spending all the money we

earned and borrowing the savings of foreigners to fund our additional

consumption.

The message at that time was clear: unless Australia undertook

sweeping reforms, its economic situation would get worse and worse

until the world lost patience and threw us into a deep recession or a

depression. That is what happened to Mexico and South Korea in the

nineties as their foreign debt levels became unsustainable.

The BCA’s debt summit concluded with a list of recommended

actions Australia had to take if we were to solve this problem. Look at

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what those were and reflect on what happened in the intervening

period:

The initiatives were:

• phasing out import tariffs;

• restraining government consumption spending;

• improving the efficiency of government business enterprises either

by increasing their exposure to competition or via privatisation;

• moving to enterprise-level negotiation of employment conditions;

• pursuing an active programme of reducing public sector debt; and

• replacing most existing Federal and State indirect taxes with a

broad-based consumption tax.

It is instructive also to reflect on the very negative reaction which

these suggestions gave rise to in the Australian community. There

was a quite widespread push amongst many businesses to prevent

tariff cuts taking place: similarly, many Church leaders spoke out

against any freeing up of the labour market on the basis that it would

be significantly to the disadvantage of the less skilled or lower paid

worker.

Slide 2

Despite such protests successive governments did pursue the

microeconomic reforms that were needed and it’s gratifying to see

how far we have come as a nation, with all those initiatives now a

part of our daily life and taken for granted.

The reforms have had a major beneficial effect on the overall health

of the Australian economy and helped to stabilize our foreign debt

position. This is strikingly illustrated in the following slides.

This one is also from the BCA 1992 Debt Summit and was based on

modelling carried out by Access Economics. It showed what would

happen to Australia’s debt to GDP ratio if we did not change our

ways. As you can see, the ratio was predicted to rise from 40 percent

to around 60 percent.

Slide 3

In fact the world would not have let this happen. Australia’s credit

would have been tightened, interest rates would have risen and a deep

recession would have occurred - choking off imports and restoring

the balance of trade.

This next slide shows what the BCA estimated would happen if the

reforms described above took place. These were estimated to

stabilise the debt level at a bit over 50 percent of GDP.

Slide 4

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This slide shows what has actually happened. Our national

performance has been better than anyone anticipated. The debt to

GDP ratio stabilised at around 40 percent throughout the nineties

owing to a strong increase in productivity through the reform process.

Slide 5

We achieved this success through becoming more efficient as a

country and more competitive in the global economy. This led to a

surge in exports and a reversal of our trade deficit.

There are some other, more visible ways in which the success of

reform can be seen. The first is that Australia weathered the late 90s

Asian collapse with hardly any ill effects - an outcome that would

have been inconceivable for our country in its former uncompetitive

state. We saw a similar resilience in 2001 when all other western

economies were in recession, commodity prices were falling and yet

Australia kept growing.

The Economist magazine described these achievements in an article

in 2003 headed “Down Wonder”. That article concluded with these

words:

“Australia is the lucky country; yet its recent performance is more

than a one-year wonder. Over the past ten years, Australia has

enjoyed the fastest growth rate of any big developed economy. A

series of reforms over the past two decades - from financial

deregulation and reduced import barriers, to the overhaul of taxes and

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labour relations - has made the economy much more competitive.

Good policy has counted for more than good luck.”

The striking thing about this outcome is how much better things

turned out than the econometric models would have predicted. There

is an important lesson in this; namely that once you free people from

institutional shackles, like centralised wage fixing, they become much

more innovative and productive than you imagined they would.

Australia’s economic success over the last decade has led to

substantial benefits for our people:

Since 1995, more than 1.8 million jobs have been created and the

unemployment rate has fallen from over 8 per cent to 5 per cent.

Over the same period, youth unemployment has fallen from nearly 20

per cent to below 15 per cent.

Real wages have risen by 20 per cent, compared with no increase in

the previous decade.

That adds up to a decent dividend to our community. But how many

people know about it and understand how it came about? And how

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many appreciate that for the sake of our future security, it can’t stop

there?

Over the last year the BCA has been pre-occupied with just those

questions.

In August we released a study that calculated the economic dividend

of 20 years of prosperity.

The study showed the average Australian is $83,000 better off in

terms of real wealth as a direct result of economic reform over that

period.

Income growth has given individuals the means to accumulate more

wealth - via home ownership, shares, superannuation contributions

and other general savings.

The research also found that economic reform between 1983 and

2004 resulted in an extra 315,000 people being employed compared

with what would have been the case without the reform.

As a consequence of these gains, Australia shot up the OECD league

table of relative prosperity from 18th to 8th position.

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Yet without further reforms - further micro reforms and further job

market deregulation in particular - our recent excellent national

productivity growth will flag, and the coming decades will be a repeat

of the 1980s. Just as the benefits of reform were greater than anyone

anticipated, reform fatigue carries greater risks than many currently

fear.

These risks are exacerbated by the ageing of the Australian

population. A combination of falling birth rates, rising life

expectancy and the demographic bulge of the baby boomers means

that in 40 years time the number of Australians aged over 80 will go

up by a factor of 5. There will be a relatively smaller pool of

productive workers supporting a relatively larger pool of consumers.

Those older consumers will put huge strains on public finances

because of their health care needs - and therefore increase our

national debt concerns.

The implication is simple: Australia, and the businesses and families

that make up the Australian economy, have to continue to increase

their productivity. Any country that fails to keep pace with reform

will quickly be overtaken by its competitors.

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In a recent report entitled “Locking in or Losing Prosperity:

Australia’s Choice”, the BCA looked at what Australia could achieve

if we build on existing reforms.

The report concluded that if the reform process stops Australia is

likely to achieve a growth rate over the next 20 years of 2.4 percent

pa, compared with an average 4 percent over the last decade.

If, on the other hand, we build on our past reforms we can maintain

that 4 percent growth. The difference between the two is dramatic.

Under the 4 percent scenario, the average Australian will be $74,000

better off (in today’s dollars) by 2025.

- the Australian economy will be nearly 40 percent larger, and

- Commonwealth tax receipts would increase by nearly 9

percent of GDP

Well, what do we need to do?

Since October last year the BCA has been working on a new reform

plan which involves four areas: workplace relations and participation,

infrastructure, taxation and business regulation. Slide 6

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We have commissioned major independent studies into each of these

policy priorities and released them over the last six months,

commencing with workplace relations in February. The reports

contain recommendations of what needs to be done if Australia is to

remain a prosperous economy.

Let me talk briefly about each of those areas.

Workplace Reform

Starting with workplace relations, always an issue of controversy, we

can point to an average annual growth of 2.3 per cent in labour

productivity in Australia from 1990 to 2003.

This improvement in productivity alone - the result of workplace and

other reforms - has meant average Australian incomes are now at

least $3000 a year higher than they would have been.

But despite these increases, our productivity levels are lower than a

number of our economic peers, including Canada, Ireland and the

United States. In fact the latest data shows Australia’s productivity

going backwards.

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The Government’s planned changes to workplace relations will go a

long way to making sure the productivity gap between Australia and

its competitors is narrowed. As such, the Government deserves the

applause of business and the support of the community.

Despite all the noise and protest being generated, in particular by the

union movement, these are not radical reforms. They simply continue

the process of deregulation and simplification of agreement-making

between employers and employees which started 20 years ago.

Whenever major change or reform is proposed it will inevitably be

met with uncertainty and resistance. As we have all witnessed with

every stage of reform to Australia’s workplace over the past two

decades, the same concerns have been raised that change will lead to

a race to the bottom in terms of wages and living standards.

However, the opposite has consistently been the case - that

workplace reform is linked directly to rising living standards and

increased opportunity.

Along with higher levels of productivity, the proposed IR changes

will mean fewer barriers for employers and managers to create new

jobs. More flexibility will lead to higher work participation of various

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sections of our community, particularly among those groups in the

workforce that business will depend on to offset chronic skills

shortages and the impacts of an ageing population.

My view, personally, about workplace reform is that the central thrust

of it should be to progress the culture change begun over the last 10

years, removing demarcation between “classes” of employees and

eliminating the notion that employees and employers have different

agendas and interests.

As anyone involved in business knows, the key to being successful is

to build a satisfied and motivated workforce. High productivity is in

the interest both of employees and employers, as we have seen over

the last decade. Given the demographic challenges ahead of us all,

employers are going to be looking for ways to reward and motivate

productive employees, not to take advantage of them.

Tax

Turning to Australia’s tax system, we should acknowledge the

significant work on tax reform the Government has already

undertaken.

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The GST and the reform of numerous business taxes have

significantly improved our competitive position.

Measures announced in this year’s Budget, particularly moves to

reduce the tax burden on skilled workers, were also welcome.

Tax is the one area which our Government can proactively structure

to increase our competitiveness.

Put simply, our tax system is central to the way we work and live,

which is why we must be smart about how it is structured.

As treasurer Costello says, tax is an area where everyone seems to

have an opinion.

Given the complexity of the issues, debate is a good thing and it’s

good to see tax back on the public agenda.

But while we’re navel gazing, other Governments around the world

are working hard to build far more competitive tax policies than ours.

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That includes countries we regularly trade with, our neighbours in

Asia Pacific, but also the emerging economies of the former Eastern

bloc. Let me give you a few examples - some of which will make you

green with envy! Compared with our corporate tax rate of 30 per cent,

- Hong Kong has a corporate tax rate of 17.5 per cent

- Singapore is 20 per cent and Taiwan is 25 per cent

- Ireland has a 12.5 per cent company tax rate

- Poland has just announced that it will introduce a flat tax

system of 18 per cent on all personal income and corporate

profits, and

- The US Government has removed Federal tax on all dividends.

And these are just some of the recent moves in the global market.

Over the last twenty years Australian companies have shouldered an

unnecessary proportion of the income tax burden. As this slide shows,

corporate tax has risen from around 2 percent to over 5 percent as a

proportion of GDP.

Slide 7

How does that compare with other countries?

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As you can see on this chart we are at the top end, and well above the

OECD average of around 3 percent. Slide 8

The burden is further compounded by the complexity of the system.

In ten years Federal tax legislation has ballooned from 3,000 pages to

10,000 pages.

But the problem isn’t just company tax. Our personal tax system is

also highly uncompetitive. With skills shortages in so many sectors

already biting and forcing companies to delay projects and

investments, high personal tax rates act as powerful disincentives.

On the lower end of the income scale, the intersection of tax and

welfare hurts people trying to join or re-enter the workforce.

Australia needs to move beyond the piecemeal changes and the

periodic catch-ups that characterise the current tax debate.

We need to review the system lock, stock and barrel.

Infrastructure

The third area on the BCA’s policy hit list is infrastructure.

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Infrastructure represents the basic building blocks of the economy,

our economic arteries. It is the economy’s supply chain.

The state of our energy, water, transport and urban infrastructure

systems is directly related to our capacity to support high levels of

economic growth

From a business perspective, they represent the time it takes to make

a delivery, or to get a container to the wharf.

They are the difference between full production and having to shut

down a plant when there are spikes in power prices, or having to turn

your home air-conditioner off on a hot summer’s night.

From a community perspective, the health of our infrastructure is

equally vital. Road congestion, water shortages and electricity black-outs - these all affect our quality of life and living standards.

The BCA’s over-riding contention is that infrastructure has to be

considered strategically and managed effectively if it is to serve the

country well. Unlike other policy areas where problems and shortfalls

can be addressed relatively quickly, infrastructure requires long-term

planning and investment. Given the long lead times in undertaking

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major improvements in infrastructure, by the time deficiencies are

apparent, it is already too late. We need to anticipate these needs and

not wait for them to manifest into full-blown problems.

The BCA’s Infrastructure Action Plan found that by 2025, without

major reform, all of our capital cities will be demanding more water

than is currently available, and the story is the same for energy.

Slide 9

- By 2020, the gap between energy supply and consumer

demand is estimated to be about 50 per cent.

- The amount of new investment required in developing

additional energy supplies totals somewhere between $30 and

$35 billion.

- Australia’s road and freight transport systems are straining. By

2020, road freight movements will grow by 65 per cent.

- That means 900,000 more truck trips over the next 15 years in

and around our major cities.

- And the cost to the economy of traffic congestion will increase

to an estimated $30 billion a year by 2015.

Overall, Australia’s economy has an infrastructure asset base worth

an estimated $300 billion. Yet there is no co-ordinated plan or policy

to make sure the country’s infrastructure keeps pace with the

economy.

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The Federal Government has done some preliminary work on the

export infrastructure side and more recently the Council of Australian

Governments (COAG) set up a working group to look further into the

matter.

In the business world we work to plans for the next one, three and

five-years. We know all too well the market’s response if we fail to

deliver to their expectations. But that’s not the way Government

operates and, given what’s at stake, we don’t think this is good

enough.

The BCA has thrown down the gauntlet to COAG to introduce an

audited and transparent report on the health of Australia’s existing

infrastructure assets on a regular two-yearly basis. This type of audit

will give everyone a clear understanding of Australia’s infrastructure

capacity and performance at any point of time. It is designed to be

light on red tape - by utilising information the various jurisdictions

and entities would reasonably be expected to be collecting.

But I’m afraid this may be a lost cause. The Prime Minister’s

statement to the recent Infrastructure Leaders’ Summit in Melbourne

signalled the Government is prepared to rely on the drawn-out COAG

committee process and go with COAG’s idea of collating five-yearly

infrastructure assessments from the States and Territories.

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Only when there is publicly available, up-to-date information can we

hold Governments accountable for their infrastructure policies and

decisions. This becomes particularly important given our electoral

cycles, where the pressure for votes and quick-fix answers is all too

evident.

It also becomes important given our dysfunctional Federal-State

relations, which is complicating almost every aspect of policy making

through a duplication of funding, compliance and service provision.

The BCA’s strong view is that COAG remains the best vehicle to

achieve reform in the critical area of infrastructure planning and

development, but things need to happen faster. Business will help

where it can - it has the investment resources to play a much bigger

role in the funding of new infrastructure. But ultimately, only

Government can resolve the strategic and policy issues - especially in

our fragmented Federalist systems where game-playing and buck

passing are uncomfortably common.

Regulation

The final area of the BCA’s policy focus is business regulation.

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After an era of extensive deregulation - one of the things that has

helped make Australia as competitive as it is today - there is now a

marked reversal towards re-regulation.

We’ve coined a phrase for it - regulation obesity. This is suffocating

the productive resources and creative energies of our larger

corporations and our SMEs.

Regulation has become the growth industry of the nation.

Slide 10

- The number of new laws and regulations is now increasing at

10 per cent a year - that’s three times faster than Australia’s

average rate of economic growth.

- The Commonwealth and State Parliaments added 33,000

pages of new laws, rules and regulations in 2003 alone.

- Half of the legislation passed by the Commonwealth

Parliament since Federation has come into force in just the past

14 years.

Our regulation obesity not only diverts resources from the private

sector, it also soaks up massive amounts of taxpayers’ money on

administration, compliance and policing. Some put this figure at $5

billion a year.

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And regulatory obesity is not just an Australian problem - it is a

Western disease. When PricewaterhouseCoopers conducted a global

survey of CEOs last year, over-regulation was singled out as the

biggest threat to business growth prospects.

Many countries such as the UK and Netherlands are already

addressing this issue. By confronting the problem, these countries

will gain a significant competitive advantage over us. That’s why it’s

essential that Australian Governments at all levels address the

problem now.

It is pleasing in that respect to have seen the recent establishment by

the Federal Government of the Regulation Reform Task Force, which

is due to report by the end of January 2006. That seems a pretty

ambitious timetable but, given the calibre of the people involved in

the task force, it is likely to be a good start.

The main things we need to do in this area are firstly to review the

huge stock of existing regulation and decide which of it no longer

serves a useful purpose; secondly, prior to new regulations being

introduced, to conduct impact analyses on their likely effect; and

thirdly, where feasible, ensure that new regulations are equipped with

sunset clauses so that they are automatically reviewed in future.

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To sum up, I have been talking today about the choice we face in

Australia between locking in or losing our current prosperity.

I’ve told you why business believes there is reason for concern.

As the BCA’s recent studies show, if we continue on the reform path

of the past 20 years, we will all reap the dividends.

Through reform of the kind I’ve described, by 2025 our economy

would be 40 per cent bigger.

The average Australian could be $74,000 better off in real wealth

terms.

The Federal Government would have more than $80 billion in extra

revenue to return to the community.

If you tallied up the money Canberra will spend this year on the

environment, the unemployed and sick, on PBS, Medicare, defence,

education, pensions and aged care, then that would total something

similar to this $80 billion reform dividend.

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The dividend would pay for all of this, or alternatively the

Government could afford to cut all our taxes by 30 per cent.

And if we continue on the path of reform, in 20 years Australia could

be the 3rd most prosperous country in the developed world. Surely

that’s worth striving for.

Businesspeople have a central role to play in this debate. We’ll be

charged with implementing the changes being proposed. As business

leaders we can - and we will - influence the future shape of Australia

and its fortunes.

Today I’ve singled out a lot of weaknesses in our public policies.

Rest assured, the BCA has also been careful to give the Government

credit where credit is due. But we do need to act urgently on the

reform agenda.

We need not only to protect Australia against future risk, but to make

it more aggressively competitive, innovative and growth-oriented.

This will require decisive leadership from all sectors of our

community.

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The BCA believes an integrated agenda of economic reform of the

scope I have outlined today is the way forward. The changes we are

proposing are not radical, but a logical extension of the reforms the

Australian community has adapted to, and prospered from, over the

past 20 years.

In the 1980s Australia was at a similar crossroads, although the

evidence of decline was then more evident. We faced up to it and

acted accordingly. Now it is time to repeat the performance.

We face a choice: whether to lock in the prosperity we currently

enjoy - or lose it. Our challenge is to ensure the right choice is made.

Thank you.

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