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Renewed reform: why it's an imperative: speech by Michael Chaney to an ICAA breakfast briefing: 8 November 2005
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.
ICAA Breakfast Briefing 8 November 2005 1 of 25
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
ICAA Breakfast Briefing 8 November 2005 2 of 25
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.
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
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
ICAA Breakfast Briefing 8 November 2005 3 of 25
ICAA Breakfast Briefing 8 November 2005 4 of 25
what those were and reflect on what happened in the intervening
The initiatives were:
â¢ phasing out import tariffs;
â¢ restraining government consumption spending;
â¢ improving the efficiency of government business enterprises either
by increasing their exposure to competition or via privatisation;
â¢ moving to enterprise-level negotiation of employment conditions;
â¢ pursuing an active programme of reducing public sector debt; and
â¢ 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
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.
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.
ICAA Breakfast Briefing 8 November 2005 5 of 25
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.
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
“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
ICAA Breakfast Briefing 8 November 2005 6 of 25
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
ICAA Breakfast Briefing 8 November 2005 7 of 25
many appreciate that for the sake of our future security, it can’t stop
Over the last year the BCA has been pre-occupied with just those
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
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.
ICAA Breakfast Briefing 8 November 2005 8 of 25
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
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.
ICAA Breakfast Briefing 8 November 2005 9 of 25
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
ICAA Breakfast Briefing 8 November 2005 10 of 25
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.
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
ICAA Breakfast Briefing 8 November 2005 11 of 25
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
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
ICAA Breakfast Briefing 8 November 2005 12 of 25
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.
Turning to Australia’s tax system, we should acknowledge the
significant work on tax reform the Government has already
ICAA Breakfast Briefing 8 November 2005 13 of 25
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.
ICAA Breakfast Briefing 8 November 2005 14 of 25
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
- 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.
How does that compare with other countries?
ICAA Breakfast Briefing 8 November 2005 15 of 25
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
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.
The third area on the BCA’s policy hit list is infrastructure.
ICAA Breakfast Briefing 8 November 2005 16 of 25
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
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
ICAA Breakfast Briefing 8 November 2005 17 of 25
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.
- 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
- 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
ICAA Breakfast Briefing 8 November 2005 18 of 25
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
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
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.
ICAA Breakfast Briefing 8 November 2005 19 of 25
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
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.
The final area of the BCA’s policy focus is business regulation.
ICAA Breakfast Briefing 8 November 2005 20 of 25
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.
- 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
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.
ICAA Breakfast Briefing 8 November 2005 21 of 25
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
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.
ICAA Breakfast Briefing 8 November 2005 22 of 25
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
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.
ICAA Breakfast Briefing 8 November 2005 23 of 25
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
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
ICAA Breakfast Briefing 8 November 2005 24 of 25
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.
ICAA Breakfast Briefing 8 November 2005 25 of 25