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Speech to Committee for the Economic Development of Australia, Melbourne.



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Shadow Treasurer Bob McMullan

Speech to

Committee for the Economic Development of Australia

Thursday, 25 July 2002 Melbourne

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Promoting the economic development of Australia is of course a goal shared by all political parties - or at least all the main parties -- and I applaud CEDA for its role in the debate on how best to achieve that goal. As you well know, the arguments in politics are not generally about the goal itself, but over how to achieve it.

I have spoken before about Labor’s framework for answering those questions, which I call the ‘four foundations’ of economic policy. I will spend a few minutes briefly outlining our ‘four foundations’ framework. I argue that the Howard-Costello government has failed to deliver in each of the four key areas of economic policy, and in other areas of economic management as well - highlighted by the recent debate about the adequacy of corporate governance internationally and in Australia. Next I will focus on one critical area of policy in which government policy has failed - Telstra. Then I will consider the implications of the current brawling within the Democrats for Telstra and beyond - including for the Labor Party.

The four foundations of a healthy economy

Effective economic management has four foundations.

• The first foundation is stability through sound macroeconomic policy. It underpins all of our other policies. Reinforcing Labor as a party of low, stable inflation and low interest rates is a critical goal. As part of this, we will maintain our commitment to the golden rule of balancing the Budget over the economic cycle.

• The second foundation is improving productivity. Labor must build on the productivity boost delivered by the Hawke-Keating reforms by taking advantage of the new productivity revolution, based on skills, innovation, and a new competition agenda. This is a field given far too little attention by the Howard-Costello government.

• The third foundation is equity, that is, ensuring a fair distribution of the benefits of growth. The Labor Party’s goal is a strong economy for a just society. Economic growth needs to be inclusive, not just for its own sake, but also because a fairer distribution of the benefits of economic growth is important to maintain support for future economic reforms.

• The fourth foundation is sustainability - that is, making sure growth is sustainable economically, socially and environmentally -- to ensure a healthy economy in the medium to long term. Economic sustainability means avoiding the damaging impacts of policies that exacerbate ‘boom and bust’ cycles, particularly in the regions. Social sustainability means ensuring the benefits of growth are shared equitably, and so build support for further reform. Environmental sustainability means ensuring environmental impacts are properly factored into economic costs.

The government’s failures

The Howard-Costello government has failed the nation on each of these fronts.

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The failure of macroeconomic policy is demonstrated most recently by the blowout in the Budget deficit.

Four years ago Peter Costello promised that the Budget would be in surplus by $14.6 billion in 2001-02. Mr Costello admitted in the Budget in May that the deficit for the year would be $1.2 billion, or $3 billion by the old cash measure. Finance Department figures released last week put the fiscal deficit for the first 11 months of the year at $3 billion, suggesting Mr Costello is well on the way to achieving his deficit embarrassment.

This week’s edition of The Economist shows Australia once again has the highest interest rates of all the countries in its weekly survey; for three-month money market-rates, two-year government bonds and ten-year government bonds. As a result Australian consumers and businesses face a higher interest burden than virtually any of their competitors.

The government’s failure to drive productivity growth is demonstrated on several fronts: by its continued unwillingness to invest adequately in education and in research and development, and by its reluctance to support an effective regime to promote competition.

On the competition front, the government has been particularly remiss in not tackling the anti-competitive features of two critical industries in which big, vertically-integrated businesses dominate much of the production chain: petroleum and telecommunications. I will return to the Telecoms issue shortly.

The government’s failure to promote equity is another burden. It is a burden not only on the neediest in our society, but it undermines the social cohesion necessary to win support for the economic reform that we need to keep pursuing to lift living standards for all Australians.

And the government has shown little understanding of the need to ensure that economic growth is economically, socially and environmentally sustainable over the long term.

One sign of this is that Mr Costello has never been heard to say anything about the value of using economic instruments to address environmental issues such as salinity, water quality and greenhouse gas emissions. On greenhouse, the government continues to follow a bizarre policy of saying it will pursue the Kyoto targets for reducing greenhouse gas emissions, but without taking part in the international framework designed to achieve those goals. It is saying it will pay the price of following those targets without receiving the benefits.

Costello’s complacency

When the economy is travelling well, governments always face the danger of becoming complacent. Peter Costello is showing this in spades. He is starting to believe his own rhetoric about the supposed qualities of his economic management.

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I was astonished to read this morning of Mr Costello’s comments playing down the possible impact of the drought.

… agricultural production is not a large part of Australia’s GDP; so, the effect that [drought] will have will affect that proportion of GDP that is made up by agricultural production … Australian farmers have got a few things going for them on the world markets in terms of prices.

This is not only insensitive to the plight of many farmers struggling to cope with the worst season in years, it is dismissive of a very real threat to our overall economic performance.

There is another area where this government has displayed its complacency: its failure to promote sound corporate governance. On the issue of audit reform, the government has still not acted on a report it received in October last year from Professor Ian Ramsay, which provided a benchmark for the reforms needed in this area. Professor Ramsay’s proposals are thoughtful and useful - so far as they go. Unfortunately they were overtaken by the collapse of Enron, which filed for bankruptcy in December. But the government has done little about responding even to Professor Ramsay’s suggestions.

The government has been equally tardy in carrying out its own promise to ensure directors of bankrupt companies don’t pay themselves excessive bonuses at the expense of its workers and shareholders.

In the wake of the uproar over news that One.Tel director Jodee Rich was paid a $7.5 million performance bonus, Prime Minister John Howard on 4 June last year made this promise to the Parliament:

The Commonwealth intends to amend the law so that in future, where bonuses are paid in the circumstances where those bonuses were paid to the bosses of One.Tel, that money will be refundable and can be used to meet the lawful and legitimate entitlements of the workers and also the other creditors of the company.

But as Mr Costello’s answer to a question in Parliament last month made clear, the government has still not fulfilled this pledge. This is another case of the government going soft on the wealthiest and most powerful Australians while it attacks the most vulnerable.

A third failure of policy on corporate governance is the failure by Attorney-General Daryl Williams to release a report aimed at preventing high-flying lawyers from using bankruptcy as a means of avoiding tax. Answers to questions on notice from Senate Estimates have revealed that the Attorney-General has been in possession of the report since 18 January.

Last September, with an election looming, Mr Williams assured Parliament that he had established a taskforce to report on whether ‘any changes are needed to the bankruptcy and taxation laws to ensure that the bankruptcy law cannot be used to avoid tax obligations.’

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But Mr Williams has been sitting on the report for six months.

Telstra and the economy

Can I come back to Telstra, which remains one of the critical issues for economic management. My colleague Lindsay Tanner has already addressed the broad questions surrounding the future of Telstra in his discussion paper, Reforming Telstra.

The insight of Lindsay’s paper is that there may be a substantial economic cost in retaining Telstra’s present structure. It is a point reinforced by analysis from three credible groups of analysts: Fred Hilmer, in his former incarnation as lead author of the 1993 report National Competition Policy, Allan Fels, chairman of the Australian Competition and Consumer Commission, and the OECD.

Without mentioning Telstra specifically, Hilmer makes a general argument about the problems of vertically integrated industries, an argument which applies directly to telecommunications. In some vertically-integrated industries, elements of the industry are natural monopolies, but have been integrated with potentially competitive activities. A vertically-integrated company in this industry may use the profits from the monopoly market to reduce prices in the competitive market, driving out or deterring competitors.

ACCC chairman Allan Fels took up some of these issues in a speech last December. He concluded: ‘There is no doubt in my own mind that Telstra’s incumbency and strong degree of vertical integration gives it an unparalleled advantage in the Australian market.’

The OECD too argues, in a report last November, that in spite of the best efforts of regulators, controls aiming at preventing cross-subsidies in vertically-integrated industries ‘are seldom fully effective.’ Instead the OECD also urges full separation of the two parts of the enterprise, saying this would remove the incentive for the owner of the monopoly element to discriminate against competitors, and allow competition to develop to a greater extent.

These are powerful arguments, but of course there are also difficulties posed by full structural separation. And as Lindsay Tanner argues, these may in the end be judged to outweigh the potential benefits. The disadvantages warrant serious consideration. But the significance of this issue is such that it should not be seen as a mere subset of a Budget balance sheet argument, nor as a mere argument about ownership structures.

The key point is that when a company such as Telstra dominates a crucial market such as telecommunications, the level of competition and overall economic performance may be harmed. The telecommunications sector is a key factor in generating improvements in productivity.

The central question is not whether the economy would be better served by a more competitive structure for the telecommunications industry -- that is self-evidently the case - but whether the government has gone too far down an alternative path to allow this approach to be pursued effectively.

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I pointed out a couple of days ago that the government’s timetable for selling Telstra was driven not by the need to maximise the potential price, but by political imperatives. With sharemarkets around the world under severe pressure, this is the worst possible time to be thinking of selling Telstra. But Mr Costello confirmed my fears yesterday, when he acknowledged the timetable for selling Telstra would be determined by the Senate, not the sharemarket. ‘What’s going to determine the timetable of offering equity in Telstra is the Senate,’ he said yesterday.

Mr Costello’s comments reinforce my concerns that his efforts at selling Telstra could create the worst of all possible worlds. The asset that has been built up under public ownership over all these years might be sold irresponsibly into a falling sharemarket to suit the Government’s political timetable, even though it will be a profligate undervaluing of a public asset.

I recognise it will take a long time from a decision to sell Telstra to finalising its sale. No one can accurately predict the state of the sharemarket in the year or two that task would take. We are opposed to the sale of Telstra full stop. But even the strongest advocates of the sale ought to counsel caution at a time of global market uncertainty, particularly for telecommunications companies.

My comments about the parlous state of the telecommunications industry are reinforced by this week’s cover story in The Economist, headed ‘The great telecoms crash’. The story argues that turmoil in the market could lead to dangerous decisions to support the former monopolies that still dominate the industry in many countries.

It would be wrong to grant the former monopolies any regulatory concessions now that would protect them from competitors in future. Once today’s bust is over, too much power concentrated in the hands of the former monopolies could let them raise prices and stifle the deployment of innovative technologies. The one thing that keeps would-be monopolists on their toes is viable competitors.

The government is effectively bribing the Nationals and the minor parties to support the sale of Telstra, offering the carrot of spending proceeds on some of their pet projects. There have been signs in recent weeks the National Party is beginning to desert its own constituency by supporting the sale, and now the Democrats too are beginning to crack.

The crisis in the Democrats provides the government with an opportunity to force through the sale of Telstra, potentially giving them the numbers they need in the Senate.

The spat in the Democrats has important lessons for every political party. For the Labor Party, it shows clearly that we have to expedite the implementation of Simon Crean’s important modernisation agenda, and get on with the important policy tasks. There are very few, if any, people in the Labor Party who don’t privately recognise that the party needs to be reorganised, and that the changes that Simon Crean is making are in the right direction.

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We are plagued though with individuals seeking to stake out territory in this debate in the hope of gaining factional advantage out of some last-minute deal. This isn’t good enough. We don’t need any Meg Lees and Andrew Murray type of activity in our party. The platform of modernisation isn’t just necessary, it is long overdue.

The democratisation of the party and the opening up of avenues of influence in the party to individual grass roots members, rather than to a narrow caste of factional leaders, is a fundamental reform and needs to be endorsed, embraced and expedited.

Party reform has always been a necessary first step in the transition of the Labor Party from opposition to government. We need to get that first step out of the way as quickly as possible and move on to the key task of finalising our policy agenda.