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A new economic partnership: speech by Wayne Swan, MP to the Labor Business Forum, Sydney: 27 October 2005.



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AN EIGHT-PILLAR AGENDA FOR GROWTH

SPEECH TO THE LABOR BUSINESS FORUM

SYDNEY, 10 AM THURSDAY 27 OCTOBER 2005

WAYNE SWAN, SHADOW TREASURER

** CHECK AGAINST DELIVERY

A NEW ECONOMIC PARTNERSHIP

First can I join with Kim in thanking you all for coming to an event we hope signals

an historic new era of partnership between the ALP and business.

Being here today means you share our great ambition for the Australian economy

and what - with some vision and hard work - we can achieve together for all

Australians.

When I became Shadow Treasurer a year ago, my first priority was to get out and

meet as many of you as possible from all walks of economic life - business,

unions, investors, academia, policy-makers, here and abroad.

This consultation has been part of the first phase of addressing Labor’s key

challenge - to craft a creative and ambitious economic policy agenda for Australia,

not just for our next term of Government, but the next twenty years.

Labor wants to be in the front line of the economic debate in partnership with

employers and employees and all other levels of Government.

Australians needs to decide where we want our economy to go and what needs to

be done to get there.

And if getting there means making tough decisions, it is crucial that there is

dialogue, partnership and co-operation between all levels of Government, with

business and with the broader community.

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Business is critical to this debate and has already made an enormous effort to get

it going, as have State Governments.

Labor’s consultation with business hasn’t just started today, and it won’t finish

tomorrow. But today we want to say that this is a Labor Opposition more

committed to economic policy than ever before and we are seeking your views on

the challenges we must face together.

We know that first and foremost business needs a stable macro-economic

environment to flourish. This means budget discipline - keeping the budget in

surplus during expansions to ensure it remains balanced over the entire cycle.

In the second phase of our economic policy development, beginning today,

we want to work with business to find practical policy solutions.

We want business to tell us how we can overcome obstacles you face to

expanding, developing and commercialising new products and services, breaking

into new markets and creating new and better paid jobs.

Labor has an ambitious economic agenda designed to lift our economic horizons

and generate the next wave of productivity growth.

This agenda is built around eight pillars - the components of which my colleagues

will elaborate upon - and we invite your feedback.

THE ISSUES

But before I do so, I would like to set the scene. Where is our economy at and

what, in our view, are the risks, opportunities, challenges and choices that lie

ahead?

We have enjoyed enormous prosperity in recent times with 14 years of

uninterrupted growth. As the architect of the reforms of the 1980s and early 90s,

Labor is rightly proud of role it played in delivering that prosperity.

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Australia has also had its fair share of good luck. As Access Economics recently

observed, Australia moved almost seamlessly from record house prices to record

commodity prices - keeping our economy buoyant.

But things have changed in recent years that put our future prosperity at risk.

The Business Council of Australia (BCA) recently warned: "The performance of

Australia's economy is slipping and we are heading for trouble.”

At the top of the list is our flagging trade performance - which is symptomatic of a

broader decline in our productivity and competitiveness.

Australia must set its sights on a trade surplus of at least 1 percent of GDP to

offset the income deficit and stabilize foreign debt as a share of GDP. That’s a

swing of more than 4 percent of GDP - a huge challenge.

Rising foreign debt may well reflect the sum of rational decisions in the private

sector but it is also indicative of structural malaise in our traded sector. Based on

IMF figures, it will rise by 20 percent of GDP a decade. This is not sustainable.

Leaving aside the impact of commodity prices, our terms of trade are in decline

despite falling imports prices. And leaving aside rising commodity volumes,

exports have slowed to a crawl in real terms.

Australia has made little headway in this decade in either existing export markets

or in moving up the value chain into new products and services that can deliver

high wage jobs and strong company profits into the future.

Our recent poor performance in ETM exports is well documented. From double-digit growth in the 1990s, almost half are now in absolute decline. Since 2000,

Australia has shed over 115,000 manufacturing jobs - 10 percent of the

workforce.

Some might shrug and say, ‘the decline in manufacturing is inevitable given the

rise of China and India and there’s not much that can be done’.

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It is true that China and India are driving the most profound global industrial

restructuring in economic history. And it’s going to get tougher. The pace of

innovation will only quicken, competition will only intensify.

But clearly no one has told this to BP Solar Australia. Like many Australian

businesses, they see the rise of Asia as an opportunity, not a danger.

BP-S is headquartered in Western Sydney. The sole Australian manufacturer of

solar cells and panels, it employs 300 people and 90 percent of its US$100

million plus sales come from exports to Asia. It is now looking at ramping up sales

to China.

The truth is Australia can compete and compete very well.

But, success stories aside, large sections of our manufacturing industry are doing

it very tough. And we must ask ourselves: Are we as a nation prepared to see our

manufacturing industry disappear?

Because, unless we change course and lift our game, that’s where we could be

heading.

If, however, we all play our part, our highly educated and innovative workforce has

shown it can re-engineer existing processes and develop new technologies and

products to lift productivity, competitiveness and exports.

The same is true for services. Here there are also great success stories.

The IBM Business Transformation Outsourcing centre in Brisbane will create up to

1,000 jobs, selling business services to Asian customers and offering call centre

services. Its Brisbane-based call centre was recently voted best in Japan.

Wealthy countries dominate trade in services exports. But despite Australia’s

wealth, our overall export performance in services is dismal and the challenge to

lift its performance is daunting.

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Our service sector exports are just 4 percent of GDP, the third lowest in the OECD,

one-third of the OECD average. Less than even Korea’s 5 percent.

Our export composition is distorted by the sheer dominance of commodities.

But consider this - only 27 percent of our service exports lie outside tourism and

transport, down from 30 percent in 2000. Tourism and transport are both

important, but what about the vast array of other high skill, high value added

services?

In the US, such high-end services account for 90 percent of service exports

including education, financial services, communications and computer services,

scientific and medical research, software and movie distribution.

There are significant trade barriers in some sectors and the way into these

markets is often through on-the-ground investment or joint ventures. But that

alone doesn’t explain why our competitors are making bigger inroads.

AN AMBITIOUS STRATEGY

In light of these challenges, I ask you, how can we do better in the future?

What’s our plan? What’s our ambition for Australia for the next twenty years?

So far we have been lucky to move from a housing boom to a commodity boom -

but this should have been viewed as a window of opportunity.

The Government’s inertia reminds me what some Americans refer to as an

“ambition gap”. An inability to think big. A lack of confidence in what Australians

can achieve.

But who would have thought that in the 1980s Australia would lead the world in

reforming and opening up its economy? And who can imagine Australia alone

riding out the global financial crises of the 1990s had it not done so?

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Labor recognises Australia’s immediate economic challenges and the need for

long-term solutions.

We recognise that as Asia continues to lift its game, we need to match and even

exceed it; that the rise of Asia creates unprecedented opportunities as well as

risks.

And while Government has a big role to play, success will only come through

partnership.

We must understand and invest in our strengths. We must know which way the

trade winds are blowing and set our sails accordingly.

And, industry by industry, business, workers and Government need to work

together to offset Asia’s low-cost advantage.

Australia needs a Government that is ambitious about its future.

At the heart of Labor’s strategy is one key objective - to lift productivity.

Let me take this opportunity to clear up any misconception on Labor’s attitude to

proposed industrial relations changes.

Labor has an open mind to constructive proposals that will lift productivity but

there is no evidence that the Government’s current narrow IR proposals will do so.

Labor has a broader approach to improving our competitiveness, our trade

performance and securing our prosperity.

There are eight pillars to this strategy.

We are aware that many of the ideas we will raise with you for discussion today

would cost money. So let me assure you that any commitment we make must fit

within the fiscal framework that Lindsay Tanner will outline, which means making

some tough decisions.

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The eight pillars are:

1. Create a tax system that offers incentive and is competitive;

2. Remove deterrents to R&D and commercialisation;

3. Adopt new flexible and competitive regulatory models;

4. Work with State Governments in good faith;

5. Welfare that works;

6. Invest in skills and education;

7. Provide national leadership on infrastructure; and

8. Foster private savings.

In the time I have today, I want to focus on the issues and options in the first five-

taxation, commercialisation, regulation, state-federal relations and welfare.

My colleagues will deal with the others in detail.

TAX

Labor sees tax reform, guided by the principles of competitiveness, efficiency and

fairness, as an investment in the drivers of growth.

Personal tax

The recent debate has focussed on personal taxation.

It’s no secret that tax reform is needed to reduce marginal tax rates. The tax

Australians pay on additional earnings is too high, severing the link between

reward and effort.

According to the OECD our top marginal rate of tax is fast becoming

uncompetitive, and the effective tax rates faced by those on low and middle

incomes even more so.

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Labor is convinced of the need for a simpler system. A powerful case is emerging

for a personal income tax system with fewer and lower marginal rates and a

streamlined system of tax offsets and personal income tax deductions.

As a part of this reform process Labor is closely examining the merits of reducing

the differential between the corporate tax rate and the top marginal tax rates.

Labor’s approach here will be guided by sound evidence of potential economic

benefits and its contribution to the underlying fairness of a reformed income tax

system, not ideology.

Corporate tax

Less recent attention has been given to corporate taxation. Are our tax rates

competitive internationally and does our tax regime act as a disincentive to

international investment?

Last week the Business Council released new analysis that showed Australia is

not uncompetitive on a superficial comparison of headline company tax rates. But

we may be uncompetitive in terms of our total tax take and complexity.

Their research showed that while Australia is in the middle of the pack in our

region in terms of the headline company tax rate, we are the highest taxing

country in terms of our total corporate tax take.

The Ralph reforms, while intended to be revenue neutral, have been followed by a

surge in corporate tax revenues. While much of the increase can no doubt be

attributed to improved business profitability we need to examine other factors

that may have resulted in an increased burden for business.

There have been many recent calls to assess the competitiveness of Australia’s

corporate taxation system. In Labor’s view and in light of the BCA research, this

can be easily justified.

But there’s a myriad of other specific business tax issues too.

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Are we competitive in terms of attracting international investment in plant and

equipment? How does our regime for accelerated depreciation compare to other

countries that are competing for the same investment dollar?

We also need to consider tax reform to encourage Australian companies to

expand overseas. For example, we may need to consider changing our dividend

imputation system to remove bias against foreign source income.

We need to make sure that the tax treatment of highly skilled foreign executives

isn't disadvantaging the international competitiveness of Australia's businesses in

the hunt for top global talent.

We also need to ensure that Australia's corporate tax system encourages

investment in much-needed national infrastructure. Business has been waiting

two years for workable proposals to reform Section 51AD and Division 16D

dealing with the tax treatment of infrastructure projects.

And we need to deal with the hardy perennial question of complexity. As one

observer recently commented, the Treasurer campaigned in 1996 on the need to

cut the Tax Act and has so far “slashed” it from 3500 to 9500 pages.

INNOVATION

Australia’s investment in R&D as a percentage of GDP has ticked up of late but

remains low by international standards.

Labor is open to ideas to make such investment more attractive, including

reviewing the adequacy of tax concessions on R&D.

However the issue is far more complex than our aggregate spend on R&D.

Research is undervalued as a profession, there is a breakdown between

innovation and commercialisation, the appetite for risk in private capital markets

is limited and the allocation of public risk capital is inefficient.

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Consider these facts.

Since 1975, a total of 22,000 Orders of Australia have been awarded. Just 1

percent has gone to scientists. Innovation has been mentioned only 13 times.

That’s one-third fewer than lawn bowls.

There is not a single Australian brand in Business Week’s “100 Most Valuable

Global Brands” yet several smaller countries are represented including Finland

(Nokia), Sweden (Ericsson), and Switzerland (Rolex, Nescafe).

Sirtex, a leader in liver treatments, recently told a Parliamentary Committee that

“Australia’s uninhibited culture makes us good at research (because) we are free

thinking…but we are not very good at commercialising these ideas”.

“Australia has a wonderful history in medical innovation…we have three Nobel

prize winners in Medicine (but) most brilliant medical ideas never progress

beyond laboratories to become medical products worth millions of dollars”.

Another company which has developed a portable high tech digital broadcast

system said “we are in a market where there are many, many good ideas” but

“the most difficult part (is) taking it through to the market place”.

Venture capitalists Neo Tech Ventures admit the market for risk capital “is much

less sophisticated relative to the US or Europe. In the (US) there are probably more

(VCs) in one office park in Silicon Valley than in all of Australia.”

Government has stepped in to try and meet the needs of early stage businesses

but in the view of Sirtex the “bureaucracy is stultifying… overly bureaucratic…(and)

not transparent”.

I recently met with an emerging financial services company that has developed a

business model supported by proprietary technology that delivers scalable, active

and low cost investment advice to small retail investors.

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It applied for funding from AusIndustry.

After wading through the “box-ticking” red tape, they faced the Catch-22 where

private investors wouldn’t commit without matched funding but AusIndustry

wouldn’t approve matched funding without investment dollars in the bank.

They then tried to cut their funding needs by striking an agreement with their

major supplier to accept equity instead of cash for their services only to be told by

AusIndustry that they wouldn’t match in-kind investment.

Labor will review such schemes so that they take account of the bootstrap

financial realities faced by start-ups.

REGULATION

Another of Labor’s key priorities is to reduce the drag on productivity and cost to

business from ineffective or unnecessary regulation.

Labor welcomes the Government's belated efforts to address this issue

after nine years of adding to the burden.

However, we will keep a critical eye on the process and seek to make constructive

contribitions.

We have already made the following suggestions:

É Take an axe to the Tax Act, to dramatically simplify legislation that has

grown to 9,500 pages, creating huge compliance costs for business;

É Impose limits on regulation such as if a new regulation is introduced

another must be abolished;

É Explore the new flexible, low cost regulatory models being adopted by

our international competitors such as in the United Kingdom; and

É Reform Regulatory Impact Statements to ensure the economic costs of

excessive red tape do not outweign the benefits of regulation.

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As many of you would know, the Financial Services Reforms introduced in 2001

were a case study into how not to implement regulation.

Regulations attached to these reforms ran to 600 pages, impacted up to 9,000

businesses and imposed a cost on business of at least $200 million.

Despite the scale and cost, the financial impact statement amounted to just five

paragraphs with no dollar estimates of the cost - pointless.

But ultimately Labor believes that to ease the regulatory burden doesn’t mean

fixing the odd regulation but a rethink of the whole approach to regulation.

New risk based compliance models, which target regulation on those areas where

non-compliance runs the greatest risks, are the way forward. A breach of

prudential requirements is far more dangerous that failing to fill in a form.

Labor also supports moves towards principles based regulation rather than

exhaustive and inflexible “black letter law”. The evidence indicates such an

approach is not only less costly to comply with, but more effective too.

COMMONWEALTH-STATE RELATIONS

Australians are justifiably angry at the continual buck passing between the state

and federal Governments. They want solutions not scapegoats.

As Wayne Goss said last Friday: the federal system is the reality and only co-operative federalism can deliver real reform.

Co-operative federalism isn’t easy but it can be done. And Governments are

obligated to make it work. They have done so in the past.

In the 1990s co-operation between tiers of government delivered an array of

reforms in rail, energy, competition policy, and Asian language programs.

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A federal Labor government will deal with the States in good faith regardless of

their political persuasion.

SKILLS AND EDUCATION

Our training and education systems are failing to keep pace with demand - with

severe shortages in both the trades and the professions.

The Government is doing too little, far too late to fill the training gap for trades

and business is paying the price - capacity constraints, lower sales, fewer

exports, higher wages, lower profits.

But the Government seems blind to the long-term need to train and educate

Australians if we are to stay ahead of our competitors.

Australia’s comparative advantage over its Asian neighbours lies with its highly

educated workforce.

But while Indian and Chinese universities are churning out 4 million graduates a

year, and Malaysian universities are competing for international students - our

Government is cutting its spending in real terms.

Labor understands education is an investment in future prosperity and Labor will

make that investment. More about that from my colleague Jenny Macklin

tomorrow.

WELFARE THAT WORKS

For too long Governments have been putting band-aids over our social welfare

system.

There is too little incentive and assistance to help people move from benefits into

work, and too little emphasis on preventing welfare dependency in the first place.

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Many of you may be surprised to know that despite extended economic growth

the welfare bill has nearly doubled under the Howard Government and the

number of workforce age stuck on benefits has remained virtually unchanged.

There needs to be much stronger financial incentives for those who move from

welfare to work, and much more needs to be invested in early assistance

programs for children to ensure they get the best possible start in life.

It’s not just about extending the reach of opportunity; it also has the potential to

save taxpayers money in the long term. For example, early assistance programs

have the potential to save $7 for every $1 spent.

That’s not just good social policy, it is good economics.

INFRASTRUCTURE

Labor knows that a shortage of investment capital is not the reason why critical

economic infrastructure is not being built.

We live in a global capital market. And Australian investors, including those in the

$700 billion plus super industry, have a huge appetite for infrastructure

investments as they can deliver high returns as well as reduce overall portfolio

risk due to their low correlation with traditional asset classes.

The Future Fund will more than likely invest in infrastructure. But like others, it

will struggle to find viable projects in which to invest.

The problem is not a lack of investment appetite or capital but a lack of national

leadership on infrastructure.

Stephen Smith will talk in detail about these issues shortly.

SAVINGS

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Can anyone imagine what would have happened to national savings if Hawke and

Keating had not introduced compulsory superannuation in the 1980s?

At the very least the financial services sector as we know it would not exist.

The industry now manages over $700 billion and on an annual basis receives

some $30 billion in super guarantee contributions and $1 billion in co-contributions, underwritten by almost $10 billion in tax breaks.

Of course there is always room for further improvement and Senator Nick Sherry

will deal with the issue of super in his presentation.

CONCLUSION

Now, we recognise that if we’re to embark on this ambitious agenda we have in

mind we need your help, your views, your experience.

When Labor last embarked on a serious program to make our economy more

competitive, we didn’t do it alone. We did it with your assistance, in an historic

partnership with the states and organised labour.

We need a cooperative approach if we’re deliver a new wave of national

prosperity.

Because together we can do great things for our economy and our country if only

we tried.

If we opened our eyes to the opportunities available to us in the region and

beyond.

Hard yards have been done on economic policy have been done; but we can’t rest

on our laurels and coast on high commodity prices like the lucky country of

yesteryear.

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In this room we know only a forward-thinking agenda can deliver a new wave of

national prosperity.

So, thanks again for coming, and I look forward to the discussion about all these

issues, not just over the next two hours or the next two days but over the next two

years and beyond.

ENDS.