Restoring Australia’s Competitiveness

Australia is slipping down global competitiveness rankings as other countries undertake the difficult reforms Australia is struggling to enact. From workplace relations to tax, competition policy and skills training, there are many significant areas of policy in which Australia needs to act if we are to maintain our standard of living. Kate Carnell AO, CEO of the Australian Chamber of Commerce and Industry, has diagnosed Australia’s ills and in an address to The Sydney Institute on Tuesday 18 August 2015, Ms Carnell expounded on her evaluations.

RESTORING AUSTRALIA’S COMPETITIVENESS

KATE CARNELL

Here in Australia we are blessed. We have tremendous political and social stability. We have a talented and educated workforce. We have an abundance of natural resources. We have easy proximity to some of the world’s largest and fastest growing markets. We have a population with a significant disposable income. We have only moderate disparities in wealth. We have had 23 consecutive years of growth – only the Netherlands has done better. Given these factors it is easy to become complacent.

But our nation is at a crossroads. The easy increases in growth, spurred by the mining boom and the positive terms of trade, gave us steadily rising quality of life over the past few decades. This is now at an end. If the prosperity to which we have all become accustomed is to continue for our children and grandchildren we need to make some tough choices.

As the Intergenerational Report explained earlier this year, the 2.2 per cent annual productivity growth we experienced in the 1990s sank to 1.5 per cent in the 2000s – and is likely to stay there. We are now in the twilight of the mining boom, and recent economic developments in China indicate darker days for our resources sector may lie ahead.

But we are fortunate to have a services sector that can pick up the slack. From tourism to education to professional services, Australia has emerging businesses that can employ large numbers of people and get economic growth back on track. Thanks to technology and trade agreements it is now easier than ever to export these services and attract foreign income.

Our unemployment rate stands at 6.3 per cent, a 13-year high. This means that 800,000 people, including 300,000 young people, are looking for work. Unemployment affects every aspect of a person’s life, including their health. The long-term unemployed are twice as likely to be a current smoker, twice as likely to have back pain and almost three times as likely to have mental health problems.

Setting the scene

Australia has historically ranked highly on international measures of competitiveness. We were a place that had decent infrastructure, a highly educated workforce and a “can-do” attitude. But now the rest of the world is catching up, and in many cases overtaking us. Other advanced countries such as Singapore and New Zealand are undertaking reform and showing us a clean pair of heels. Our developing neighbours are also making great strides forward.

This international comparison matters. As the Red Queen says in Through the Looking Glass, “In this place it takes all the running you can do to keep in the same place”. In an increasingly globalised economy, countries are assessed not just in absolute terms but in relative terms as well.

In a global economy, international businesses can choose to set up wherever the business conditions are best. For young professionals, who are more footloose than ever, a sluggish economy in one place makes them likely to move where the opportunities are better. For exporters, a lack of competitiveness drives up costs compared to more nimble counterparts. Put simply, countries now have to compete for businesses and talent.

Each year, the World Economic Forum compiles the Global Competitiveness Index. The index measures countries on criteria including institutions, infrastructure, health, education and labour markets. In the latest report Australia ranks 22nd in the world, behind the United Kingdom, New Zealand and Malaysia. Five years ago we were ranked 16th. We are going backwards. Australia’s declining competitiveness stems from the fact that our ability to respond to challenges and to embrace change has severely weakened.

It is tempting to attribute this to the failings of particular personalities, but the problem is structural. Our political system discourages boldness and innovation, instead rewarding minimalism and caution. Our institutions are operating in fear of upsetting their political masters. Our public debate seeks to scare people about potential changes rather than inform and educate them – just look at the misinformed scare campaign run by the union movement on the China- Australia Free Trade Agreement.

We are collectively losing the ability to identify our failings and do better. We seem to have a view that if there is no immediate crisis, we should do nothing.

Australia should heed the words of US General Colin Powell. He said:

“If it ain’t broke, don’t fix it” is the slogan of the complacent, the arrogant or the scared. It’s an excuse for inaction, a call to non-arms. It’s a mindset that assumes (or hopes) that today’s realities will continue tomorrow in a tidy, linear and predictable fashion. Pure fantasy. In this sort of culture, you won’t find people who proactively take steps to solve problems as they emerge.

It is little wonder that it is so hard for governments to get support for a reform agenda. The aversion to reform is particularly troubling given the demographic challenges that loom on the horizon. Our population is ageing. The number of people in the workforce needed to support each retired person is shrinking. Today we have 4.5 people of working age for every person over 65, but by 2055 it will be only 2.7.

The costs of providing healthcare are far exceeding the rate of inflation. Today, Australia spends $2,830 per person each year; by 2055 the cost is expected to be $6,460. Growth in female workforce participation is stagnant. The Grattan Institute estimates that if Australia increased its female participation rate by 6 per cent – to the same level as Canada – this would add $25 billion to our GDP. All these things mean Australia is sleepwalking to disaster if it doesn’t take action.

The Intergenerational Report made clear the extent of the problem. By 2055, government spending as a share of GDP was forecast to rise to 37 per cent compared to the long-term average of 25 per cent. Net debt was projected to reach $5.6 trillion, representing 122 per cent of GDP, based on no policy change.

Alarmingly, the Intergenerational Report failed to act as a circuit breaker to the hyper-partisan politics that constitutes business as usual. Despite the warnings contained in the report (and previous reports) we have seen the abandoning of plans to introduce a user-pays element to GP services, a watering down of restrictions on accessing the pension, closure of debate on curbing superannuation tax concessions and the blocking of higher education and industrial relations reforms.

The sleepwalk continues.

Ripe for reform

So if we accept, in the abstract, the need for improved competitiveness, what does that mean in practice? I would like to propose five areas where Australia is falling behind and can take action to improve its competitiveness. Those five areas are small business, workplace relations, training, tax and competition policy. In each of these areas I would like to show where Australia is falling short and what we can do to improve. Collectively, these reforms can make a big difference.

Australia should set itself the target of being in the top 10 in the Global Competitiveness Index by 2030. I think we can get there.

Small businesses

Australia is home to two million small businesses, which collectively employ about five million people. Yet our regulatory systems put many burdens on the shoulders of these businesses that discourage growth. The challenge we face is to create the right eco-system for aspiring entrepreneurs to turn good ideas into good businesses. It is also important that we get the culture right.

Australia needs an entrepreneurial culture that encourages innovation and celebrates business success. In some parts of the world, a business failure is regarded as a learning experience that brings you one step closer to success but, in Australia, we often shame those who try unsuccessfully.

Australia’s “tall poppy syndrome” also comes into play. As a nation, we seem to distrust people who are very successful and run profitable businesses. We must reframe the way we perceive these things. Our successful entrepreneurs should be Australia’s new rock stars, up there with our sporting heroes.

As for policy reforms, it is often the small things that make a big difference. Each year the Australian Chamber conducts a National Red Tape Survey. In the latest survey nearly half of respondents said the impact of regulation had prevented them from making changes to grow their business. More than one in four respondents said they spent 11 hours a week or more on compliance, with almost one in two putting the annual cost of compliance at beyond $10,000.

To combat excessive red tape, new regulation should only be introduced with a comprehensive Regulation Impact Statement. This will force politicians and bureaucrats introducing new rules to think carefully about their impact and look for ways to repeal regulations that are no longer relevant or essential.

Just yesterday, Peter Harris from the Productivity Commission spoke at an Australian Chamber event in Canberra. He put forward the idea that rather than repealing regulation by incrementally reducing it, government departments should assume there was no regulation and then build back in what is needed. That approach makes a lot of sense.

For many small businesses, access to finance from traditional lenders is a frequent bug-bear. Without existing assets, like a house, or an existing cash flow many start-ups, small businesses have doors slammed in their face by risk-averse lenders.

Part of the solution might come from facilitating crowd-sourced equity funding. Rather than big institutions acting as the lender, individuals can make investments through an online platform that allows businesses to offer a pitch. Other countries, including New Zealand, have taken great strides forward in this regard by setting the simple legal ground rules for this type of lending. Australia is catching up through some work being done by the Small Business Minister, Bruce Billson, but has further to go.

In their early stages, many start-up businesses have limited capacity to pay salaries, and so they rely on employee share schemes, which give equity in the business to staff. As the business grows so too does the wealth of staff.

Changes to the tax law made by the previous government interfered with these schemes and made it much tougher for start-ups to attract talent. Thankfully the current government has rectified the situation. Still, employee share schemes are still underused in Australia compared with the US or the UK.

When we look at the support given to start-ups in other parts of the world, from tax holidays, streamlined legal requirements and loan underwriting, it is clear there is a lot more that can be done. To tap into the opportunities of the future, small businesses need to be digitally savvy.

A recent report from the Grattan Institute found that cloud computing allows smaller firms to access sophisticated IT services previously out of reach. Firms that use cloud computing report more growth in revenue and profit than do others.

But many Australian SMEs do not use cloud services because they are not aware of the benefits or believe they lack the skills to capture them. Some are concerned about transition costs, data security and privacy. Networks are too slow or unreliable for cloud services in some areas.

We at the Australian Chamber have partnered with Google to present a roadshow to small businesses across Australia to help small businesses develop an online presence. At the launch of the event in Frankston, I spoke to Matt Bebe, who runs the boutique Mornington Peninsula Brewery. Matt set up a website for his new business a few years back and now has customers in Asia buying his product.

Another great success story has emerged from Cooma, south of Canberra. In the main street of town is a fashion retail outlet called Birdsnest, a family-owned and operated business that was going broke. The family took the business online and they are now employing 100 staff. What they have done is personalise their service; Birdsnest helps you solve your fashion and style problems.

Until recently, a business needed several links in the chain to get their product to a customer overseas. Now it can be done at the click of a button.

Workplace relations

I turn now to workplace relations reform. Thirty years ago computers were rare in workplaces, mobile phones were in their infancy and there was no email or internet. Job-sharing and working from home seemed almost inconceivable. We did most of our shopping from 9 to 5 or in the occasional mad scramble on a Saturday morning.

Our world has changed a lot since then, so we need our workplace relations system to change with it.

Across Australia, we are grappling with rising youth unemployment, which stands at 13.8 per cent. In Burnie and Cairns, the rate sits above 20 per cent. If we don’t act, we risk consigning a generation of young people to the fringes of the economy. A key part of the solution is to give young people entry-level work opportunities so they can get a foothold on the ladder of career advancement.

So what reforms are we advocating? There are a few key principles that guide our approach.

Firstly, the system must be flexible enough to meet the needs of a diverse range of businesses, industries and locations, avoiding a one-size-fits-all approach and allowing individual enterprises and their staff to negotiate agreements that suit their circumstances. We need to help small businesses be flexible and dynamic.

Secondly, it must create the right climate for businesses to hire new staff, recognising that a job is the best form of welfare and that the needs of potential new employees must be considered as well as those of existing staff.

Thirdly, it should be simple enough for everyone to understand their rights and obligations without needing to wade through mounds of complicated paperwork. The Fair Work Act has 208,000 words across 950 sections. What hope has a small businessperson or employee got of making sense of it?

Two weeks ago, the Productivity Commission brought down its draft report into workplace relations. While there is room for debate about whether the Commission went far enough, it did offer some recommendations worth considering.

On penalty rates, the Productivity Commission proposed that the Sunday rate be aligned with the Saturday rate for workers in the retail and hospitality sectors. This change would deliver a significant number of new jobs and work hours as more small businesses find they can afford to open. In a recent survey of 1000 restaurant and café managers, around half said that if penalty rates were reduced they would increase employment on Sundays or public holidays and around 40 per cent indicated they would open for longer.

The study projected increases in employment of nearly 40,000 employees.

On employment contracts, the Commission proposed the introduction of “enterprise contracts”, which would sit between individual contracts and the enterprise agreements entered into by large businesses and their staff. This has great potential for small to medium businesses, giving them the flexibility to move away from proscriptive awards and towards agreements that meet their particular needs.

On flexibility, the Commission proposed changes to the way the Fair Work Commission compares an agreement between employers and their staff to the award, to decide whether an agreement can proceed. The current “better off overall test” is technical and legalistic, meaning some innocuous agreements can get knocked back. The proposed “no disadvantage test” would better enable agreements to be reached and implemented.

One area beyond the scope of the report where we would like to see action is the introduction of a small business award, for enterprises with five or fewer staff.

These awards would give greater flexibility to employers and remove some of the restrictions that are more suited to larger businesses, like strict rules on unfair dismissal and penalty rates. Of course, the baseline protections offered by the National Employment Standards should still apply. Going ahead with this shift would make it easier for small businesses to employ staff and grow.

Training

Australia has one of the world’s highest participation rates in tertiary education, and we should be proud of this. But there are alarming signs that many graduates from our universities are not ready to join the workforce when they leave campus.

Many employers are reporting a dearth of suitable candidates to fill skilled and technical roles, even at a time of high unemployment. The problem is also affecting apprenticeships, both trade and non-trade. We also face a shortage of graduates with skills in mathematics, technology, engineering and science, collectively known as STEM.

In an era when digital literacy is nearly as important as the ability to read and write, too many Australians miss out on the training they need to equip themselves for the jobs of the future.

Collaboration between universities and businesses is also alarmingly weak. While other countries have seen the benefit of collaboration – in California, Stanford University sits in the heart of Silicon Valley – Australia is still caught in mutual suspicion. In fact, Australia ranks towards the bottom of OECD countries on partnerships between universities and business.

What can be done about it?

Work-integrated learning refers to university students completing part of their course in workplaces so they can get a taste of what awaits them after they graduate. Students gain practical skills, and they also build connections with employers in their industry. The Australian Chamber has joined with other business organisations and universities to support the National Work Integrated Learning Strategy. This document seeks to break down barriers between business and academia, for the sake of students and for the sake of the economy.

Students at TAFE and vocational colleges also need to know that what they are learning in the classroom will help them at work. We need to ensure that employers can shape competency- based training. This will ensure it remains relevant to the jobs of today – and tomorrow.

We also need to rebuild support for apprenticeships and traineeships, which are so important in giving young people a start in their career.

As for improving our STEM outcomes, there is no silver bullet. The Labor Party’s proposal to introduce coding classes at schools is worthy of further consideration, but we need to create a pathway to fulfilling careers for students who excel in these areas.

Tax reform

Our tax system has served us well in the past but it is clear it is no longer fit for purpose. We need to make sure that our tax system provides the revenue needed to fund essential services while doing as little as possible to curtail economic activity. Every tax hurts, but some taxes hurt more than others.

Bracket creep amounts to tax increases by stealth. As people’s incomes rise, they move into higher tax brackets, allowing governments to collect extra tax revenue without proper debate or transparency. Over a decade, the average worker’s after-tax pay will drop by almost 5 per cent thanks to bracket creep. Unless, that is, we do something about it. A sensible solution is to periodically review tax brackets so that they keep up with wage inflation.

Stamp duty is a drag on competitiveness because it makes it harder for people to adjust to changed circumstances. In the case of real estate, stamp duty means that many empty-nesters are reluctant to sell their family home to move into something smaller because of the tax bill they will face. This “empty bedrooms” issue exacerbates our housing affordability problem. A sensible approach is to replace stamp duty with land tax, so that transactions are not discouraged. With appropriate transitional assistance and the ability for older people to defer their land tax bill against their estate, this change could be managed equitably.

The GST is an efficient tax and can do more of the heavy lifting. Because it is applied at the point of consumption, it does not act as a disincentive to work. It is time for public debate on removing current exemptions and raising the rate, so long as the extra revenue is used to offset reductions in less-efficient taxes. Equity demands that lower-income households be compensated for the increased GST, through reduced income tax rates or increased transfer payments.

At 30 per cent, or 28.5 per cent for small businesses, Australia’s corporate tax rate is one of the highest in the developed world. This high tax rate hurts the profitability of companies, and in turn the capacity of those companies to employ staff. With many companies increasingly agile, a high tax rate in one country gives them a great incentive to shift their operations elsewhere. The United Kingdom recently announced its plan to cut company tax, which will go from 28 per cent in 2010 to 18 per cent by 2020.

The cut to the tax rate for small business in the May budget was a step forward. It was gratifying to see that not only did the government make this the centrepiece of its budget, but the proposal was quickly supported by the Opposition.

In fact, the Labor Party identified 25 per cent as an aspirational company tax rate target for small business. The Australian Chamber believes that a company tax rate of 25 per cent for all businesses is necessary to improve our competitiveness. Clearly both major parties understand the benefits, but they need to achieve sustained action.

There is also scope for reform in our retirement incomes policy. The pensions system was designed as a safety net but many people who have the means to support themselves are currently able to receive the pension, so we need to tighten eligibility. Our superannuation system works well, but we need to make sure that it sticks to its purpose of providing retirement incomes rather than allowing workers in their twilight years to reduce their tax bill. Both these issues require action, but we need to avoid having them used for cheap political point-scoring.

Competition policy

The recent Harper Review shone a spotlight on competition policy and identified many areas for improvement. One of the recommendations that has produced some debate is the proposed changes to section 46 of the Consumer Law, the so-called “effects test”.

We are very supportive of the proposed change, which we think gets the balance right in giving small businesses a fair go, leaving consumers better off and giving everyone greater certainty. While other business organisations that speak only for larger companies are critical of the proposal, we are unambiguous in our support.

Section 46 deals with the unilateral conduct of a single business. The new section would prohibit a business with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition, and would require the court identifying this conduct, to balance pro-competitive and anti-competitive purposes and effects.

The Harper Review identified a number of other areas where action is needed.

User pricing for roads. Ask anyone who commutes to work in Melbourne or Sydney or Brisbane and they will tell you just how congested our roads have become. Why? Part of the reason is that access to our roads is too cheap during peak times, so there is a lack of incentive to shift journey times or move on to public transport. Just about every car and truck in the city these days has an electronic tag, so it is quite easy to use them to levy a charge for each trip. Of course we don’t want this to be used as a tax grab, so instead the revenue raised should be used to fund new infrastructure.

This change can fundamentally improve the functionality of our cities. So much of our GDP is generated in big cities, but yet those cities lack the necessary infrastructure to allow people to move around. A few key facts from a recent Infrastructure Australia audit demonstrate the problem.

A federal minister for cities. Our four biggest cities – Sydney, Melbourne, Brisbane and Perth – are projected to house an additional 5.9 million people, a 46 per cent increase, over the next decade and a half. By 2031, congestion could cost Australia $53 billion. Road travel times will increase at least 20 per cent in the most congested corridors without action. This is a looming planning and productivity crisis.

Just yesterday the Assistant Treasurer, Josh Frydenberg, told the Australian Chamber event in Canberra that he was open to the idea of a federal minister for cities. Perhaps that’s part of the answer. But at the very least governments at all levels can heed the Competition Review’s recommendations in this area.

The provision of health and welfare services. These are typically financed by the state, but that doesn’t mean they need to be run by government. When you open up monopolies to competition all sorts of interesting things happen, inefficiencies are weeded out and customers are better respected. We recognise that logic in all sorts of areas, but not in the provision of health and welfare.

Let’s change the game. The technical term, which the Competition Review supported, is “competitive neutrality”. What this means in plain English is that the government treats its own services providers and private providers on equal terms and awards contracts to whichever can deliver the best bang for buck.

It is essential that the majority of the Harper Review recommendations are implemented.

Conclusion

As you can see there are plenty of policy areas in which Australia can do better. If we don’t, Australia will condemn our children and grandchildren to a lower standard of living than we have enjoyed.

Done right, these policies can elevate Australia up the World Economic Forum ranking of competitiveness. Australia currently stands at 22, but there’s no reason why we can’t be one of the top 10 globally competitive economies by 2030.

I look forward to us making this a reality.