Restoring Australia’s competitiveness

After 23 years of consecutive growth, Australia is at a crossroads. Kate Carnell, CEO of the Australian Chamber of Commerce and Industry, identifies five areas where Australia is falling behind and can take action to improve.

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 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. 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.

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.

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. Countries now have to compete for businesses and talent.

Each year the World Economic Forum compiles the Global Competitiveness Index. In the latest report Australia ranks 22nd in the world. 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.

Our political system discourages boldness and innovation, instead rewarding minimalism and caution. We seem to have a view that if there is no immediate crisis, we should do nothing.

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 to support each retired person is shrinking. The costs of providing healthcare are far exceeding the rate of inflation. Growth in female workforce participation is stagnant.

All these things mean Australia is sleepwalking to disaster if it doesn’t take action.

I would like to propose five areas where Australia is falling behind and can take action to improve its competitiveness.

 

1. Small business

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.

Australia needs an entrepreneurial culture that encourages innovation and celebrates business success.

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.

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 recently 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.

Without existing assets, like a house, or an existing cash flow many start-ups and small businesses have doors slammed in their face by risk-averse lenders. Part of the solution might come from facilitating crowd-sourced equity funding. 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.

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.

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.

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.

 

2. Workplace relations

Thirty years ago computers were rare in workplaces, mobile phones were in their infancy and there was no email or internet. 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. 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?

Firstly, the system must be flexible enough to meet the needs of a diverse range of businesses, industries and locations.

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.

A few weeks ago the Productivity Commission brought down its draft report into workplace relations.

On penalty rates, it 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.

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.

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.

 

3. 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.

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. The Australian Chamber has joined with other business organisations and universities to support the National Work Integrated Learning Strategy.

Students at TAFE and vocational colleges also need to know that what they are learning in the classroom will help them at work.

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.

 

4. 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.

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. 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. 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. 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. With many companies increasingly agile, a high tax rate in one country gives them a great incentive to shift their operations elsewhere.

The cut to the tax rate for small business in the May budget was a step forward. 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.

 

5. 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.

The new section would prohibit a business with substantial market power from engaging in conduct that has the purpose 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. Our roads have become too congested. 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. 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.

Our four biggest cities 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.

Another area ripe for more competition is 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, 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.

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.