The Economic Challenges Facing Australia” - Address by MRC Director Tony Shepherd AO, Bond Business Leaders Forum - June 27, 2017 - Bond University Media Team +61755951376 media@bond.edu.au
“The Economic Challenges Facing Australia”, address by MRC Director Tony Shepherd AO, Bond Business Leaders Forum, Bond University, 26 June 2017
I was on the Gold Coast in 2014 and gave a similar presentation on the need for economic reform and budget reform based on the National Commission of Audit.
I regret to say the situation has not materially
changed since then and in some areas my level of concern has risen. We appear to
be at serious risk of sleep walking into an intractable budget crisis but worse,
a slow economic decline.
The key problem is with the Senate and
those who have the balance of power. The Senate and cross benchers are
emboldened by a community which does not seem to be concerned about deficit
funding. Similarly, the community reacts negatively to any moves to cap or limit
payments and enthusiastically supports increases in expenditure which are
unfunded and unaffordable.
I was in the US for their election and
just returned from a visit to UK and Europe. There is no doubt that the rise of
populism and the retreat from rational economic policies is a common phenomenon
in Western Democracies.
There are exceptions like NZ and NSW who
have made difficult but rational decisions, lifted their economies and have so
far benefitted at the polls. Both were characterised by strong leadership and
strong engagement with the broader community.
What are the causes and what can we do
about it? Social media and the 24 hour news cycle have changed the media and
political landscapes forever. The greater majority of people now receive their
news and information from unfiltered social media. This has coincided with a
lack of political leadership and community suspicion with the pre-eminence of
the so-called elites and apparatchiks.
All polls show rising community
disenchantment and falling trust with politicians and to a lesser extent big
business.
So where are we? The Budget deficit is
growing with net debt forecast to rise to an historic high in 2018-19 and then
decline as growth takes off. Annual interest payments will peak at $20b. Now the
problem with this is will the growth assumptions underpinning the prognosis be
realised and will the underlying assumptions of world growth be forthcoming?
Furthermore with trenchant opposition to the most sensible and reasonable
reforms can the inexorable rise in the cost of health, education, NDIS , aged
pension and aged care be contained within the post forward estimates prognosis?
All of these programs are projected to grow faster than inflation, population
and GDP.
I certainly hope so but these are two big
"ifs" with an aging population, poor productivity, a volatile world economic and
political situation and the unlikelihood of either party getting a clear mandate
in the Senate. Add to that no increase in real wages, an explosion in the cost
of housing and energy, increasing casualisation and part time work, a digital
revolution designed specifically to reduce the number of jobs.
The household savings ratio has dropped
from 9.7 per cent in June 2014 to 4.7 per cent in March 2017. The average Aussie
is facing high debt and weak real wages growth. This is hardly consistent with a
consumer lead recovery - in fact consumption was particularly weak in the March
National Accounts. Persistently high youth unemployment is a worry for all
families and a portent of the future.
If the structural deficit is not fixed by
growth, productivity improvement and expenditure reduction then the only
solution is to increase taxes. The level of tax increases required is difficult
to predict. No sane observer would disagree that we would have to raise personal
and business taxes to such a level that we would strangle the very growth we are
relying on – effectively killing the goose. Countries like Sweden have
recognised this and wound back some of their more punitive taxes. Sweden now has
a lower rate of company tax than Australia at 23 per cent. The great reformer
Paul Keating also agrees that handing over half of your taxable income is no
incentive to work harder or more productively or to invest.
What to do about it? For my sins, I
agreed to join the Board of the Menzies Research Centre and conduct the Shepherd
Review to be overseen by an expert independent panel and to be based on
extensive community engagement.
The biggest single failure with the
Commission of Audit was the failure to bring the community with us. It was
released two weeks before the 2014 Budget. The community still does not believe
we have a structural deficit nor do they believe a deficit and growing national
debt is bad. If we can bring the community with us on the need for economic and
budget reform it may be easier to win the support of the cross benches in the
Senate. Of course, this is far easier said than done.
From surveys we understand that the major
concern of the average Australian is their inability to get ahead and the future
prospects of their children. This has been brought about by the low rise in real
wages, the explosion in energy costs, high cost of housing in Sydney and
Melbourne (50 per cent of the cost is government charges and governments are
restricting the release of land for new lots), increasing casualisation of jobs
and the increased proportion of part time jobs. There is an overarching
suspicion about immigration and globalisation as the community searches for
causes.
To start the process, the Menzies Research Centre published a paper outlining
the five major economic challenges facing Australia which are at the heart of
the community's concerns. These challenges are:
1. A sustainable economy and budget where
taxes and incentives support people and business to invest and grow. Our tax
collection is focussed on a relatively small group of people and business whose
taxable income is volatile. The GST was a major reform but we need to review the
tax mix to give governments greater certainty.
2. Effective and
accountable government which works for the people and gives a clear sense of
control and accountability. Federal spending is inefficient by global standards
given the vertical fiscal imbalance and unsustainable and growing legislated
commitments. There is significant waste at all levels of government. Australians
have the right to feel secure but not entitled. We cannot leave our children and
grand-children a mountain of debt to fund our entitlements. The baby boomers
were great at creating wealth, but are even better at spending it. The Magic
Pudding is an Australian fable not a budget recipe.
3. An economy that remains competitive
and open to trade creating opportunities for growth throughout Australia. For
example, agriculture is our most globally competitive industry and in a good
year we export more than 80 per cent of the food we produce. What a great
opportunity. Our labour market rigidity, tax inefficiency and love for
regulation are the prime contributors to our lack of competitiveness.
Globalisation and freer world trade are great for Australia but we must be
competitive to enjoy the full benefits.
4. We require infrastructure and affordable and secure energy to provide
confidence and a better quality of life. We have managed to turn a great
national advantage in energy into a disadvantage. The East Coast energy crisis
is self-evidently not the result of market failure but of government failure.
The quality of our infrastructure lags behind even developing countries like
Thailand and Kenya.
The cost of getting agricultural products like grain to port is far higher than
countries like Canada and the US. Investment in proven sensible economic
infrastructure is essential to sustainable economic growth.
5. As a high cost, low productivity
island country with a small domestic market we need to be far more imaginative,
flexible and innovative. We need to be quick to adapt to the opportunities and
threats arising from changing market conditions and technology developments.
It's hard to believe at times we are the country which pioneered dry land
farming, Wi-Fi, colour xerography, the rotary mower, scramjets, google maps etc.
We rank lowly in international rankings in innovation.
The Menzies
Research Centre has asked for community feedback on these challenges and we are
conducting a series of community forums across the country to discuss the issues
and possible solutions. This process is underway and will continue over the next
several months. Arising from this community consultation we will publish for
comment and review a summary of the options to deal with our challenges.
Following further feedback on the options
we will publish a comprehensive and integrated blueprint for reform. This will
be couched in the language of the people and will be tied to their very real
concerns. In fact we are starting with their concerns and developing solutions
to deal with them.
If you go online to www.menziesrc.org
you can read about the Shepherd Review and how you might
participate.
In closing let me give you a quote from
Robert Gordon Menzies the father of post war Australia:
“The greatest function of a democratic
government is to create a climate in which enterprise flourishes and
productivity will increase.”
It was true 60 years ago and it is more
true today. Thank you.