Pathway to Prosperity
31 March 2017
The Business Council's president Grant King delivered this speech to the Ausralia Israel Chamber of Commerce in Sydney on 31 March, 2017.
From time to time we are dramatically reminded of the consequences of past choices we have made. In recent times this could not be more true than for the ‘crisis’ that’s being called in our energy industry – the subject of analysis and discussion in the media nearly every day.
Yet to the extent that events in the energy industry have fuelled the belief that our energy industry may have failed us today, there are many knowledgeable of the industry who would say those events were entirely predictable.
I want to reflect on just two choices as a community we made in respect of the energy industry that go to the heart of the issues we have today, not because I want to dwell on them but because I think they highlight a broader and in my opinion more important issue. That is why, when faced with important choices we often take the easier path on the day (something we might call populism) yet find that in the fullness of time that path often comes at enormous disruption and cost to the community (something we might call a crisis).
The first of those choices relates to the RET scheme. The original aim of this scheme was to cause investment in renewable energy to a level that equalled the expected growth in demand for electricity. What transpired was a scheme that was fiddled with on many occasions, competed with state-based schemes (particularly excessively generous solar feed in tariffs) and was implemented at a time that the Australian economy was transitioning to a less energy-intensive service economy and new technologies were making energy use more efficient.
As the growth in energy demand flattened, the scheme no longer provided the new energy investment we needed, rather it displaced existing generation – a risk that was understood because there was a loud call for the scheme to be reduced. After much debate it was reduced, but not as low as the original 20% target as many including the Warburton review recommended. In this circumstance it should be absolutely no surprise because, as predicted by those with relevant industry knowledge and expertise (dare I say experts), baseload coal-fired power stations are being closed earlier than many expected and the increase use of intermittent energy has reduced the reliability of the system and increased the cost of energy.
The second of the choices relates to the development of one of Australia’s greatest assets – its gas resources. When the LNG industry was developed in Queensland its proponents were aware of the vast scale of that undeveloped resource and reasonably expected that it would be able to access that resource and develop it on an effective and timely basis. This did not occur with access being frustrated or denied, particularly in Victoria and NSW. The result was the delayed development of resources, the result of which is a market that is now short of gas, threatening the reliability of electricity supply (because gas is the balancing fuel for more intermittent renewable generation) and eroding Australia’s competitive advantage in the cost of energy.
These two choices more than any other explain why we are in the position in respect of energy that we are today.
But are we in a crisis? There are measures used to demonstrate the reliability of the National Electricity Market. These measures show that the reliability of the NEM is extraordinarily high, exceeding 0.002%. Surely that is good enough and there is no crisis. But it’s not just about reliability – it’s also about affordability. We have also seen significant increases in prices as well. Furthermore it is increasingly difficult for business customers to access competitively priced gas supply. So it should be no surprise we think the system has failed us.
In the energy industry we have always known that the community values reliability, affordability and sustainability above all other things – and more importantly in that order. We have very high expectations and when they are not met, we have a crisis.
The BCA has made a submission to the Finkel review setting out detailed recommendations to address the crisis in energy so I don’t plan to dwell more on that here.
More relevant to today’s discussion is: what are the general lessons we might draw from this situation?
The key lesson must be: why do we need a crisis before we listen to our experts? I have used our energy industry as an example but we could also have used the GFC. Again there were those that called it and were ignored, the consequences for many were disastrous. And we continue to ignore the constant warnings from many experts on the need for action to turn around our budget position.
The title of this speech is ‘Pathway to Prosperity’. Prosperity is not a given; it must be nourished and earned. As I said earlier in respect of energy, time and time again we learn that the community values reliability, affordability and sustainability in that order. More broadly in the community we know we value a meaningful job, a growing income and opportunity for ourselves and our children above all other things – subject of course to our national and personal security being reasonably assured. We put the politically easy things ahead of the politically hard.
There are many definitions of prosperity but the one that is I think most important for this discussion is that prosperity exists when we take for granted those things that we know will always be the most important to us. In these times there is no crisis and the voice of populism is in the ascendancy. We put the short-term wants of the few ahead of the long-term needs of the many. We do not recognise in these times that we must continue to work for our national prosperity.
I think it is a reasonable contention that in prosperous times the evidence suggests we don’t listen to our experts because they are calling for action that promotes vigilance and caution at a time when none seems necessary, actions for our long-term benefit but with short-term disadvantages, savings over expenditure, to name just a few.
By my definition the prosperity we have enjoyed, evidenced by 25 years of growth, is declining because we are increasingly worrying about the things we most value – meaningful jobs, growing incomes and opportunity for us and our children.
The other sign that prosperity is declining is that increasingly the discussions we are having on important national issues is now overwhelmingly characterised by a debate on how we divide up what prosperity we have got rather than how to grow prosperity that we can all share in.
So what might the future look like if we don’t make some of the important choices available to us that can grow our country’s prosperity.
In 2019, our politicians will be competing to govern for the next three years. If our politicians can’t agree on some of the important choices we need to make now, the first budget following the next election, most likely in 2020, will be delivered in the following context:
The wafer thin surpluses currently promised won’t have been delivered. We will have a structural deficit where expenditure is outgrowing revenue and budget deficits will be in the range $20-30 billion. Our national net debt will exceed $350 billion and growing.
Household debt in Australia as a proportion of GDP is already the second-highest in the world. Given the issues around housing affordability this is only likely to get higher.
With interest rates more likely to be rising from a cyclical low, the national interest bill which is currently $12 billion a year on today’s $317 billion net-debt will grow significantly, and households with high levels of debt will feel that pressure enormously.
New business investment, which has been the main driver of growth in jobs and income in our economy, and is currently the lowest since the mid-1990s as a share of GDP, will likely to continue to be weak.
The unemployment rate will be stuck closer to 6% than 5%, more than a million people will be seeking more hours of work and most troubling, youth unemployment will still exceed 13%, and much higher in regional communities.
The ageing population will be driving higher healthcare spending. We will want to improve educational outcomes some of which have fallen in the last ten years. These recurrent outlays, including welfare spending, will put severe pressure on federal income significantly limiting options to fund investment and protect the Australian community from economic shocks and physical disasters.
It would be a very bad outcome if our past prosperity was to end up looking like what I have just outlined and even worse if all we are debating is how to divide that diminishing prosperity among us.
When I took on this role I was asked ‘did I think we could make important changes in Australia without requiring a crisis’ to which my response was I hope so. The reason I hope so is, just like it has been for energy, that when a crisis comes those choices we did not make, have come to everyone’s great disadvantage.
So why ignore our experts, for which the answer in part is how do we know who they are? There are always many who present themselves as such. So who should we listen to?
Not an easy question to answer but here are some thoughts.
Firstly look for someone who is not just a student but a participant, someone whose own success depends on their deep knowledge of the matters at hand. Secondly look for someone who has the compassion to understand that the change they are advocating has an impact on people, but are not immobilised by that knowledge. Thirdly look for someone who can maintain their conviction notwithstanding the criticism the unpopularity of their arguments will inevitably attract. Fourthly look for a leader who lives in the future not a laggard who pines for the past.
Listen to the debates and the way they are being conducted. If the matters being debated are not being argued on their merits but on legitimacy, be wary. In the key choices I referred to earlier in respect of energy those that knew about our energy systems were characterised as villains, as polluters, as conflicted by their own knowledge. Those that tried to shout down the experts promised a seamless, costless transition to a more sustainable future. It just isn’t happening that way, and those that promoted it are guiltily silent.
Listen to the solutions and the way they have been chosen. In prosperous times the hard work of policy development and implementation is often subordinated to the language of appeasement. Silencing the loudest voice, acceding to the bully, responding only to wants of the few should be avoided. What is better is the language of compromise seeking the best outcome for the majority of people.
We should be listening to our experts when there is no crisis because when we don’t the crisis will almost certainly come.
So if the things we most value are meaningful jobs, growing incomes and opportunities for ourselves and our children are these things that business knows anything about? Is business an expert that should be listened to?
So let's begin answering that by asking ourselves what is, or more importantly, who is business? We, in business, have allowed for too long many of the important choices we have to make to be characterised as a choice between people on the one hand and ‘business’ on the other as if business is some inanimate, malevolent object.
We must absolutely reject this characterisation of business.
Never is the expression ‘them is us’ more relevant than to the question who is business. 10 of the 12 million working Australians are employed by business, every Australian’s superannuation invested in our businesses, and everyone who buys goods and services is a customer of a business. In short, business is all of us. What is good for business is good for all of us, and what is good for all of us is good for business.
Businesses want to grow and prosper, and we know that this can only occur in a country that grows and prospers as well. We all have a shared destiny in this regard.
Strong, competitive businesses are good for all Australians. We rely on the choices competition provides to deliver us competitively priced goods and services, provide meaningful jobs and retirement incomes for us all. Yet that same competition and rapid technological change also requires our businesses to constantly innovate and change to survive. These forces also create the new jobs to replace the relentless destruction of jobs that otherwise occurs.
In short, business is hugely invested in the growth and prosperity of Australia, used to dealing with the decisions that bring with them the short-term disadvantage of change, cares deeply about the impact that change has, particularly on employees, yet capable of making the choices that balance the needs of shareholders and customers as well – in short all of us.
Business leaders should live in the future because if we are laggards rather than leaders, our businesses will wither and die, and so too will our country.
So having made this claim, I know that amongst some there will be howls of protest. They will point to all the examples where business has failed them – and no doubt this has occurred and sometimes egregiously so. But this is the exception not the rule.
Business delivers extraordinary outcomes every day. We can get fresh food in any season at almost any time of the day or night, withdraw cash from anywhere in the world 24/7, manage our money without ever going to the bank, be warm when it’s cold and cool when it's hot, access the world’s knowledge with a keystroke and stay in touch with our families and friends whenever we want. A truly remarkable world – a world made possible by business.
Yet, notwithstanding this, the perception is that, like energy, business is failing us. We can do better and we will. The BCA has and will continue to work with its members on areas that are clearly sore points with the community. Areas such as executive remuneration, payment terms and tax transparency.
But those whose sole response to the recommendations that business makes in respect of the important choices we face is to claim that business does not have a legitimate voice is a nonsense that must be rejected. Too often the debate about the choices we must make are opposed by the basest of arguments – find a victim of change and find a villain. Too often we have allowed business to be cast as the villain and again this must be rejected. To suggest that a reduction in the corporate tax rate to maintain a competitive investment environment should be rejected because an independent commission has determined to reduce penalty rates is the basest of political arguments and should be called out as such.
Too often change is opposed because the short-term disadvantaged are easy to see and the many beneficiaries are harder to find. Business will always want those vulnerable in our society to be supported, those who need help to be offered help. However, in more prosperous times we often see the wants of the few prioritised to the disadvantage of the many. Unfortunately, as with energy, we only recognise the truly disadvantaged when there is a crisis and then we come to understand that the disadvantaged is all of us.
So the proposition, as controversial as it may be, is that business is a voice that should be listened to when it comes to discussing those things we most value. Business does speak for the needs of the many, many of whom can’t speak for themselves.
Let me explain this by examining some of the major choices we advocate for at the BCA. Choices that we believe will make Australia a more prosperous country.
We have argued strongly in our budget submission that we must not only reduce the budget deficit but move to surplus by controlling expenditure and improving service delivery rather than raising taxes. The failure to better match recurrent expenditure with revenue will result in unsustainable levels of debt to be serviced by younger Australians and generations to come. It will also limit the Government’s ability to have the capacity to act as insurer of last resort in times of genuine hardship – a role we all expect our government to play.
We have advocated for comprehensive review of our taxation system but absent the political will for this we argue for cuts in the corporate and personal income tax rates. It is critical that Australia maintains an internationally competitive tax regime to drive ongoing business investment. It is well understood that business investment drives job creation. Creating meaningful jobs is the most caring thing we can do, moving people from welfare to work is in the interests of all Australians. We also know that business investment drives productivity growth which in turns is the greatest driver of income growth. Meaningful jobs and income growth are the outcomes Australians most highly value.
We advocate for removing barriers to job creation and competitiveness in all its forums, what we call workplace flexibility. We must combat the challenge of operating in an increasing digital world, a world with no night and no day, where the economies of mass production are huge and the cost of transport falling. We must ensure our workplaces are flexible enough to match the competition if we are to have the diversity of jobs and the value creation necessary to sustain job creation and income growth, particularly for the increasing number of young unemployed in our country. To have such a rancorous debate about changes to weekend penalty rates when that decision has been made by an independent commission well-resourced to assess the issue and not known for attacking working conditions sends a very bad signal about our ability to achieve the flexibility we need.
We will continue to advocate for a reduction of the regulatory burden on business. Regulation drags like an anchor on investment and innovation and ultimately on job creation and is the silent price paid by consumers. We have argued for a streamlining of project approvals, including limiting the grounds for appealing them to speed up investment and job creation, this is increasingly important for people living in regional Australia. Reducing the regulatory burden and streamlining project approvals can also help improve housing supply and home affordability. We have objected to poorly drafted regulation such as the ‘effects test’ because it places indeterminate obligations on business that discourage competition and innovation which benefit all Australians.
We advocate for major reforms to apprenticeships, vocational and higher education, to ensure our young people get into the right pathway to work, and that all Australians have the skills they need to work in the changing economy.
We have made detailed recommendations on changes to the way our energy system works to restore confidence in our energy markets, improve the competitiveness of our energy costs for business and reduce the pressure on household energy bills.
The BCA has always been known for the quality and detail of work that sits behind these and the many other choices we advocate for and it has obviously not been my intention to cover that detail today. It is all available to see for those that are interested in doing so. We will continue to reach out more effectively to the community by talking with people in language they relate to through channels they listen to. What I do hope is clear is that these examples show that the BCA does speak to the needs of the many, many of whom as I said can’t speak for themselves.
If our parliaments, not just the Government but all in parliament, follow the populist path and put the short-term wants of the few ahead of the long-term needs of the many, then the crisis will eventually come. We will then truly understand, just like we have for energy, the cost of that path and all Australians will be the worse off for it.
The pathway to prosperity is not easy. As I said earlier it is not a given, it has to be earned. At the BCA we advocate for policies not because they will help avoid a crisis but because they will make Australia an even greater place to live. We will be better off tomorrow than we are today because we will be a more prosperous country.
Our prosperity can be secured by continuing to create a more flexible economy, with the right incentives and rewards and the encouragement of innovation. This will create the things we most want – meaningful jobs, growing incomes and opportunities for ourselves and our children. When we no longer worry about these things then we will know prosperity has returned.