BCA Member and CEO of Corrs Chambers Westgarth writes in today's Australian Financial Review about the need, amid global uncertainty, for Australia to be a competitive place for foreign investment.
Global uncertainty in the wake of Brexit reinforces the imperative for consistent policies to ensure Australia is a competitive destination for foreign investments.
We have to do everything within our power to improve our competitiveness.
The reality is that with our relatively small population, Australians do not generate enough savings to finance all the valuable investment opportunities here, especially in our relatively capital-intensive, export-oriented mining and agricultural sectors.
Having a consistent policy framework that supports strong inbound investment is critical for Australia's future growth.
As an economy in transition Australia needs foreign investment more than ever.
Non-mining business investment as a share of GDP is at its lowest for 50 years and there is little prospect of an upswing in sight. Higher investment is urgently needed to support future jobs and income growth and to ensure that Australia can tap into global supply chains.
Additional investment will have to rely largely on foreign capital. But we cannot assume that global investors will keep investing here. They have choices about where they put their money.
In this competition for global investors, Australia will have to do everything within its control to ensure that its business environment is competitive.
This requires policies that both signal that Australia is open for business and ensure a competitive business environment so that foreign investors will want to come.
Lowering barriers to investment through trade agreements and having clear and consistent screening policies are absolutely essential for welcoming foreign investment.
But while keeping the door open is an absolutely necessary pre-condition for strong investment – it will not be sufficient.
Supporting lower barriers for foreign investments while at the same time arguing against policies that would make the business environment more competitive, or indeed vice versa, is inconsistent.
The benefits from higher investment flows – more jobs and higher real incomes – will accrue whether investment is stimulated by lower investment barriers or company tax cuts, or other measures that make the business environment more competitive.
Lowering our company tax from 30 per cent to 25 per cent over a decade is needed just to bring Australia's rate in line with the current OECD average. As a net capital importer, Australia cannot afford to have a tax regime increasingly out of line with competitor countries.
The estimated permanent benefits from reducing the company tax rate to 25 per cent are large – a 1 per cent increase in GDP and a 1.2 per cent increase in real wages. Government revenues would be boosted by about $4 billion a year. And these numbers do not account for additional income flowing from the new technologies and knowhow that will accompany the investments.
Some argue that foreign investment will keep coming regardless of our tax regime. In other words, foreign investors will keep investing in Australia even if they expect to receive lower relative returns. This view of the global marketplace is disingenuous. It flies in the face of how competitive capital markets operate.
Sure, there are many factors affecting investment decisions, but it doesn't follow that relative tax rates don't matter. In a highly competitive global market for capital, Australia's uncompetitive tax rate means that we will lose out to other countries at the margin – which is where it counts.
The world will not stand still if Australia hesitates. Over the last decade the average business tax rate across the OECD fell from 28 per cent to 25 per cent. If this trend continues the OECD average will be 22 per cent by 2025. This would align the OECD closer to the current average rate in Asia of 23 per cent.
Australia's uncompetitive company tax rate isn't the only factor discouraging potential investors.
In particular, the cumulative burden on business of regulation is very large. It directly adds to production costs and discourages investment, innovation and entrepreneurship. We need to re-consider existing regulation to determine whether it is still fit-for-purpose, or if it has been overtaken by changes in production and consumer preferences.
And the conversation about the regulation of workplace relations has to change from one about protecting certain jobs at any cost to one about unleashing the potential of workplaces and the people in them.
Our budget position needs to be strengthened through redesign of major spending programs along with policy settings that underpin stronger economic growth, to maintain our AAA credit rating.
Our policy settings must work to together to improve the ease of doing business and be capable of attracting investment in an increasingly competitive world.