Australia Must Run Harder Than its Competitors

17 November 2005

By Hugh Morgan
Business Council of Australia

THERE'S a real urgency in economic reform. Through tax payments, jobs created and goods and services provided, corporate Australia has made a magnificent contribution to the welfare of Australians.

Corporations employ directly a million Australians and, indirectly, probably three times that, when their dealings with suppliers and small businesses are taken into account.

The sheer scale of taxes paid by corporations is fundamental to every Australian's well-being. The corporate tax take is the second biggest revenue stream to the Commonwealth, and the fastest growing. In the financial year 2001-02, the corporate tax take amounted to $27 billion.

The modern corporation is intrinsically linked to the prosperity and well-being of Australian society.

Australia not only has to keep up, but run harder than our competitors.

We must overcome the tyranny of distance and then be able to compete head on in global markets.

If you draw a 10,000 kilometre circle around Sydney you will capture 28 per cent of global GDP.

Do the same for London and businesses there have access to 94 per cent of global GDP.

Due in large part to reforms that have focused on improving our competitiveness over the past two decades, Australia's economy has grown by an average 4.3 per cent a year.

That means the economy is more than 40 per cent bigger than it was a decade ago.

Real wages during that period have risen by almost 20 per cent.

Yet, perhaps because of Australia's unbroken record of growth, we now seem to have forgotten the vital links between reform, competitiveness and prosperity. Policy directions that helped achieve unprecedented levels of growth and prosperity are now more likely to be seen as pandering to the big end of town.

Few people seem to recognise competitiveness is the reason why we are here in the first place and crucial to continuing prosperity.

The reality is no economy can ever achieve a state where ongoing competitiveness can be taken for granted.

Success, or otherwise, is a direct result of the commitment and efforts of policymakers to remove impediments to growth and increasing competitiveness.

Now, I acknowledge that, given the community feels that things are going well, one has to ask why the BCA wants to focus again on a new reform agenda.

Beneath the surface of growth and prosperity several blockages and imbalances have emerged. If left unchecked, they are likely to become major roadblocks to future prosperity and growth.

We have focused on four major areas fundamental to Australia's future competitiveness: taxation, infrastructure, industrial relations and business regulation.

I want to stress that our policy proposals do not represent an ambit log of claims, but a clear statement of the task ahead of us.

Starting with workplace relations, from 1990 to 2003 labour productivity in Australia grew at an average annual rate of 2.3 per cent. This was a good outcome by world standards.

Despite these increases, productivity levels remain lower than a significant number of our economic peers. In fact, in recent years, Australia's productivity has begun to slow dramatically.

The Government's recently announced changes to workplace relations continue the process of deregulation and simplification of agreement-making between employers and employees which started 20 years ago.

They will mean fewer barriers for employers to create jobs.

Yet, these first significant changes to workplace relations in a decade are only one part of the reform equation.

In regulation, business competitiveness is under real threat by a rising and largely uncontrolled tide of red tape. This tide is soaking up massive amounts of productive resources and creative energies among our larger corporations and small and medium-sized businesses.

The Commonwealth and state parliaments added 33,000 pages in new laws, rules and regulations in 2003 alone.

Half of all legislation passed by the Commonwealth Parliament since Federation has occurred in just the last 14 years.

Tax is the one area which governments can proactively structure to enhance competitiveness.

Increasing evidence suggests that, despite the focus on our headline corporate rate, Australia's overall corporate tax burden is way above our peers.

Australia's corporate taxation burden represents more than 5 per cent of GDP. In the case of most of our OECD competitors, this figure is 2 or 3 per cent.

If Australia had the same company tax burden as the OECD average, the company tax take in 2004 would have been nearly $16 billion lower than it was.

In other words, it is the sum of taxation rather than its components that determines whether Australia's tax environment for business is competitive.

Let me be clear - less competitiveness means smaller returns - which in turn eventually means a reduced tax take for governments.

A major review of corporate taxes is only one of the fundamental debates we need to have about our tax system.

We need a major simplification of the Tax Act which now totals more than 10,000 pages compared with 3000 pages 10 years ago. We also need a far more competitive personal tax system.

In a world where competition for skilled labour will increasingly determine a nation's economic performance, we cannot be wedded to tax structures and rates without considering their impact on the economy's competitiveness internationally.

The final area identified by the BCA is infrastructure. The state of our energy, water, transport and urban infrastructure systems is directly related to our capacity to support high levels of growth.

The BCA's infrastructure action plan found that by 2025, without major reform most key population centres will be demanding more water than is currently available and the story is the same for energy.

By 2020, the gap between energy supply and consumer demand will be more than 50 per cent. The amount of new investment required in developing additional energy supplies totals somewhere between $30 billion and $35 billion.

Australia's road and freight transport systems are straining and the situation will only get worse. By 2020, road freight movements will grow by 65 per cent. This will mean 900,000 more truck trips in and around our urban areas. The cost to the economy of traffic congestion will increase to about $30 billion a year by 2015 compared with $13 billion currently.

Australia's economy has an infrastructure asset base worth an estimated $300 billion.

Yet, there is no coordinated plan or policy to make sure the country's infrastructure keeps pace with the economy.

Like business, governments should adopt shorter audit time frames to ensure everyone has a clear understanding of Australia's infrastructure capacity at any point of time.

Because these issues extend beyond one electoral cycle, full accountability, transparency as well as bipartisan support are vital This is why the BCA's infrastructure action plan has called on governments to form a special federal-state body charged with responsibility for addressing the problem.

The response from our political leaders is that there is no crisis at the moment.

But it's a bit like someone on an empty road, watching a large truck approaching from a long way off. We know that we can move out the way and that there's no need to panic.

Dig deeply into any of the four issues of tax, workplace relations, regulation and infrastructure and you will discover dysfunctional federal-state relations are central to the problem.

The BCA will play an active role and continue to make strong representations on these issues.




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