Prosperity Depends on Further Reform

10 February 2006

The Australian

By Michael Chaney
President, Business Council of Australia

During the past 12 months, Australia's new reform agenda has travelled a considerable distance. There is wide recognition that Australia needs a re-energised agenda to tackle bottlenecks and clear the barriers to long-term growth. Along the way, broad agreement has been reached on which areas of the economy reform needs to be focused. In itself, this is no small feat.

After a long period of uninterrupted growth and sustained prosperity, the easiest option would be to sit back and do nothing.

For its part, the Business Council of Australia has promoted the link between further reform and locking in our prosperity for the long term. In recent months, it released economic research showing that without change, we risk giving up the gains from 20 years of hard-won economic reform.

At the same time, our living standards would tumble from eighth to 18th on the Organisation for Economic Co-operation and Development's ladder of economic success within the next two decades.

However, with broad-based reform, our economy would be 40 per cent larger by 2025. There would be an additional $80 billion to spend on health and education, and our living standards and prosperity would continue their rise to third in the world.

To their collective credit, there is growing support among federal and state governments for further reform.

Part of the reform nettle has been grasped by the Howard Government in the area of workplace relations.

Although a very welcome response by Canberra to reverse Australia's declining productivity rate, it is only one part of the equation.

As the BCA has vigorously argued, a similar scale of reform is needed on infrastructure renewal, as well as addressing Australia's red tape blow-out. In both areas, Australia's growth prospects are being constrained by the policy frameworks of government.

On the one hand, a lack of government planning has resulted in big shortfalls in the availability and development of important economic infrastructure.

By contrast, an overweening, almost obsessive interest by governments in the minutiae of regulation-making and compliance is stifling the productive energies of business and the general community.

During the past few months, a good deal of behind-the-scenes work has been done by politicians and policy-makers at the federal and state level to shape a new reform agenda around regulation and infrastructure reform.

We are likely to see more detail on this agenda in the outcomes of the Council of Australian Governments meeting on February 10.

For the BCA's part, our expectation is that reform of regulation and infrastructure should be built around a renewed national competition policy.

As the successful NCP reforms of the early 1990s demonstrated, the risk of backsliding and political obfuscation is significantly reduced if governments agree to reform performance indicators with financial incentives or penalties according to the progress made by governments against these indicators.

Another important forum for change this year will be the federal budget.

Significant reform is needed at the heart, not just at the surface level, of Australia's tax system. Our high personal tax rates and overall tax burden on business mean our system is quickly becoming uncompetitive.

Compared with rival economies that are reducing their tax rates to attract more of the jobs and investment we are vying for, Australia's tax system is slowly but inevitably pricing the economy out of many future growth opportunities.

There is almost unanimous agreement that existing tax structures are not sustainable in terms of prosperity or fairness.

Significant reform – not the usual catch-up or piecemeal changes – is required. The time for reform is now.

Economic and fiscal conditions mean there is no better time for tax reform than in the May federal budget.

Leaving it until some time when less favourable conditions force us to act will restrict our choices and make what are inevitable reforms less palatable.

While we have travelled a long way during the past year in achieving a consensus around a new round of economic reform, serious reform involves action rather than just commitment.

This year should be remembered as a unique chance for real reform that was fully grasped, not a golden opportunity squandered.



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