Reform Must Anticipate Change, Not React To It

12 May 2006

The Australian Financial Review

By Michael Chaney
Business Council of Australia

This was a budget for the short term only, argues Michael Chaney.

What benefits will this week's budget bring to the economy in five years' time? With much of the comment and analysis inevitably focusing on the budget's immediate or medium-term effects, it is a good question to pose.

Certainly, there is much to highlight in the way of initiatives that should keep the economy running at a good clip over the next 12 to 24 months in terms of infrastructure, tax cuts and additional family payments.

At the same time, it's worth reminding ourselves of the major structural factors that will shape our economy over the next five years and beyond, assessing the longer-term value of the budget against these benchmarks.

First, the competitive pressures on our tax system - already intense - will only increase due to growing integration with the global economy.

What we offer by way of competitive tax structures and rates at a given time can quickly become uncompetitive as governments around the world aggressively structure their own tax systems to compete for more investment and labour.

Second, an ageing population means inexorable pressure will be placed on health and aged services spending, which needs to be carefully planned and managed.

Third, the commodities boom that has driven much of the recent growth, as well as windfall revenues to government, will probably have begun to subside.

As a result, there will be greater pressure on other sectors to perform more strongly, if we are to sustain the present levels of growth.

What these factors highlight is the increasing importance of budgets that anticipate, rather than simply react to, change.

Over the past decade, the government has driven reforms in tax, workforce participation and industrial relations.

All have contributed significantly to the fact that our economy is experiencing its 15th consecutive year of growth.

Yet as the Business Council of Australia and others have argued, our reform mindset needs to shift from fixing, through piecemeal reform, the immediate issues that have been allowed to build up.

Instead, we need to take a more strategic approach that addresses potential barriers before they become problems.

In other words, the underlying issues that will shape our economy require us to think about, plan for and implement reform around anticipating change, rather than reacting to it.

The budget addresses some important tax issues and raises the prospect of cuts to business and other taxes in future. Yet at the end of the day, tax cuts and changing thresholds aimed at pleasing a particular constituency, or keeping in line with - but no better than - Organisation for Economic Co-operation and Development averages, are reactive and piecemeal reform. They do not amount to structural reform.

The fact is, corporate tax receipts are laying a foundation for increased government spending, while being based on a tax regime that the budget's own numbers show is becoming increasingly uncompetitive.

Therefore, we need to see a considered program of business tax reform to ensure we get ahead of the competition and make it easier for governments, now and in the future, to safeguard this increasingly rich stream of revenue.

While Australia's overall corporate tax burden remains twice that of the OECD average, we will not be competitive.

Despite a thorough intergenerational report by the government four years ago on the budgetary and economic effects of an ageing population, there has been little sign that expenditure in this or previous budgets has been framed by the strategic considerations outlined in the report.

Similarly, there were few signals in this year's budget as to how Australia might prepare for the inevitable downturn in commodity prices, and how other parts of the economy might be encouraged to take up the slack.

Certainly, export performance outside commodities is of continuing concern.

As the BCA said at the start of the year, this year's budget was an important opportunity to drive wide-ranging strategic reform by investing gains from our present economic position to fund growth.

Major tax reform, particularly around corporate tax, remains fundamental to that equation, as does a strategic response to how we manage the effects of an ageing population, while boosting performance and productivity in our service and manufacturing industries.

The budget responds to the immediate challenges and opportunities facing the economy, but it is unlikely to make much difference to locking-in growth beyond the next two years.

The next 12 months need to build on these gains and elevate the response to a more strategic level.



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