The Reform Journey Has Only Just Begun

05 October 2006

By Richard Humphry
Chairman, BCA Business Reform Task Force
Former Managing Director, Australian Stock Exchange

If there is one thing my years at the hub of Australia's capital markets taught me it was that Australia has to work much harder at being competitive. We may think we have done the hard yards on recent reforms of the workplace but there is still a long way to go.

We are up against aggressively competitive manufacturing and service industries in Asia, with whom we have fewer than ever protectionist barriers.

How much harder do we have to compete to keep skilled people? How much more cunning do we have to be in seeking out export markets? What premium do we have to offer to attract capital to our shores? And how do we strengthen our infrastructure quickly to meet the delivery and price requirements of customers?

In recent decades, Australia has shown how successful it can be and has punched well above its weight in many areas, including economic development.

However, even successful nations cannot rest on their laurels and Australia needs to continue to drive reforms aimed at removing impediments to growth and increasing its effectiveness and efficiency as a nation.

This is also true for the business community, which must strive to be more competitive than its international peers.

But two key reports on the performance of our economy point to a worrying decline in Australia's overall competitiveness.

The annual World Competitiveness Yearbook was released last week by one of the world's leading business schools, Switzerland's IMD. The Yearbook, which is used by governments to promote their economies as places to invest, showed that despite being the most resilient economy in the world, Australia fell from fourth in 2004 to ninth in 2005.

A similar conclusion can be found in the 2004-05 Global Competitiveness Report of the World Economic Forum. Australia fell from a ranking of 10th in 2003 to 14th in 2004 in the growth competitiveness index, a measure of macro-economic competitiveness.

These findings highlight that we cannot take even our current strong economic position, let alone the future, for granted.

The Business Council of Australia took the initiative over a year ago to take stock of our competitive position, and commissioned comprehensive research including major input from Access Economics. The focus was on four key areas: infrastructure development; workplace relations; taxation; and business regulation.

The infrastructure development study identifies the ageing of much essential infrastructure, including transport, water, energy and ports. This topic has been extensively debated and most are well aware of how the lack of forward planning and development affects their lives. But Australia's competitiveness is also directly affected by inadequate or overloaded infrastructure.

Workplace relations reform is another critical area and essential to protect employment opportunities. The Prime Minister, to his credit, has announced a number of initiatives in workplace reform, but we still have a long way to go. Now it's up to our industrial institutions and the unions to get behind the initiative. We should make no mistake; competitive pressures will demand even more initiatives if we are to grow employment opportunities.

Skills shortages have been identified as a brake on development, but increasingly skilled people are becoming internationally mobile. Australia has always had a significant number of skilled expatriates working around the world, and if we wish to tap that resource and new skills from overseas our personal taxation policies need to be internationally competitive. At present they are not.

Our tax system, despite worthy reforms such as changes to personal tax thresholds, a lower company tax rate and the introduction of the GST, still has a number of significant weaknesses.

Following a major review, the BCA's Taxation Action Plan for Future Prosperity found our high personal taxation works against workforce participation and productivity. It concluded that business and the community must deal with both growing uncertainty and cost from a tax system that grows larger and more complex every year.

Significantly, it identified a growing lack of competitiveness in our corporate tax system.

The final study, on business regulation, deals with the relatively recent rapid rise of the volume of regulation in Australia, the overlap of competing legislation between federal and state jurisdictions and the effect this is having on Australia's ability to compete.

While it is no measure of quality, the passage of an average of 100 pages of commonwealth legislation each sitting day for the four years 2000 to 2003 has certainly increased the complexity of our regulatory environment. Further, our state governments have also been adding to the stockpile. The NSW government, for example, grew the number of its statutes by almost 10 per cent in 2004. Queensland outdid all governments, with 8700 new pages of legislation in 2003.

Australia is not in such trouble that it requires such a massive legislative response and it certainly cannot continue without damaging our future competitiveness. The overall number of new laws and regulation in Australia is increasing at 10 per cent a year more than double our rate of economic growth. And the burden is not just on business. Billions are spent by governments on supervision of regulation which is a direct cost to taxpayers.

The Productivity Commission found that in 1994-95, the administrative burden from regulation amounted to some $11 billion for businesses. A more recent Organisation for Economic Co-operation and Development study estimated that the direct compliance costs of taxation, employment and environmental regulations amounted to more than $17 billion in 1998 for small and medium-sized Australian businesses alone.

The study highlights the sheer volume of regulation being implemented and the danger of overwhelming the scrutiny and accountability mechanisms that are supposed to ensure the quality and effectiveness of regulation.

Australia's booming economy has partly shielded business and the community from the true costs of rising regulation, but that is no long-term solution.

The answer is to discipline the process that generates regulation, making sure the full cost to the community of proposed legislation is always publicly identified, and reasons given where costs are not outweighed by the benefits. It is also necessary to have a thorough spring-clean of existing legislation, but this will be a significant and lengthy task.

Over the next decade and beyond, emerging economies will be able to exert far more competitive pressure than Australia's traditional competitors in the OECD.

We are beginning to see this in central and eastern Europe, where former Soviet bloc countries are starting their restructured economies with a comparatively clean slate in terms of formulating tax and other business and regulatory structures.

In our region, we are up against the two growth economies that will dominate the 21st century. That's our challenge. We are now 2 per cent of the world economy if you only include developed nations. This is not bad given our small population, but as the giant economies of China and India develop and mature, that percentage will fall. Australia needs to maximise its potential to compete quickly.

The key message is that we are at the start- not the end - of the reform process.




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