DAN TEHAN | Australian Financial Review | February 15 2016
Today the choice is ours on how we reform for growth. Tomorrow there will be no choice. Only by acting now will we keep the luxury of deciding our response to the challenges currently facing our economy.
Australia has been held as an example of reforming for growth. In an International Monetary Fund report last year, Australia was the case study of how trade liberalisation combined with economic reform can lead to long-term prosperity. However, the same report showed that since the end of the reform era, our total factor productivity has fallen sharply.
The liberalisation and reform of our economy has created higher living standards and wages, but this has led to a wave of contentment that has dulled our appetite to meet new economic challenges. It is a complacency that has made us sleepy with comfort.
In the short term, we might appear to be still prospering. In reality, we are moving backwards and seeing our global competition race ahead on reform.
As the World Economic Forum has recorded for some time, Australia’s failure to reform has left it languishing in economic rankings at 91st in “effect of taxation and incentives to invest” and 110th in the “taxation on incentives to work”. The IMF warns us that unless reforms occur, national disposable income per capita will remain below the long-term average growth rate of 2 per cent.
Certainly, the list of reform challenges is lengthy.
In our taxes, we are facing the corrosive effect of bracket creep, diminishing consumer purchasing power. In our government spending, we are cutting excess, but our nation’s interest bill remains over $1 billion per month. In our workplaces, we are stunted by an unproductive industrial relations system that lacks transparency and stifles job growth.
As Treasury’s modelling showed last week, without movement on tax reform the economy will slow to an even lower growth rate. In two years, the average income tax rate will rise from 24.4 per cent to 26.6 per cent – a level not seen this century. Allowing this to happen will cut our GDP growth by 0.35 per cent.
Growth is needed to keep generating wealth and our standard of living, including our generous social welfare safety net
This corrosive impact on average weekly earnings will hit lower and middle-income earners hardest, effectively increasing the cost of living by reducing their purchasing power. While the decline of the mining boom may have been outside of our control, income tax reform is not If the opportunity goes begging, we will only have ourselves to blame.
To reform this, however, the government must find money elsewhere to replace the revenue lost in tax cuts. Not replacing the revenue would lead to even larger deficits. It places us between the political devil and the economic depths of the deep blue sea.
While our budgetary position has improved since the recklessness of the previous government, we are still living beyond our means. Social security should be a back-up, not a starting point. These payments and transfers don’t come for free and when our expenditure is too high, we suppress growth. Concessions such as negative gearing and superannuation contributions, while affordable yesterday, must now be reconsidered.
The longer we sit outside budgetary balance, the longer we run the risk of being caught out by another financial shock.
Only reform on spending and tax can continue Australia’s long-term growth. In the short term, one sure way to give a boost to productivity is already in front of the Parliament The productivity to be gained by reinstating the Australian Building and Construction Commission would deliver a boost to the construction industry and bring about greater transparency. Industrial relations reform is something that can and should be acted upon now.
Australia can regain its reform momentum, but we need to stop kidding ourselves. The rest of the world won’t wait for us and our problems won’t be solved by wishful thinking.
We need to have the courage and conviction to commit to a new wave of reforms if only to make sure the tide doesn’t push us backwards.