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“The Economic Challenges Facing Australia” - Address by MRC Director Tony Shepherd AO, Bond Business Leaders Forum

“The Economic Challenges Facing Australia”, address by MRC Director
Tony Shepherd AO, 
Bond Business Leaders Forum, Bond University, 26 June 2017

It’s a pleasure to be here, home of our most successful private university. Congratulations to VC Tim Brailsford, Professor Michael Raybould and my good friend Professor Terry O'Neill, Executive Dean of the Business School.

I was on the Gold Coast in 2014 and gave a similar presentation on the need for economic reform and budget reform based on the National Commission of Audit.

I regret to say the situation has not materially changed since then and in some areas my level of concern has risen. We appear to be at serious risk of sleep walking into an intractable budget crisis but worse, a slow economic decline.

The key problem is with the Senate and those who have the balance of power. The Senate and cross benchers are emboldened by a community which does not seem to be concerned about deficit funding. Similarly, the community reacts negatively to any moves to cap or limit payments and enthusiastically supports increases in expenditure which are unfunded and unaffordable.

I was in the US for their election and just returned from a visit to UK and Europe. There is no doubt that the rise of populism and the retreat from rational economic policies is a common phenomenon in Western Democracies.

There are exceptions like NZ and NSW who have made difficult but rational decisions, lifted their economies and have so far benefitted at the polls. Both were characterised by strong leadership and strong engagement with the broader community.

What are the causes and what can we do about it? Social media and the 24 hour news cycle have changed the media and political landscapes forever. The greater majority of people now receive their news and information from unfiltered social media. This has coincided with a lack of political leadership and community suspicion with the pre-eminence of the so-called elites and apparatchiks.

All polls show rising community disenchantment and falling trust with politicians and to a lesser extent big business.

So where are we? The Budget deficit is growing with net debt forecast to rise to an historic high in 2018-19 and then decline as growth takes off. Annual interest payments will peak at $20b. Now the problem with this is will the growth assumptions underpinning the prognosis be realised and will the underlying assumptions of world growth be forthcoming? Furthermore with trenchant opposition to the most sensible and reasonable reforms can the inexorable rise in the cost of health, education, NDIS , aged pension and aged care be contained within the post forward estimates prognosis? All of these programs are projected to grow faster than inflation, population and GDP.

I certainly hope so but these are two big "ifs" with an aging population, poor productivity, a volatile world economic and political situation and the unlikelihood of either party getting a clear mandate in the Senate. Add to that no increase in real wages, an explosion in the cost of housing and energy, increasing casualisation and part time work, a digital revolution designed specifically to reduce the number of jobs.

The household savings ratio has dropped from 9.7 per cent in June 2014 to 4.7 per cent in March 2017. The average Aussie is facing high debt and weak real wages growth. This is hardly consistent with a consumer lead recovery - in fact consumption was particularly weak in the March National Accounts. Persistently high youth unemployment is a worry for all families and a portent of the future.

If the structural deficit is not fixed by growth, productivity improvement and expenditure reduction then the only solution is to increase taxes. The level of tax increases required is difficult to predict. No sane observer would disagree that we would have to raise personal and business taxes to such a level that we would strangle the very growth we are relying on – effectively killing the goose. Countries like Sweden have recognised this and wound back some of their more punitive taxes. Sweden now has a lower rate of company tax than Australia at 23 per cent. The great reformer Paul Keating also agrees that handing over half of your taxable income is no incentive to work harder or more productively or to invest.

What to do about it? For my sins, I agreed to join the Board of the Menzies Research Centre and conduct the Shepherd Review to be overseen by an expert independent panel and to be based on extensive community engagement.

The biggest single failure with the Commission of Audit was the failure to bring the community with us. It was released two weeks before the 2014 Budget. The community still does not believe we have a structural deficit nor do they believe a deficit and growing national debt is bad. If we can bring the community with us on the need for economic and budget reform it may be easier to win the support of the cross benches in the Senate. Of course, this is far easier said than done.

From surveys we understand that the major concern of the average Australian is their inability to get ahead and the future prospects of their children. This has been brought about by the low rise in real wages, the explosion in energy costs, high cost of housing in Sydney and Melbourne (50 per cent of the cost is government charges and governments are restricting the release of land for new lots), increasing casualisation of jobs and the increased proportion of part time jobs. There is an overarching suspicion about immigration and globalisation as the community searches for causes.

To start the process, the Menzies Research Centre published a paper outlining the five major economic challenges facing Australia which are at the heart of the community's concerns. These challenges are:

1. A sustainable economy and budget where taxes and incentives support people and business to invest and grow. Our tax collection is focussed on a relatively small group of people and business whose taxable income is volatile. The GST was a major reform but we need to review the tax mix to give governments greater certainty.

2. Effective and accountable government which works for the people and gives a clear sense of control and accountability. Federal spending is inefficient by global standards given the vertical fiscal imbalance and unsustainable and growing legislated commitments. There is significant waste at all levels of government. Australians have the right to feel secure but not entitled. We cannot leave our children and grand-children a mountain of debt to fund our entitlements. The baby boomers were great at creating wealth but are even better at spending it. The Magic Pudding is an Australian fable not a budget recipe.
3. An economy that remains competitive and open to trade creating opportunities for growth throughout Australia. For example, agriculture is our most globally competitive industry and in a good year we export more than 80 per cent of the food we produce. What a great opportunity. Our labour market rigidity, tax inefficiency and love for regulation are the prime contributors to our lack of competitiveness. Globalisation and freer world trade are great for Australia but we must be competitive to enjoy the full benefits.

4. We require infrastructure and affordable and secure energy to provide confidence and a better quality of life. We have managed to turn a great national advantage in energy into a disadvantage. The East Coast energy crisis is self-evidently not the result of market failure but of government failure. The quality of our infrastructure lags behind even developing countries like Thailand and Kenya. The cost of getting agricultural products like grain to port is far higher than countries like Canada and the US. Investment in proven sensible economic infrastructure is essential to sustainable economic growth.

5. As a high cost, low productivity island country with a small domestic market we need to be far more imaginative, flexible and innovative. We need to be quick to adapt to the opportunities and threats arising from changing market conditions and technology developments. It's hard to believe at times we are the country which pioneered dry land farming, Wi-Fi, colour xerography, the rotary mower, scramjets, google maps etc. We rank lowly in international rankings in innovation.

The Menzies Research Centre has asked for community feedback on these challenges and we are conducting a series of community forums across the country to discuss the issues and possible solutions. This process is underway and will continue over the next several months. Arising from this community consultation we will publish for comment and review a summary of the options to deal with our challenges.

Following further feedback on the options we will publish a comprehensive and integrated blueprint for reform. This will be couched in the language of the people and will be tied to their very real concerns. In fact we are starting with their concerns and developing solutions to deal with them.

If you go online to you can read about the Shepherd Review and how you might participate.

In closing let me give you a quote from Robert Gordon Menzies the father of post war Australia:

“The greatest function of a democratic government is to create a climate in which enterprise flourishes and productivity will increase.”

It was true 60 years ago and it is more true today. Thank you.

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