There is a new global economic environment arising from a more difficult politics.
The very heart of the European project – pooling sovereignty for growth – has been wounded. Across the Atlantic, many are experiencing diminished prosperity. The Chinese economic miracle – of which Australia has probably been the greatest single beneficiary – is slowing. Projected new miracles in emerging economies have yet to come to the fore.
Companies are not investing, despite the corporate world being flush with cash. The cost of debt is at historic lows, and bizarrely negative in some countries. There is a need for that cash to find an investment home.
And then there’s the digitalisation of the global economy . . .
It is an exponentially more complex world. And while much is far from clear, some things are certain. Technology disruption is here to stay. Volatility is here to stay. Slower economic growth rates are here to stay.
Political malaise and reform depression are untenable. The cost of inertia is rising, as Standard & Poor’s is reminding us.
Our focus must be on what can, and will be pursued, rather than what we can’t do. Reform measures that improve our productivity and set us on a sound fiscal path for the future are more critical than ever.
The ability to undertake reform is highly complex. Reform ideas are plucked by leaders from a garden of possibilities as political circumstances allow. Leaders can be more or less courageous in what they choose to pick, but importantly they play a major part in fertilising that garden. For the most part that involves resetting community expectations on what governments can do and explaining sometimes very complex ideas about the benefits of reform and the consequences of doing nothing.
It is not commonly understood, for instance, that our standard of living has been falling in the last four years, largely as a result of our declining terms of trade. Another example is that our political discourse does not distinguish government borrowing to finance current expenditure and infrastructure that does not reach a justifiable rate of return from borrowing to finance productive infrastructure.
In the next three years we need to consider measures to reduce our structural budget deficit, both on the revenue and expenditure side. Some of those will not be easy. KPMG has proposed a large number of measures in our publication on Solving the Structural Deficit.
We must continue to embrace tax reform. Superannuation changes cannot be pushed aside. Company tax reductions remain critical for future foreign investment.
While it is clear that the prospect of grand reform is more difficult, there are many second tier reforms that we should embrace. These would take unnecessary complexity out of our economy and present an efficiency dividend. They include uniformity on the employee-contractor divide, alignment of corporate law and taxation concepts of a dividend, greater coalescence of concepts of income and expense for accounting and taxation purposes, better and fairer rules on work related expenses.
Reforms involving better interaction between the tax and transfer system could reduce high effective tax rates particularly for women working part-time and seeking to increase their hours of work. Such measures could significantly lift female participation rates and hence our productivity. A similar, but less acute problem, exists for employees past retirement age.
Reforms to improve our Federation and replace highly state inefficient taxes with more efficient ones should also be part of the future COAG agenda.
We also need greater labour flexibility in certain sectors of the economy. This may not be easy, and compromise is likely to be in order, but it should not be forgotten this was the raison d’etre for the 2 July election.
Ultimately, we need a focus on outcomes in the negotiation and compromise that we will see in the 45th Commonwealth Parliament.
We need to look forward to raising the bar of the level of political discussion. We cannot afford to be insular or trepidatious. We must embrace reform if we are not going to be left behind.