Speech: Inclusive growth agenda, CEDA Chief Executive

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Speech: Inclusive growth agenda, CEDA Chief Executive


Posted : Monday, March 31, 2014

CEDA Chief Executive, Professor the Hon. Stephen Martin delivered a speech to the McKell Institute on 1 April 2014 as part of their Inclusive Growth Agenda series.

Thank you for the opportunity to be with you this evening.
The McKell Institute is to be congratulated for sponsoring this critically important series with respect to an Inclusive Growth Agenda.  I was fortunate to be at the launch of this initiative, and hope I can add a further perspective to its objectives.
There can be no more important topic for policymakers and practitioners of the black arts of economics and politics to concern themselves with than Australia's economic future, a future that should be based on growth but underpinned by inclusiveness and a genuine fair go for all philosophy.
The fact is that Australia still is in many respects the Lucky Country. But our long-running economic expansion has not come about by luck or good fortune. It has been the result of significant reforms introduced to position Australia for the future.
In this respect I am reminded of Ross Gittens' view of the 10 economic reforms that transformed Australia .
While most of those - floating the dollar, deregulating the banks, privatising government businesses, enterprise bargaining and national competition policy - occurred in the heady days of the reformist governments of Hawke and Keating,   they underpinned a subsequent two decade economic expansion.
My thesis then is that the adoption of the right policy settings now has the potential to extend and expand Australia's economic growth for at least another decade. However, this outcome will not be achieved without major reforms aimed at improving the nation's comparative advantage and international competitiveness.
Australia has the potential to remain prosperous for decades to come but only if Governments are prepared to adopt a robust reform agenda and not hide behind a myriad of inquiries, scare tactics about the state of the national books or what Nick Greiner describes as a 'mandate fetish'.  That is, governments will only enact specific reforms if they have taken proposals to an election and presumably attained a mandate because they won.
The Committee for Economic Development of Australia (CEDA) has sought to stimulate discussion of the necessary reforms by undertaking research that highlights just where such reforms should occur.  Our reports have covered issues such as securing Australia's long term green energy future through the adoption of nuclear technology , suggestions for a sustainable population policy  and advocacy of health reforms  that recommended quarantining a proportion of superannuation contributions to meet future health requirements and reducing pharmaceutical costs by adopting generic products.
We were even a touch cheeky by publishing a 'how to govern and achieve reform' kit prior to last year's Federal election .
REFORM AGENDA FOR AN OPEN ECONOMY
However, it is CEDA's major research project published in November 2013 that has even more direct relevance to the subject matter of the McKell series.
Australia Adjusting: Optimising national prosperity, sets out a comprehensive economic reform agenda to sustain Australia's international competitiveness and productivity into the future. A 10 point micro-economic reform agenda forms the centerpiece of this report that embraces three pillars - economic flexibility, incentivising innovation and developing the nation's human capital.
Let me touch on each of these briefly.
ECONOMIC FLEXIBILITY
The flexibility of Australia's economy underpins the nation's ability to respond to changing domestic and/or international circumstances. To improve its economic flexibility, Australia needs to initiate a series of microeconomic reforms to remove rigidities in the economy, address inefficiencies and uncompetitive elements of the tax system, reform the Federation, and adopt processes to deliver suitable levels of infrastructure.
This can be achieved by:
1. Establishing a National Productivity Policy (NPP) to replace the National Competition Policy that addresses a comprehensive review of regulation, pricing and licencing arrangements while phasing out industry subsidies. The NPP should be supported by a new inter-governmental agreement that provides financial incentives for the states to undertake reforms.
2. Reforming the taxation system to make it more efficient, internationally competitive, and supportive of economic growth. This should be done by reducing the corporate tax rate, eliminating tax breaks, lowering effective marginal tax rates of low income workers, eliminating job-destroying state taxes such as payroll taxes and broadening and raising the GST.
3. Reforming the Federation by re-allocating command over revenues and sharply re-defining roles to reduce overlap and duplication. This would sharply define which level of government is responsible for services; examine sharing the personal income tax base with the states and the horizontal fiscal equalisation between the states to increase incentives for states to develop their own revenue sources.
CEDA's major report for 2014 to be launched in October will examine these and other issues in making policy recommendations for an Australian Federation for the 21st century.
4. Making infrastructure investment efficient by all governments publishing long-term plans for infrastructure development. For each investment, evaluation criteria would be established at the outset, enabling ex post evaluation of whether its prospective net benefits were achieved.
At this point I would have to say Treasurer Joe Hockey's recent announcement following apparent agreement with his state counterparts with respect to his 'asset recycling initiative' is most welcome.  My reservation is that the traditional Conservative expectation that this should go to building more roads is too short-sighted.
And indeed we all continue to wait for 'the' announcement re Sydney's second airport.
INCENTIVISING INNOVATION
Along with a competitive environment that in itself provides incentives to become more productive, the capacity to innovate and to adopt innovations quickly is essential to raising productivity. Australia has tended to derive its comparative advantage from other sources in the past, so it will be a challenge for the nation to develop vibrant hubs of innovation. There is also evidence of a lack of management innovation in Australian small and medium enterprises (SMEs), relative to those in northern hemisphere advanced economies.
To improve the nation's capacity for successful innovation, Australia should:
5. Increase incentives for innovation and its rapid adoption. This should include government initiatives, including via funding criteria, to translation and diffusion of innovations.
6. Examine income contingent loans, similar to the HECS, to help fund innovative activities by SMEs to address an area of comparative underperformance.
7. Establish the enabling framework for research and development corporations, similar to those in rural industries, for appropriate sectors of the economy.
There is clear evidence that cooperation between universities and business in undertaking research and development (R&D) and commercialising the results can provide new and exciting growth opportunities for Australia.  However demarcation issues such as ownership of intellectual property (IP), together with changing the parameters for government financial support for universities to enshrine outcomes rather than pure R&D should be an integral part of the funding criteria.
These issues are considered and underpin a number of additional recommendations relevant to an inclusive growth agenda that will be made in CEDA's April research report on Advanced Manufacturing.
CAPABILITY AND WORKFORCE DEVELOPMENT
A nation's most valuable resource is its people - its human capital - and how well it performs in productivity and raising living standards depends critically on ensuring that their capabilities and agility are developed to their full potential, and that we have adaptive and consultative workplaces. While Australia has had relatively high levels of participation and employment in recent times, there are segments of the community where skill development and participation are poor.
To maximise national human capital needs Australia should re-focus and optimise education and training and develop a less adversarial and more flexible industrial relations environment by:
8. Developing a unified, over-arching policy framework to guide the allocation of investment in education and training from early childhood to further education and training and tertiary education. This should examine the entire educational process and allocate investments in a targeted way, building on previous investments. It should also target underperformance, particularly children from disadvantaged groups in the population. At the other end of the spectrum, develop initiatives targeted at optimising the capabilities of the brightest children.
9. In the existing workforce, developing a national workforce development plan that aims to engage, and as needed re-skill, under-utilised groups in the workforce.
10. Reviewing Australia's industrial relations system to make it less adversarial, more flexible, adaptive and responsive to the needs of individual sectors and workplaces, for example provide for more flexible negotiation of penalty rates in services such as retail, tourism and hospitality that operate on all days of the week, often day and night (and in some cases 24/7), year round.
CONCLUSION
Real reform is hard.  Real reform requires leadership.  Real reform that is based on an inclusive growth agenda is dependent upon the willingness of policymakers to step outside the shackles of political ideology. Real reform requires a comprehensive plan, a willingness to take risks, and a willingness to take decisions for the greater good, not sectional interests.
The Federal Government has a real opportunity to develop and action a reform agenda that can position Australia for economic prosperity for decades to come. Hard decisions will need to be made and I hope this government has the courage make those decisions in the interests of all Australians and with a clear view to the long term.
THANK YOU.

A copy of the speech is below*.

Thank you for the opportunity to be with you this evening.

The McKell Institute is to be congratulated for sponsoring this critically important series with respect to an Inclusive Growth Agenda.  I was fortunate to be at the launch of this initiative, and hope I can add a further perspective to its objectives.

There can be no more important topic for policymakers and practitioners of the black arts of economics and politics to concern themselves with than Australia's economic future, a future that should be based on growth but underpinned by inclusiveness and a genuine fair go for all philosophy.

The fact is that Australia still is in many respects the Lucky Country. But our long-running economic expansion has not come about by luck or good fortune. It has been the result of significant reforms introduced to position Australia for the future.

In this respect I am reminded of Ross Gittens' view of the 10 economic reforms that transformed Australia .

And while most of those - floating the dollar, deregulating the banks, privatising government businesses, enterprise bargaining and national competition policy - occurred in the heady days of the reformist governments of Hawke and Keating   (and I would add the introduction of the GST under John Howard) they underpinned a subsequent two decade economic expansion.

A few salient points illustrate what I mean.

  • Australia's terms of trade have been at levels never before experienced, although current indications are that the underlying investment boom in the mining sector has cooled, to be replaced by a production boom associated with China's still significant demand for raw materials.
  • Record low interest rates following the GFC (although the effects on the housing market might be a point of conjecture).
  • Unemployment reasonably stable at around six per cent and in line with Budget forward estimates (with monthly ups and downs in terms of jobs being created).
  • Government debt the second or third lowest in the developed world at around 27 per cent.

My thesis then is that the further adoption of the right policy settings has the potential to extend and expand Australia's economic growth for the foreseeable future. However, this outcome will not be achieved without major reforms aimed at improving the nation's comparative advantage and international competitiveness. It must also make significant contributions to maintaining appropriate support mechanisms and safety nets for those most vulnerable to the adjustment process currently underway in various sectors of the economy such as mining, heavy industry and privatisation of government assets.

However, Governments must be prepared to adopt a robust reform agenda and not hide behind a myriad of inquiries, inflated rhetoric about the state of the nation's books or what Nick Greiner describes as a 'mandate fetish'.  That is, governments will only enact specific reforms if they have taken proposals to an election and presumably attained a mandate because they won.

All new governments undertake inquiries to freshen up their governance credentials or to give legitimacy to policies they wish to pursue.  I have no problem for example with the Murray inquiry into the Australian Financial System (why would I as the former Chairman of a similar parliamentary inquiry some years ago), the Commission of Audit or the recently announced competition inquiry.

I may have some issues with the somewhat over-use of Business Council of Australia (BCA) personnel on the Commission of Audit or the appointment of some individuals to other inquiries that may appear to pre-empt any balanced findings. But that is the nature of the political system in which we all are obliged to operate.

Equally I have no fundamental issue with any government attempt to fairly and equally tackle what has been described as the 'age of entitlement'. It is right and proper that capacity to pay for services in a difficult budgetary environment should be a criterion for policy reform - whether they be Medicare or childcare.  But such policies should not be directed at political targets or the most vulnerable, but applied to the entire spectrum of the economy, including corporate welfare.

Importantly then the Committee for Economic Development of Australia (CEDA) has sought to stimulate discussion from its independent perspective on the necessary reforms to sustain Australia's economic future.  In part we have achieved this by undertaking research that highlights just where such reforms should occur.

Our reports have covered issues such as:

  • Securing Australia's long term green energy future through the adoption of nuclear technology;
  • Suggestions for a sustainable population policy; and
  • Advocacy of health reforms  that recommended quarantining a proportion of superannuation contributions to meet future health requirements and reducing pharmaceutical costs by adopting generic products.

We were even a touch cheeky by publishing a 'how to govern and achieve reform' kit prior to last year's Federal election .

REFORM AGENDA FOR AN OPEN ECONOMY

However, it is CEDA's major research project published in November 2013 that has even more direct relevance to the subject matter of the McKell series.

Australia Adjusting: Optimising national prosperity, sets out a comprehensive 10-point micro-economic reform agenda to sustain Australia's international competitiveness and productivity into the future. The centerpiece of this agenda embraces three pillars - economic flexibility, incentivising innovation and developing the nation's human capital.

Let me touch on each of these briefly.

ECONOMIC FLEXIBILITY

The flexibility of Australia's economy underpins the nation's ability to respond to changing domestic and/or international circumstances.

CEDA has recommended this can be achieved by:

  • Establishing a National Productivity Policy (NPP) to replace the National Competition Policy supported by a new inter-governmental agreement that provides financial incentives for the states to undertake reforms.
  • Reforming the taxation system to make it more efficient, internationally competitive, and supportive of economic growth. This should be done by reducing the corporate tax rate, eliminating tax breaks, lowering effective marginal tax rates of low income workers, eliminating job-destroying state taxes such as payroll taxes and broadening and raising the GST.
  • Reforming the Federation by re-allocating command over revenues and sharply re-defining roles to reduce overlap and duplication. CEDA will tackle these issues in its major 2014 report to be launched in October.
  • Making infrastructure investment efficient by requiring all governments publishing long-term infrastructure plans that include criteria enabling ex post evaluation of whether their net benefits were achieved.

At this point I would have to say Treasurer Joe Hockey's recent announcement with respect to his 'asset recycling initiative' is most welcome.  My reservation is that the traditional Conservative expectation that this should go to building more roads is too short-sighted.

And indeed we all continue to wait for 'the' announcement re Sydney's second airport.

INCENTIVISING INNOVATION

Along with a competitive environment that in itself provides incentives to become more productive, the capacity to innovate and to adopt innovations quickly is essential to raising productivity. Australia has tended to derive its comparative advantage from other sources in the past, so it will be a challenge for the nation to develop vibrant hubs of innovation.

There is also evidence of a lack of management innovation in Australian small and medium enterprises (SMEs), relative to those in northern hemisphere advanced economies.

To improve the nation's capacity for successful innovation, Australia should:

  • Increase incentives for innovation and its rapid adoption.
  • Examine income contingent loans, similar to the HECS, to help fund innovative activities by SMEs to address an area of comparative underperformance.
  • Establish the enabling framework for research and development corporations, similar to those in rural industries, for appropriate sectors of the economy.

There is clear evidence that cooperation between universities and business in undertaking R&D and commercialising the results can provide new and exciting growth opportunities for Australia.  However, demarcation issues such as ownership of intellectual property (IP), together with changing the parameters for government financial support for universities to enshrine outcomes rather than pure research and development (R&D) should be an integral part of the funding criteria.

These issues are considered in CEDA's April research report on Advanced Manufacturing.

CAPABILITY AND WORKFORCE DEVELOPMENT

A nation's most valuable resource is its people - its human capital - and how well it performs in productivity and raising living standards depends critically on ensuring that their capabilities and agility are developed to their full potential, and that we have adaptive and consultative workplaces. While Australia has had relatively high levels of participation and employment in recent times, there are segments of the community where skill development and participation are poor.

To maximise national human capital needs Australia should:

  • Develop a unified, over-arching policy framework to guide the allocation of investment in education and training from early childhood to further education and training and tertiary education.
  • Create a national workforce development plan that aims to engage, and as needed re-skill, under-utilised groups in the workforce.
  • Review Australia's industrial relations system to make it less adversarial, more flexible, adaptive and responsive to the needs of individual sectors and workplaces, while retaining fairness and protections as appropriate.

CONCLUSION

Real reform is hard.  Real reform requires leadership.  Real reform that is based on an inclusive growth agenda is dependent upon the willingness of policymakers to step outside the shackles of political ideology. Real reform requires a comprehensive plan, a willingness to take risks, and a willingness to take decisions for the greater good, not sectional interests.

The Federal Government has a real opportunity to develop and action a reform agenda that can position Australia for economic prosperity for decades to come. Hard decisions will need to be made and I hope this government has the courage to make those decisions in the interests of all Australians and with a clear view to the long term.

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