Cross-posted from The Conversation
There is much to consider when thinking about our future as a nation. We are a small, resource-rich, open economy facing a volatile global environment. We are particularly vulnerable to the impact of climate change. As in other developed countries, our population is ageing, which will have significant implications for taxation, public spending and the labour market.
We realise that the prosperity brought about by the latest mining boom will not last forever. However, the impact of the high Australian dollar partly caused by the boom will have a lasting effect on the economy with the loss of manufacturing jobs and major structural adjustments.
The looming federal election could provide a timely opportunity for a debate about the future. Unfortunately the political debate seems to be characterised by a government that changes policy direction with the news cycle and an opposition following an “as small as possible target” strategy.
In this context, the Business Council of Australia’s campaign on the long-term reforms needed for Australia is welcome.
Outlined by BCA President, Tony Shepherd, at the National Press Club in Canberra, the plan identifies nine key areas: taxation and fiscal policy, population, sustainability, infrastructure, innovation, education, the workplace, regulation, foreign investment and energy.
There is much to agree with in the reforms proposed by the BCA. Some important examples include requiring mandatory regulatory impact statements for all new regulations, improving numeracy and literacy skills for our kids, removing inefficient state taxes, and promoting a broad debate on alternative sources of energy (including nuclear).
There are also reasons to agree with the general view that governments should remove themselves from the production of goods and services that can be more efficiently produced by the private sector, that there is a need for better infrastructure planning, and that a link exists between improved public infrastructure and increased productivity.
There are, however, many sources of potential disagreement. A key example is the suggestion to reopen the discussion on tax reform from scratch. The options for tax reform are clearly laid out in the Henry Review. What is missing is not yet another list of vague ideas about tax reform, but rather more extensive analysis of the various options canvassed in the Henry Review — such as the choice between the introduction of an Allowance for Corporate Equity versus a reduction in the corporate tax rate — and political will to pursue these options.
The emphasis on the size of the government is also misplaced. Instead the focus should be on ensuring that “the business of government” is undertaken in an efficient manner. This means reviewing not only what goods and services should be directly provided by governments but also how they should be financed (taxes versus users pay). Government procurement reform should be a big part of reforming the government agenda.
More broadly, the BCA vision has many inherent contradictions. In ten years’ time, the BCA wants a cutting edge education system for our kids, a National Disability insurance scheme, an unemployment benefit that allows people to live in dignity, effective employment services so that unemployed workers can get back to work quickly and avoid long-term unemployment, new public infrastructure, support for SMEs through government procurement and incentives for firms to pursue Research and Development. These are all very costly undertakings requiring substantial public funds.
At the same time, the BCA wants both debt to be repaid and the government to be running consistent budget surpluses in ten years’ time. The only way to accomplish this is to either raise taxes or significantly cut government expenditures, and there are no hints on how such an ambitious task can be undertaken. It seems that the BCA wants to have its cake and eat it too!
Importantly, there are no economic reasons that justify a need to repay all debt or to consistently produce budget surpluses. In fact, a more efficient tax system might act as an automatic stabiliser for the economy so that the government fiscal position deteriorates in a recession, which might result in a budget deficit and increased government borrowings For example, a tax system that allows carry back of losses would automatically reduce tax outlays and improve businesses’ cash flows during economic downturns. This is likely to produce better outcomes than stimulus packages that target particular areas favoured by the government of the day.
All in all, the BCA’s contribution is most welcome. It might help elicit the public’s views on these important issues. The public debate might uncover a very different vision for Australia from that offered by the BCA. This was the case, for example, in the recent public reaction to the opposition’s NBN proposal with many favouring instead a larger, publicly funded, nation building fibre to the home network for all. Either way, it is time for a more informed debate.
Article by Flavio Menezes, Professor of Economics at University of Queensland