Labor’s Agenda for Growth and Competiveness – Mr. Swan’s 2006 Speech

This is a speech given by Mr. Wayne Swan, then in Opposition, on 20 March 2006.
I am delighted to be in Melbourne during the final countdown to the Commonwealth Games.
It will be a remarkable event: one of the world’s great sporting events being held in one of the world’s great sporting cities.
Victorians and indeed all Australians love to compete with the best in the world. We all relish success on the world stage.
But this desire to triumph extends beyond the sporting arena.
Each and every day Australian business competes to win against the best and brightest from around the globe.
The Victorian economy has been travelling well in recent years recording the biggest growth in output of any state.
Behind the numbers there are great success stories, including two recognised in the 2005 Governor of Victoria Exports Award.
? Rofin Australia sells forensic instruments for detecting fingerprints and document fraud to the FBI, CIA and Scotland Yard, and
? Ripe Maternity Wear manufactures contemporary clothing for mothers-to-be, almost half of which is exported.
But success stories aside, there are signs that Australian business is facing strong headwinds from intensifying global competition.
Last Friday, we learned that Australia notched up its 46th consecutive trade deficit in January - at $2.7 billion the highest on record.
Our trade balance is the ultimate barometer of Australia’s capacity to compete in the world and sustain our prosperity into the future.
Persistent deficits reflect the fact that productivity, which was fast approaching US levels in the 1990s, is now almost back where it started.
There is a raft of submissions setting out range of options to address the urgent challenge of getting us back on the high productivity path.
Tonight I want to present Labor’s plan to reverse the decline in our productivity and competitiveness and turn around our trade balance.
THE ISSUES
But before I do so, I would like to set the scene.
Australia has enjoyed great prosperity in recent years with fourteen years of uninterrupted growth.
The resilience of our economy in the face of economic shocks like the Asian crisis and dot-com meltdown has been remarkable.
The Treasury Secretary recently explained this resilience as the result of three key developments in the 1990s:
? the floating of the Australian dollar;
? increased emphasis on the supply side of the economy; and
? the adoption of a medium term framework for economic policy.
As the sole architect of the first two, Labor is rightly proud of the role it has played in creating our recent prosperity.
But luck has also played a part in our success.
Most recently, we moved almost seamlessly from record house prices to record commodity prices, keeping our economy buoyant.
But beneath the surface things are changing prompting business groups to warn the economy is slipping and heading for trouble.
This prompted the Victorian Government to release its National Reform Initiative – a timely and welcome contribution.
Like Federal Labor, it recognises that Australia needs a long-term plan to lift our competitiveness and sustain our prosperity into the future.
The central issue is why – when commodity exports are earning their highest prices in a generation – Australia is not running a trade surplus?
Why – when the world economy is growing and rural exports are in post-drought recovery – Australia is not running a trade surplus?
Unless we can lift our export performance, the stellar economic growth rates over the last 14 years will be a thing of the past.
Unless we can turn our trade deficits into surpluses our foreign debt – already at a record level of $473 billion in 2005 - will continue to climb.
At the heart of the issue is the slump in our manufactured exports – from double-digit growth in the 90s almost half are now in absolute decline.
As a result, since 2000 Australia has shed over 115,000 manufacturing jobs – 10 per cent of the workforce – many of them in Victoria.
Some might shrug and say that ‘manufacturing’s decline is inevitable – we just can’t compete with China and India and that’s that.’
Earlier today CEDA held a seminar in Melbourne entitled “Can or should Australian manufacturers compete against China and India?”
Perhaps they should ask Berri Ltd. Berri has been exporting packaged juices to India since the late 1990s, now holds 5 per cent of the Indian market and is experiencing growth of 30 per cent a year.
There are great opportunities to sell high value added goods such as clean, safe and high quality food products in India and China but also to open up markets in other sectors.
What we are looking at are two countries with rapidly growing demands for products and services sought by a large and growing middle class with rapidly rising disposable incomes.
The only way forward is to redouble our efforts to re-engineer existing processes and develop new products to fit the demands of these two emerging economic superpowers.
But we also need to recognise that the world economy is changing and we must change with it.
Less than fifty years ago, agriculture, manufacturing and services contributed almost equally to global GDP. Now services accounts for over two-thirds of wealth generated in the global economy.
Yet Australia’s service exports are just 4 per cent of GDP, the third lowest in the OECD and just one-third of the OECD average.
We have a once in a lifetime opportunity to position ourselves in India and China in a vast array of service industries.
These include biotechnology and medical research, environmental, information and communication technologies, financial, professional and technical services, education and health care.
AN AMBITIOUS STRATEGY
In light of these challenges, I ask you; what’s our plan? What’s Labor’s strategy for Australia for the next twenty years?
First we need to recognise that as Asia lifts its game we need to match and even exceed it.
We must understand and invest in our strengths. We must know which way the trade winds are blowing and set our sails accordingly.
Industry by industry, business, workers and Government need to work together to offset Asia’s low cost advantage and open new markets.
At the heart of Labor’s strategy is one key objective – to lift our productivity.
That is the only way to improve our competitiveness, turn around our trade performance and secure our prosperity for the future.
There are eight pillars to this strategy built on the foundation of budget discipline.
But before I go on, let me take this opportunity to set the record straight on Labor’s attitude to changes in workforce relations.
Labor does not oppose changes to workplace relations, it opposes the Government’s changes.
They are the wrong changes. Treasury’s own limited analysis did not support the proposition that they will lift productivity.
And there is ample independent analysis that questions whether they will deliver higher productivity.
This includes a damning critique from the Government’s own favoured expert labour market economist Professor Mark Wooden.
Kim Beazley will present Labor’s alternative proposals for genuine productivity enhancing workplace reform in a forthcoming Blueprint speech.
FISCAL DISCIPLINE
Labor knows that first and foremost business needs a stable macro-economic environment to flourish.
All policy options must be measured against our overriding objective of keeping the budget in balance, on average, over the course of the economic cycle.
How does that translate to the upcoming 2006-07 Budget?
Right now we are enjoying strong surpluses – the prediction in the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) that revenues will exceed expenditure by $42 billion over the forward estimates is more likely than not to be revised up at Budget time.
In other words fiscal policy has tightened since MYEFO, which explains recent comments by the Reserve Bank Governor suggesting that fresh tax cuts would not necessarily trigger an interest rate response.
But Labor is acutely aware that a significant proportion – some analysts say as much as half - of the likely surplus will derive from a temporary surge in tax revenues, in particular in corporate tax revenue on the back of record commodity prices.
There is ample scope to outline and begin funding a major tax reform package but there is a strong case against using any of the temporary windfall to fund recurrent spending or permanent tax cuts.
We could quarantine the temporary surplus in the Future Fund or we could apply some to non-recurrent investment where such an investment eases capacity constraints and inflationary pressures.
This year’s Budget should be about striking the right balance between setting in train meaningful tax reform and investing in the productive and export potential of the economy.
LABOR’S ECONOMIC STRATEGY
Within the constraints of fiscal discipline lie Labor’s eight pillars for growth:
? Reform the tax system so that it offers real incentive, is competitive and simpler;
? Increase our workforce capacity and productivity by investing in skills and education;
? Remove export bottlenecks by showing national leadership on infrastructure;
? Get the regulatory burden off the back of business by adopting new simpler, flexible and competitive regulatory models;
? Remove road blocks to developing and commercialising new products and services;
? Accept that only co-operative federalism can deliver real reform and deal with state government’s of all persuasions in good faith;
? Raise workforce participation by strengthening incentives for people to move from welfare into work; and
? Foster a domestic savings culture and reduce our reliance on foreign savings.
In the time I have left I want to focus on five of these areas: tax reform, skills and education, infrastructure, R&D and regulatory reform.
Tax reform
Labor sees tax reform, guided by the principles of competitiveness, efficiency and fairness, as an investment in the drivers of growth.
With highly mobile capital and increasingly mobile labour, countries with uncompetitive tax regimes will suffer.
It is incumbent on governments, therefore, to regularly assess the competitiveness of their tax arrangements and make policy adjustments accordingly.
This applies to both personal and business taxation.
There has been a vigorous debate of late on personal taxation. Labor welcomes it, even if Treasurer Costello hasn’t.
As Labor sees it, the number one priority when it comes to reforming our personal income tax system is improving the incentive for hard work, skill formation, and savings.
To do this we must reduce the clawback on earnings caused by high marginal tax rates that exist right up and down the scale.
I’m not just talking about the 42 and 47 cent rate but also the interactions lower down the scale where the 15 and 30 cent rates interact with the withdrawal of tax offsets and transfer payments and result in even higher marginal tax rates again.
The Treasurer recently claimed it was wrong to refer to these interactions has high marginal tax rates.
I strongly disagree, and I suspect anyone who is on the treadmill – working harder with little apparent benefit – only cares about what ends up in their pocket, not how it gets there.
Clever adjustments to rates, thresholds, and other targeted measures in the tax system have the potential to mitigate the worst effects, but they won’t solve the problem.
Treasury has now been modelling significant reform options for more than a year.
If at this year’s Budget the Treasurer fails to outline his vision for a tax system which has at its centrepiece bold measures to boost work incentives, it will not be because of a lack of ideas and policy detail from the fine analysts in Treasury.
As the coming weeks unfold in the lead up to the Budget Labor will continue to increase the pressure on the Treasurer to bring out into the daylight the reform proposals that are so desperately needed.
A failure to get it right will result in a system that continues to shackle people to welfare, discourage people from acquiring new skills, and undermines the ethos to save.
If in the Budget we see more of the same – a threshold adjustment here a rate adjustment there - the Treasurer will be doing little more than putting a new coat of paint on a rusty creaking machine.
When it comes to our business tax regime, it too ought to be re-assessed for its international competitiveness.
We need to ask whether our tax rates are still competitive internationally and whether the regime in totality may act as a disincentive to international investment.
With capital so mobile its treatment under the tax system must be at the centre of our deliberations.
In particular we should assess how our tax system accommodates capital-intensive investment relative to other countries competing for the same investment dollar, and whether the capital allowance system sufficiently supports capital deepening which will boost productivity.
With skill formation also critical to boosting productivity we are also interested in whether there are sufficient incentives for business to train or retrain workers - in particular whether the scope of the current arrangements for deductibility is too narrow.
We also need to make sure that the tax treatment of highly skilled foreign executives isn't disadvantaging the international competitiveness of Australia's businesses in the hunt for top global talent. I would note recently that the Government sought to address capital gains tax penalties for temporary residents – a measure which Labor supported.
We also need to ensure that Australia's corporate tax system encourages investment in much-needed national infrastructure.
And finally, we need to deal with the hardy perennial question of complexity.
Skills and Education
Our training and education systems are failing to keep pace with demand – with severe shortages in both the trades and the professions.
The Government has done too little, too late to fill the gaps and business is paying the price – capacity constraints, lower sales, lower exports and lower profits.
Public investment in our universities and TAFEs has fallen 8 per cent since 1995. The OECD average is an increase of 38 per cent.
Australia was the only developed country to reduce its investment. The next worst performing country increased it by 6 per cent.
Labor’s Skills Blueprint outlines our plan to solve the Howard Government’s skills crisis.
? First, give every student in every school district the choice of attending a senior trades or science and technology high school;
? Second, ensure they have first class facilities;
? Third, provide more school based apprenticeships; and
? Fourth, overhaul the New Apprenticeships Scheme to ensure it invests in developing traditional trade, skills; and
? Fifth, Labor plans to introduce the Skills Account which will have the effect of reducing TAFE fees for apprentices to zero.
Infrastructure
For 10 long years, the Howard Government has presided over a severe deterioration in our key infrastructure assets.
Analysis shows there is a $90 billion shortfall in Australia’s infrastructure and that substantive reform could lift the level of GDP by 2 per cent or $16 billion.
Even the Prime Minister’s task force found there were ‘underlying weaknesses’ in Australia’s export infrastructure that must be addressed to prevent capacity constraints and bottlenecks for exports.
Labor’s Infrastructure Blueprint outlines how a Labor Government will show the national leadership on infrastructure that has been lacking from the Howard Government by:
? One, conducting a National Infrastructure Audit;
? Two, establishing a National Infrastructure Priority List;
? Three, creating Infrastructure Australia – an independent agency to drive the rebuilding of our infrastructure;
? Four, putting in place the right competition policy framework, and
? Five, putting in place the right funding framework.
As part of this funding framework, Labor has already said it will retain the assets of the Future Fund in its Building Australia Fund but allow the income to be invested for productive purposes including infrastructure.
R&D and Commercialisation
Australia has a strong track record on innovation but a comparatively poor track record for taking new products from development through to commercial success.
In January, the 2006 Melbourne International Venture Capital Conference was told US venture capitalists had successfully invested in a myriad of Australian companies such as HitWise and LookSmart.
The conference was told that US VCs are interested in Australia’s expertise in semi-conductors, software, optical wireless LAN, immunology, oncology and stem cell research.
But the conference was also told that Australia needs to take urgent action to attract a greater share of the world’s private equity to our shores to support business innovation.
A Labor Government is examining a range of options to increase the depth and liquidity of our market for risk capital and we will bring forward concrete policy options to ensure innovators can successfully develop new products and services in Australia for export.
Regulatory reform
Another of Labor’s key priorities is to reduce the drag on productivity and cost to business from ineffective and unnecessary regulation.
Labor has been beating the drum on reducing the regulatory burden and calling on the Government to act.
They have since announced a review to reduce the burden they have imposed over ten long years.
The Regulation Task Force chaired by Gary Banks has reported to the Government, but they haven’t released the report.
Labor will keep a close eye on the process to ensure it delivers.
We have already made the following proposals:
? First, impose limits on regulation, such as introducing a rule that a regulation must be abolished before any new regulation can be introduced;
? Second, explore new flexible, low cost regulatory models being adopting by our competitors, such as the United Kingdom; and
? Third, reform Regulatory Impact Statements to ensure the economic costs of red tape do not outweigh its benefits.
CONCLUSION
Federal Labor recognises that there is an urgent need to lay out a long-term plan to lift our productivity and competitiveness.
This is the only way we will turn around our trade performance and sustain our prosperity into the future.
Labor had already put forward a raft of policy options to address key areas that are holding us back, and we will continue to do so.
This year’s Budget should be about striking the right balance between setting in train meaningful tax reform and investing in the productive and export potential of the economy.
Australia needs a long-term plan and a Government that is ambitious and confident in its future.