The Australian economy

• Great need to address long-term issues. I want to consider the likely economic climate for the next few years - not trying to forecast the economic weather for the next couple of weeks or months.

• Going well by international standards - due in large part to legacy of Hawke/Keating Government

• What do we think the future is likely to bring in relation to inflation, unemployment, interest rates, currency, etc? Where is Australia going in the world economy? Useful to review briefly where we have come from ...

The slides referred to in the text below can be downloaded as a PDF at the bottom of this page.

• SLIDE 1: Economic Growth – this chart shows economic growth for five year periods on the preceding five years

• Australia tops this chart 25 years out of 40.

• Most recent 5-year period is best for us in 30 years.

• Under Malcolm Fraser’s watch the show went sideways

• Accord & restructuring mid-eighties through early nineties have delivered this payoff over past decade

• Australia is a developed economy, but a young economy still pushing back the extensive margin for growth. There is every chance of achieving more of this good performance over coming years.

• SLIDE 2: Employment – Australia and US topped the league charts for jobs growth in the eighties and in the nineties. Indeed, Australia outperformed the USA notwithstanding (1) we consistently look after minimum wages here, they froze minimum wages for all of the eighties; and (2) the recession in the early nineties was worse here than anywhere else.

• These are heads, not hours worked, and much of the nineties jobs growth has been part-time in contrast to our eighties performance.

• SLIDE 3: Unemployment Rate – We took a bigger hit than the USA on unemployment in the early nineties; but have done much better than them this time round (last few years, since turn of the century)

• Europe is not quite dead-flat boring, but there is not much excitement over there, and Japan has flattened things out a bit for the Big 7 economies as a group.

• SLIDE 4: Inflation – How the world changes.

• Back here [early-mid 70s], when many of us were passing through economics faculties, the issue was how to deal with the demon stagflation. OPEC and the Vietnam War are generally credited with bringing it upon us. A lot of quackery emerged in response to it, including monetarism and economic fundamentalism, that rules were better than discretion for monetary authorities, that policy could affect the real economy only by being capricious, you know the themes ...

• At the end of the century the new wisdom was ‘inflation targetting’. It would be quite wrong to describe this as a new quackery, but the new orthodoxy is already facing its own challenges.

- Today the demon is deflation – a monster whose previous incarnation was almost eighty years ago. Once it gets a hold of your economy, it’s hard to shake it off.

- Japan has been mired in it for a decade and still seems stuck.

- Alan Greenspan has been pushing all the knobs and pulling all the levers for the past two years to keep the threat at bay in the US, and it may be that the effort has been successful.

• Two powerful slow-burners seem likely to give the world economy an extended stretch of low inflation.

- First, the awakening dragon of the Chinese economy [might wrap India in this bundle too] and the low-cost mass-production that will emanate from there.

- Second, the continuing steady (even galloping) insinuation of Information and Communications technology into our lives and its adoption in every corner of our economy.

• Today it seems pretty clear that central bankers everywhere practicing inflation targeting would rather have a bit too much inflation than not enough. Today, rates in the range 0% to 1% for any stretch of time might well produce more cold sweat and nightmares for these chaps than outcomes in the 4% to 5% range.

• Erring on the inflation upside presents much less risk to growth than erring by a similar magnitude on the downside.

• Australia’s exceptionally low levels of public debt signal substantial reserves of policy discretion, should deflation threaten to take hold here. As yet, it doesn’t.

• SLIDE 5: Inflation # 2 - Indeed, at the time of the introduction of the GST, official forecasts were for Australian inflation to fall below 1.5% in Sep quarter 2001, and to stay at or around that level thereafter.

• For the past two years, the forecast has repeatedly been made by the Treasurer and the RBA Governor that Australian inflation would imminently fall to the mid-point of the RBA target range.

• In fact, abstracting from the GST spike, Australian inflation has hovered around the 3% mark since the turn of the century. This does not seem to be alarming the RBA or anyone else. Alan Greenspan does not have an overt or official inflation target. It is a fair bet he would like to have the RBA’s problem of an ambient rate around 3% or more, and would not be inclined to raise official US rates for anything less.

• History shows that the faster growth nations usually generate faster domestic inflation than the sluggards (if that is a word). Yesterday’s CPI result for the March quarter was the lowest quarterly result for 4 years, though December’s result was the highest for 8 years (excluding GST introduction).

• Domestic economic fundamentals are pretty sound here – profits high, balance sheets in good shape, business focussed on world economy, public sector accounts as tight as any in the OECD, labour demand strong and sustained.

• Expect higher growth than other countries. Expect higher inflation too, for the next few years, something around the top of the RBA target range for some time yet. Housing prices make the RBA job that much trickier. All up, we are probably, now, right at the bottom of the interest rate trough, and if not then we are very close to it.

• Most likely scenario is for US economic growth to resume, and for the inflation gap between us and them to close over the year or two ahead through higher US inflation. Expect Europe to remain dead-flat boring economically but a nice place to visit.

• In medium/long term, China’s need for capital equipment bodes well for some degree of Japanese economic recovery too. Similarly for the Asian Tigers, though a surging China will constrain their export-led growth performance to be back with the pack much more than has been the case in the past couple of decades.

• Whichever way you cut this, Australia is well placed - as supplier of energy and raw materials, of top shelf services, of high-tech niche items – to post sustained healthy rates of economic growth for the foreseeable future.

• Short of global cataclysm, it would take a sustained series of domestic policy foul-ups and incompetence of the highest order at the highest levels of corporate and political Australia to stymie achievement of plodding economic growth.

• Certainly, there are challenges ahead and issues to be addressed, but with a bit of creativity and clear directions and strong leadership, prospects are for outcomes much better than this.

• In this respect, a critical challenge for our federal and state governments is in the provision of quality infrastructure. Not just the physical infrastructure – efficient and effective roads and bridges and ports and transport hubs and utilities – but the social and the natural infrastructure too. The universities and schools, the hospitals and primary health systems, the sewers, the public transport, the arts precincts, the national parks and the biodiversity.

• Part of the economic populism of the past twenty years held that efficient markets would see the private sector look after all this, don’t you worry about that. The role for government was to remove the roadblocks and let the market deliver.

• For its part, the ACTU has never accepted this. Governments do, of course, have a role in removing roadblocks, but they have a vital road building role and responsibility too.

• The question then, is, how to pay for it. Another artefact of economic fundamentalism is the precept that public debt is always and everywhere a bad thing. Apparently this view does not burden the Japanese or US administrations, but it has taken hold with our federal government and among many state governments in this country. So we see PPP schemes and other funny-money arrangements whose purpose is to deliver infrastructure off-budget. Usually this comes at an inflated cost to the community.

• SLIDE 6: SAEDB - Interestingly, the South Australian Economic Development Board under the Chairmanship of Mr Robert Champion de Crespigny has recently produced a ‘Framework for Economic Development in South Australia’ (available on-line) which takes issue with this view. This is what the Board said: ...quote ...

• The SA Labor government has accepted all but one of the 72 recommendation made by the EDB, including this one about the zero net borrowing constraint.

• Of course, the operative golden rule is that state governments should only borrow for capital expenditure not for recurrent, and should aim to balance their budgets after payment of debt interest, and central governments should stick to a similar rule over the course of the cycle.

Tax

• Which puts the focus back on tax. If government is to ensure provision of quality public services and service any additional debt taken on to build infrastructure, it has to assure the requisite revenues to fund it all.

• SLIDE 7: Total Tax Revenue - Australia is a low tax country by OECD standards. If Australia had the average tax to GDP ratio of the OECD countries, there would be an extra $50 billion a year flowing into consolidated revenue to pay for these things.

• SLIDE 8: Tax/GDP time series – Australia has always been a low tax country, but the gap between us and the rest of the OECD has widened over the past 15 yrs.

• SLIDE 9: Corporate tax rates – international comparisons of corporate tax rates are fraught for all sorts of reasons, but our company tax regime is in line with or lighter than those applying in other OECD countries

• SLIDE 10: Income Tax on higher paid employees – the income tax burden on higher paid employees in Australia is relatively low. This chart is for 1998. Since then the GST package has delivered seriously big tax cuts for this group.

• SLIDE 11: Income tax on average workers – For average workers, Australian income tax is adjacent to the OECD average. Note that ‘average production workers’ in this OECD series earn around AWE; around two-thirds of all wage and salary earners receive wages equal to or less than this amount. The GST package delivered little by way of income tax cuts for this group.

• I don’t have a slide for low paid Australian workers, those earning in the range from the minimum wage up to AWE, but the GST package provided peanuts for them. For low paid full-time workers in particular, the bracket creep screws have really tightened on their incomings over the past decade and the GST has put new screws on their outgoings.

• So when we talk about wages and tax and public services and provision of infrastructure for growth, we must think about efficiency and effectiveness, but in all this there is simply no escaping questions of distribution.

The contemporary Australian labour force

• You might recall that during the Accord period overall wage movements were fairly centrally controlled, and that it was possible, through the Industrial Relations Commission, to give effect to agreements between the ACTU and the federal Government relating to tax, wage increases and public expenditure.

• In fact, award superannuation was born out of such an agreement. Real wages fell in the period 1986-1991, although this was compensated for through tax cuts, the introduction of Medicare, superannuation and significant benefits for low income households.

• SLIDE 12: Union Wage Differential - With the development of enterprise bargaining in the nineties this degree of central control has gone, possibly for ever, and collective bargaining has become the main method for achieving wage increases, particularly for union members. This has resulted in rising real wages since that time.

• There is a full-time / part-time split in this, with union density higher amongst full-timers and jobs growth heavily weighted amongst part-timers.

• Union members have achieved real wage increases over the past decade through bargaining.

• Part-time workers rely heavily on award minimum wage rates, and over the past 5 years or so we have managed to achieve modest increases in minimum wages through the national wage case processes.

• Union members are the minority. Since the mid-90s the ‘trickle down’ theory of distribution has been put to the test in this country and been found wanting. We have had GDP growth averaging around 4% and profits bumping along the ceiling but we are seeing declining fairness in distribution to the workforce and amongst workers.

• ABS analysis of inequality trends finds “a picture of some possible rise in income inequality over the second half of the 1990s”. Incomes rose only 1% in real terms for low income households over the period 1997-1999 to 1999-2000, while real increases of 4% and 6% were recorded for middle and high income households respectively over the same period.

• SLIDE 13: Labour productivity – during the Accord period we also had a root and branch overhaul of the award system, and it shows up in the data. Labour productivity growth has increased significantly.

• But if you think the rising inequality reflects the distribution of productivity gains to the 'factors’ responsible for generating them, think again. Most of the productivity gains come from the most award dependent industry sectors – including wholesale and retail trade, accomodation cafes and restaurants

• SLIDE 14: Real Unit Labour Costs – in terms of the cost competitiveness of Australian output, we’ve got it, we’ve had it for 15 years, there is no sign the Australian economy is about to lose it.

• SLIDE 15: Profit Share - Looking at the same thing another way, the share of profits in national income is up around its historical ceiling and the wages share is down around its historical floor

• Corporate balance sheets here have not been distressed to the extent that the US has seen over recent years. There is no shortage of investable resources for corporates, investment expectations and outcomes are good, confidence is fine

• No question that increased flexibility of the workforce, much of it negotiated with unions, has played a part in this.

• However, we are seeing growing gap between skilled, unionised, full-time workers, and ununionised, casual and part-time, unskilled workers. The change in the structure of the workforce in the past 20 years is enormous and, incidentally, is responsible for much of the decline in union membership.

• What have been the key changes? Refer to the Future of Work research conducted for us by ACIRRT and available for them at the registration desk.

- casual employment increased from 16% in 1984 to 27% in 2002: this means that one in four employees has no entitlement to paid sick leave or holidays

- part-time employment increased from 18% in 1984 to 29% in 2002

- permanent full-time employment fell from 74% in 1988 to 61% in 2002

- between 1990 and 1995 the proportion of large workplaces (more than 500 employees) using labour hire workers increased from 16% to 55%

• Inequality has increased. ABS has established this – yesterday’s Household Income and Income Distribution release for 2000-01. Michael Keating has had a look at it too. Much of the increase in inequality derives from the pattern of jobs growth we have had over the past 5 – 10 years.

• SLIDE 16: employment increases by salary range – this is from Borland, Gregory and Sheehan - other than managers and professionals, the net increase in jobs in the 1990s consisted entirely of part time and casual jobs

• There has been strong earnings growth at the top of the labour market, reflecting both faster jobs growth and also faster rates of salary increase at the top. These two factors combined to generate real hourly average earnings increases for males in the top decile of the distribution, of 53% (2001 dollars) between 1989 and 2001

• Real earnings growth in the middle and bottom of the distribution has been much slower or nonexistent, depending how you measure it. For low paid full-time workers, real minimum wages have risen slightly since 1997. Most of the employment growth, however, has been in part-time and casual jobs. Even though many of these are second family incomes, the fact is that they do not provide a living wage.

• What this translates into is growth in the numbers of working poor in this country:

- an estimated 18% of the workforce live below recognised poverty lines

- 70% of low wage employees are of prime age (25 to 54 years)

- the majority of low wage women are working full time

- women accounted for 3/4s of all the new jobs in low paying occupations from 1985 to 2001

• Immediate relevance of this to the superannuation industry is that low wages and casual employment means less money going into super, and less coming out from it - people are not only low paid in their working lives but in their retirement

• Raises issues of the kind of economy we will have, and the kind of investment. Is it necessarily a race to the bottom, this society we have? Must short-termism rule, with cost cutting for immediate gains fouling our social nest long-term?

What policy changes should there be?

The Congress to be held next month will discuss a range of policy initiatives we believe will address the key issues facing the nation and directed towards achieving fairness for all Australians in the context of an open, growing and dynamic economy.

We do not believe that economic development requires lower living standards, reduction in services to the public and shifts to low paid and insecure employment.

Nor do we believe that the way forward lies with some sort of resurgent Stalinist centralism.

We do think Australia needs a vibrant and competitive manufacturing sector to assure jobs, skills and export income in an economy with some breadth and balance. The collapse of exports of elaborately transformed manufactures (ETM's) is a particular concern. The annual growth of ETM exports fell from more than 15% (1986 - 1996) to less than 7% (1995-96 to 2001 - 2002), leaving Australia with an ETM trade deficit of more than $60 billion. The need for a strategic industry policy has never been greater - particularly to encourage exports.

Industry and trade policy: We see great merit in greater co-operation between federal and state governments to develop strategic approaches to attract investment, promote trade, invest in infrastructure and develop our industries. There is a role here for:

• cooperation in a competitive economy, through support for industry clusters and joint bidding;

• issuing of National Development Bonds as a means to fund infrastructure, and a cost effective alternative to PPPs;

• greater incentives for investment in venture capital – our performance is low by international standards,

• an approach to trade which is fair - whereby Australia receives reciprocal access to its trading partners’ markets, which ensures protection for Australia’s national interest and which is not exploitative of developing countries.

Tax policy initiatives include:

• changes to the tax system which are designed to achieve greater equity, and produce sufficient revenue to meet the economic and social needs of all Australians.

• SLIDE 17: Poverty Traps – there are many ways of looking at work incentives at the intersection of welfare and work. Most analyses are in terms of effective marginal tax rates, pointing to the loss of additional income to tax and withdrawal of social security benefit.

• This chart looks at how much extra income a long-term jobless couple with two young children get from finding work. When she finds full-time work as a shop assistant on award rates, the family’s gross additional income is $9.27 per hour. This is after loss of Job Search Allowance is withdrawn. With tax taken out too, the family is better off to the tune of $6.30 per hour worked, and she is working 38 hours per week in this example. No account is taken here of the additional costs that attach to working, such as fares and clothes.

• When he also finds work, as a bar attendant for 20 hours per week, the family loses Family Tax Benefit B, as well as remnant JSA. In gross terms, family income rises by $3.23 per additional hour worked. After tax, the increase is $2.59 per hour. This is from a gross award wage rate of almost $13 per hour. Again, no account is taken here of the additional costs that attach to working, nor of the cost of childcare that might be necessitated.

• In terms of the interaction between our tax and social security systems, there is clearly great scope for improvement and we see this as a critical area for policy improvement.

Other tax policy initiatives to be pursued include:

• making company taxes (including discretionary family trusts) consistent with personal tax rates;

• more progressive income tax scales, including means-testing of the tax-free threshold;

• restoring the previous capital gains tax for assets valued above $1 million;

• the abolition of the private health insurance rebate, with the saved expenditure directed towards the Medicare system;

• the elimination of tax deductibility for salaries in excess of $1 million per year, with FBT applied to shares or options packages valued at more than $1000 per year;

• consideration of a small number of hypothecated taxes, given that the community has shown it is prepared to accept taxes where it knows and approves the purpose eg the levies to fund Medicare, the gun buy back and our intervention in East Timor.

Our wages policy is centred around encouraging collective bargaining, while seeking to ensure that this is underpinned by an award system which provides a fair go for those who are unable to bargain with regular moderate increases in minimum wages.

In relation to the future of work, our policies are aimed at obtaining flexibility for employees as well as employers, through:

• a right for casuals to convert to permanency (full or part-time) after a set period of regular employment;

• a right for parents of young children to request part-time work;

• greater access to paid and unpaid leave for family reasons

• negotiated caps on working hours, based on the 48 hour limit which applies in the European Union

• equal pay for employees doing the same work at the same workplace whether they are employed directly or though a labour high company.

Presented at the Fund Managers Seminar by ACTU Research Officer, Grant Belchamber.