Enhancing Australia’s competitiveness

The federal budget in May provides an opportunity for the Turnbull Government to build on Australia’s record-breaking run of economic growth.

Such growth is essential to fund vital infrastructure projects and health and education services, and to improve the individual and collective wellbeing of Australia’s people. The stakes are particularly high for mid-sized businesses facing an uncertain future due to rapid technological change, rising consumer expectations and a competitive global marketplace. A government making smart choices about how to distribute the benefits of growth would deliver a budget that improves Australia’s ability to attract investment and compete on the world stage. This should include bold measures that enable mid-sized businesses to thrive rather than just survive in the digital economy.

The competitiveness imperative

Providing a competitive, low-tax investment environment is vital in a world where labour and capital are increasingly mobile, and many of Australia’s major trading partners such as the US are embracing significant tax reform agendas. The evidence for the relationship between competitiveness and growth is clear. Across high-, middle- and low-income economies, countries that score strongly on global competitiveness indices enjoy higher 10-year average growth rates.[1]

So, how does Australia compare? In the World Economic Forum’s 2017–2018 Global Competitiveness Report, Australia ranked 21st out of 137 countries. Not bad, but also, in the words of the report’s authors, not remarkable.

While the nation performs well in measures that reflect its strong institutions in the finance, health and education sectors, it performs particularly poorly in other areas. For mid-sized businesses, these statistics are sobering. Australia ranks 102nd out of 137 countries on measures such as total tax rate and the effective taxation of incentives to work. It is 94th on the effect of taxation on incentives to invest, and 109th and 110th on measures related to labour market flexibility. Overall, it ranks 27th for innovation, driven by a low score for government procurement of advanced technology products.

Where should Australia focus its efforts?

We believe the Government’s fiscal strategy should target three areas to enhance Australia’s long-term competitiveness.

1. Create an efficient taxation and transfer system that modernises and broadens the tax base, and reduces reliance on income taxes. This requires the Government to adopt a comprehensive forward-looking approach to the future Australian economy rather than focusing on short-term politics. As the digital revolution gathers pace, disruptive technologies such as vehicle automation and artificial intelligence will significantly affect workforce participation and the growth prospects of mid-sized businesses, particularly in sectors such as manufacturing. Given the implications for future revenue collection, tax and policy settings must be prepared now.
   
   
2. Enhance technological readiness and the ability of Australian businesses to undertake and commercialise innovation. Boosting the research and innovation capacity of private and public institutions – and deploying basic communications and information technology infrastructure – will be necessary to ensure that everyone can participate in the digital economy. In particular, the Government should directly incentivise mid-sized businesses to innovate and help grow the Australian economy. This is preferable to Australian innovations flowing offshore to jurisdictions where such investment is already being encouraged.
   
   
3. Invest in physical infrastructure to support Australia’s ongoing liveability and ability to compete. Australia’s infrastructure challenges include reducing the daily commute in cities; efficiently moving freight and fresh produce across long-distance supply chains; ensuring sufficient water for agricultural and environmental purposes while supporting a growing population; and meeting the nation’s energy requirements. Addressing these complex issues will create jobs and opportunities for mid-sized businesses while enhancing Australia’s global competitiveness.

Inclusive and sustainable growth

Of course, economic growth is not an end in itself. Recently, the World Economic Forum ranked Australia ninth out of 30 advanced economies in its 2018 Inclusive Development Index.[2] While this is a good result, it masks an uneven performance across the 12 inclusiveness categories the index assessed. For example, Australia ranked 22nd in income inequality. Income and wealth inequality have both increased over time – a trend exacerbated by the slow pace of wage income growth even as housing, energy and healthcare costs rise.

The Government has already put in place several important policy initiatives, including its Housing Affordability Strategy, several elements of which will commence in July. Recent reports suggest that house prices are starting to decline, although total housing costs remain high relative to incomes. In the May budget, the Government may need to consider additional policy responses to ensure the cost of housing remains within reach. This will help ensure Australia’s economy not only grows but is inclusive and sustainable.

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