The Government Reforms Challenge

June 2020
Phil Ruthven, Founder & CEO

Keeping Australia competitive in the world today is a never-ending challenge of adjustments, reform and emulating world’s best practice.

The period from 1983 to 2000 (perhaps even to 2007) saw well-overdue reforms in a number of areas, including: labour market regulation and industrial relations (IR); trade and protectionism; sensible deregulation of the finance industry; taxation and surplus budgets; and superannuation. Since then, however, nothing much has happened.

The first exhibit below spells out what a nation’s citizens can rightfully ask of their political leaders.

At present, Australia and its states and territories have met around nine of these 15 benchmarks. Of the above list, continual reform is of most interest to businesses specifically, via parliamentary reform, taxation reform, and labour market reform.

Parliamentary Reform

The issue is simple: we are in need of a democratic government, and we don’t have one. We have an upper house (Senate) that is not democratically elected, given that 12 seats are given to each of the states and two to the territories, regardless of population. This enables smaller states, fringe parties and single-issue members to be elected that are not representative of the electorate but have veto powers on any bill passed by the democratically elected governing chamber (the House of Representatives).

As a result, the Lower House is too often held hostage by minorities in the Upper House. In short, we do not really have a British Westminster system at work: their Upper House cannot veto Lower House bills; only delay them for a short period.

The below chart shows the democratically elected House of Representatives, the governing chamber. Of some interest is that conservative parties have won over 75% of the control since Federation, pointing to a prevailing conservatism at the national level of the Australian electorate.

By contrast, the next chart shows the undemocratically elected Senate (Upper House) – the ‘unrepresentative swill’, according to one-time Prime Minister Paul Keating – that controls Australia via its veto power.

As can be seen above, this was not a problem for the first six or seven decades. While the Senate – being a political party from the outset – never fulfilled the role of protecting state interests, it was at least dominated by the major parties. Fragmentation began in the second half of the 20th century, and the emergence of special-interest minorities now makes it impossible for either Labor or the Coalition to ever get a majority to implement their policies.

This makes it near impossible to achieve the major reforms we need without them being rejected or watered down to lesser versions of their original purpose. To rectify this, we need to emulate the United Kingdom’s Westminster system by removing the Senate’s veto power.

It will be difficult to execute this change, but it needs to be done. It will require a long campaign over a year or two, driven by a competition-winning advertising agency that presents the case for removing the Senate’s veto power as both necessary and achievable. A touch of humour wouldn’t go astray, either.

The next exhibit shows how the political dialectic has changed – in part due to the above attenuation of democracy; although mostly as a result of leaving the Industrial Age behind in the mid-1960s.

Like so many Western nations today, Australia has seen emotionality in the form of populism triumph over rationality, with the heart or ‘gut-feel’ winning over the brain, evidence-based facts and wisdom. Sadly, a reversion to rationality is usually the result of a populace who is disenchanted with the snake-oil promises of populism, as opposed to a populace actively switching their vote to rational policies. But this reversion will happen again in due course.

Taxation Reform

The value of tax reform lies in helping businesses to be more internationally competitive, and allowing workers to keep more of their wealth generation (wages) while paying more taxes on their spending.

It is important to note that Australia is already one of the lowest-taxed developed nations in the world, as shown in the next chart; although this scenario is likely to change in the wake of the government’s response to COVID-19. In the interim, this analysis looks at our mix of taxes, not the total impost.

The next chart shows our current taxation mix plus other government revenue from GBEs and other investments.

By contrast, the below chart outlines what a reformed mix of taxes would look like if the following changes were made:

  • Individual taxes reduced by 5%
  • The corporate tax rate lowered from 30% to 25%
  • The GST rate lifted from 10% to 15% (as is the case in New Zealand), with exemptions removed
  • Payroll taxes abolished
  • Stamp duties abolished

The proposed mix above becomes more in line with other advanced economies that favour increasing expenditure taxes and decreasing income (wealth creation) taxes. Few governments have had the will, or the courage, to tackle this area, and simply don’t know how to sell the proposition to the electorate. Perhaps Senate reforms are a precursor to tackling this challenge.

Labour Market Reform

Workers are on a new journey in the current Infotronics Age of services and information & communications technology (ICT) that displaced the Industrial Age of manufacturing and power (electricity) in the mid-1960s. The characteristics of this journey as it pertains to employment are summarised below.

In short, work is becoming more flexible and individualized compared to the rigid working conditions of the 20th century and earlier. The fact that over 330,000 new business start-ups occurred in 2019 points to the pattern of workers taking charge of their own destiny. This rate, representing 3% of households starting up a new business, highlights an increased preference for business-to-business (B2B) relationships over the traditional business-to-employee (B2E) relationship that prevailed in the Industrial Age.

Another marker for the mobility of modern employment – assuming, of course, that instability or dissatisfaction is not also a factor – is the rate of staff turnover in corporations, which equates to around 8% a year. This churn rate is higher in some industries, as we see in the next chart.

Labour market reform is just as difficult for our current governments to handle as other reforms; meaning that productivity growth will be impeded for some years yet. As the below chart shows, Australia’s productivity is currently in poor shape; though it must be said that this is just as much a business issue as it as a government one.

What next?

Prime Minister Scott Morrison made some encouraging promises with regard to the above reforms – and more – in April, noting that his government is planning to consult all the historic reform studies and recommendations available to them to establish a genuine reform program.

This process would be helped enormously if all parties involved in such reforms were to co-operate, including the Federal Government, the Opposition, State governments, and unions. The Prime Minister’s closure of COAG and formation of the replacement National Cabinet has been welcomed. One would think a post-pandemic environment should provide enough goodwill to see a large measure of this co-operation occur – but whether ideologies will give way to fundamental, rational and commonsense approaches to enable this remains to be seen.

The near certainty is that, without parliamentary reform to alter the veto power of the Senate, we could expect only watered-down, suboptimal reforms to continue into the future.

We can only hope that this won’t be the case.

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