This week’s National Reform Summit was the business community’s way of saying to politicians, “without serious economic reform, we’re stuffed”.
It’s a message that some commentators have been trying to get across for a long time, and most of the big issues – tax, the retirement income system, productivity growth and balancing government budgets – have been raised many times before.
But when big business says it, does that mean the Tony Abbott and Bill Shorten will lay down their weapons to find bipartisan ways forward?
Don’t hold your breath.
Almost since Tony Abbott won the leadership of the Liberal Party in 2009, his combative style of politics has provoked similarly pugilistic tactics from Labor.
It’s worth recalling that it was a bi-partisan approach to carbon pricing that was the undoing of former Liberal leader Malcolm Turnbull and, eventually, Kevin Rudd.
Both major parties have gone into scare-campaign mode over key reforms – the ‘wrecking ball’ carbon tax; the ‘ghost of WorkChoices’ IR reforms; the ‘great big new tax’ GST; the ‘raid’ on super.
Economists have said a great deal about such reforms, but some newspapers published by the very sponsors of the summit have profited from scare-mongering headlines, often drowning out consideration of whether a policy will make us more prosperous in the long term.
And so the ‘free market’, such as it is, moves around these obstacles. Capital that should race directly to its natural resting place is instead trapped in unproductive pools. The greatest of these is the housing finance industry.
Utterly illogical policies have swollen the mortgage market – negative gearing, capital gains tax concessions and, until recently, a disparity between the capital reserve requirements of the big-four banks.
Those laws have transferred wealth from taxpayers who do not own investment properties to those that do.
A cynic might see that as a transfer of wealth from the ‘slow witted’ to the ‘clever’ – but even if you believed that, the policies harm the economy overall by encouraging a giant misallocation of capital.
At the same time as the long housing-credit boom, the mining boom pushed the Australian dollar too-high for too-long, and sucked the life out of numerous exporting industries.
That’s not a bad thing in itself – national income rose substantially as a result – but Labor’s attempt to smooth that process with two versions of a mining super-profits tax was successfully shouted down by the mining majors.
Again, a bit of bipartisanship could have set Australia up for a brighter future than the one that the National Reform Summit has now been set up to address.
That is not to say private sector forces have been as idle as our elected ‘reformers’. Money follows opportunity, no matter what ludicrous framework Canberra sets up for the economy.
Over the past 15 years, the companies listed on the Australian Securities Exchange (ASX) have been dominated by the banks and miners.
From 2002 to 2013 those two sectors accounted for around 50 per cent of market capitalisation of the entire ASX.
That’s right – half of non-SME capital was parked in the big four banks, BHP, Rio Tinto and a few smaller players.
The banks were attractive because each year they were able to increase the size of mortgages – roughly the same number of staff selling to the same number of borrowers, but increasing the amount lent each year as house prices soared.
And the miners were attractive because of the long mining boom driven by demand from China.
Now here’s the rub.
The Abbott government is now parroting daily that it’s all about ‘jobs and growth’, but there never were too many jobs in those two sectors (see the lowest two lines on the chart below).
And the sectors from which they sucked capital – particularly manufacturing – shed plenty of jobs and shut down plenty of firms.
The auto manufacturing industry is the largest, and saddest, example of that process.
Now, as a widespread commodity slump hits miners, and the exhausted Australian housing borrower gives up (or is told, following Australian Prudential Regulatory Authority changes, that they are no longer credit-worthy), the years of reform laziness are starting to bite.
Yes, the reforms raised by this week’s summit are necessary – but making them during the boom years would have been far preferable to now.
In the years ahead the banks and miners will make up a smaller slice of the ASX overall, and, reform permitting, new jobs will be created in advanced manufacturing, agribusiness and food processing, education exports, tourism and so on.
But let’s not forget that we’ve had a basic road-map to tax reform since the 2009 Henry Review – and if tax had been reformed less selectively the federal budget would be in a less of a mess.
We’ve known for years that negative gearing and capital gains tax concessions were pumping up an unproductive banking sector, and that sky-high land prices hit businesses as much as consumers.
And we’ve known for a long time that superannuation tax concessions were being used for wealth-management rather than genuine retirement income planning.
Watching the capital markets pick apart the warped jigsaw that politicians on both side of politics have refused to touch is going to be ugly.