Finance Finance News Incomes, taxes are holding back Australia’s economic competitiveness

Incomes, taxes are holding back Australia’s economic competitiveness

A map of Australia with some coins and financial data.
Low incomes and high personal tax rates have hindered Australia's competitiveness. Photo: The New Daily
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Low disposable incomes are hampering Australia’s ability to compete economically on a global scale, and tax reform could be the only solution.

The IMD World Competitiveness Yearbook 2019 ranked Australia 18th out of 63 countries based on more than 340 business competitiveness criteria, using both official statistics and data from survey results.

Australia’s ranking points to a continuing a trend that has seen the country linger between 17th and 21st place for the past  five years and outside the top 10 since 2011.

Jarrod Ball, chief economist with the Committee for Economic Development of Australia (CEDA – an Australian-based partner of the report’s publishers IMD), said Australia’s stagnation suggests the country is “getting complacent on competitiveness”.

“Clearly, it feels like we’re set now in that ranking well and truly outside the top 10,” he said.

AMP chief economist Shane Oliver said the ranking should be concerning, but not worrying.

“Someone has to be 18th, and it’s always good to be in the top half rather than the bottom, but we can be doing better,” he told The New Daily.

Incomes squeezed by taxes

While Australia’s lacklustre competitiveness ranking can be chalked up to numerous domestic and international factors (including notably the end of the mining boom), Mr Ball said low wage-growth rates played a significant role in the blunting of Australia’s competitive edge.

“They’ve been pretty much flat since 2012,” he said, noting that the collapse of the mining boom spelled the end of “that big force in the economy that’s generating demand and lifting incomes”.

Income growth became a key issue in the 2019 federal election, with a hopeful Labor Party signalling the introduction of a ‘living wage’ if elected, while the soon-to-be victorious Coalition cautioned such a move would force businesses to cut staff.

However, Mr Ball said a balance of sorts could be achieved between the two through changes to personal tax rates.

“One of the clear things this report points to in terms of disposable incomes is that there’s probably room for reducing personal taxes so people have more income in their pockets,” he said.

Taxes on household incomes grew by almost 10 per cent in 2018, according to the Reserve Bank’s May 2019 Statement on Monetary Policy, and that growth has “weighed on household disposable income growth”.

Finding a way to lower that tax rate, Mr Ball said, would “certainly have a big impact” by leaving Australian consumers with more money to spend – making Australia a more attractive prospect for businesses.

AMP’s Mr Oliver agreed that taxes need to be reviewed, saying the current system was “not particularly competitive” on an international stage.

“Our personal income tax is relatively high compared to other countries, and the top rates kick in at a relatively low level of average earnings as well,” he said.

Corporate tax rates are not much better either, Mr Oliver said.

“We used to be middle of the pack. Now we’re in the high end,” he said.

Energy costs continue to hamper

Income and taxes aren’t the only weight on the nation’s economic shoulders; a lack of clarity on energy policy is also adding to the nation’s woes.

“We’ve clearly lost our competitive edge on energy,” Mr Ball said.

Without certainty around the future of Australia’s energy market, businesses can’t predict how the market will evolve and are subsequently cautious to invest.

Similarly, Mr Oliver said the cost of energy “has become a big issue” for businesses that currently pay “a lot” for energy, which is generated for more reasonable prices.

“The actual cost of energy production is relatively low by global standards,” he said, “so we should be able to get the cost of supplying it down to a more competitive level.”

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