Reform and Prosper
The Australian economy is in uncharted waters and this time our traditional complacency will not save us, says Tony Shepherd in this inaugural speech named in his honour.
Thank you for inviting me to make the inaugural Tony Shepherd Oration. I am indebted to my good friend Senator Andrew Bragg for honouring me with this annual event.
This oration is designed to encourage business to actively engage in debate on Australia’s economic future through public and private participation in policy formulation. Tonight I am going to reflect on my experience and offer my view on some of the current challenges facing Australia.
I am going to ring the bell on industrial relations – clearly one of the biggest drags on our competitive position.
After starting my career in the public service, I have pretty much dedicated my working life to business. I am passionate about business and how it drives the economy for the greater good of all Australians. Business is 80 per cent of our economy and the sole generator of wealth and prosperity. Whether it be a sole trader working out of a garage, a farmer or a mega corporation, they are all essential cogs in our economic machine. Business is not a “sector”. It is our economy.
I believe that in a country as heavily regulated as Australia it is in the interest of business to speak out on issues and policies affecting them. When I say business I mean all business – small, medium and large.
This is far more than self-interest. It is in the national interest because a healthy, growing and competitive business sector is what drives our economy and our prosperity.
Australia has never been more prosperous. This is a product of the economic reforms of the 1980s, 90s and 00s plus the magnificent performance of our resources sector and growth in global trade.
However, as a trading nation heavily reliant on the export and import of goods, services and capital we are inextricably tied to the world economy. We are now entering uncharted waters. Never before have we had interest rates close to zero. Growth in real wages is low and has fallen in line with poor productivity performance and low inflation. Unemployment is not too bad at 5.2 per cent although there are pockets of higher unemployment particularly amongst youth and the long-term disadvantaged. Added to all this is one of the worst east coast droughts in recorded history. We also have an unresolved trade dispute between two important friends in China and the United States and concern with the impact of a possible Brexit on the UK and Europe.
The world economy has three principal fly wheels: Europe and the UK; North Asia; and North America. All three at present have their challenges.
Monetary policy is running out of options and although quantitative easing is an option it is only an option if our economy is strong enough to rebound and repay the resultant debt.
Fiscal policy can offer a temporary fix but what is really required is structural economic reform to build on our strength and to put our economy in the best possible shape to deal with the challenges ahead. Governments have reform agendas but without control of the upper houses it is difficult to achieve reform without the pressure of a major crisis.
My Journey
In my early days in major projects like the Sydney Harbour Tunnel, I recognised that staying out of the media and not getting involved in the public debate was a mistake. The old dictum that "it will blow over" is simply wrong! Unanswered social media rapidly turns bullshit into gospel.
My first interview with Alan Jones was in his then studio in North Sydney. He was sceptical about our plans for the Sydney Harbour Tunnel but he eventually came around.
Outside of major projects, I first became involved in the public policy debate some 15 years ago when I saw that climate change policy - or energy policy - was ill considered, poorly managed and driven by rhetoric rather than logic. Business was sidelined in the debate and economists, ideologues and policy wonks were leading the charge. We can see the results now with skyrocketing energy costs and serious concerns about reliability of supply in NSW, Victoria and South Australia this coming summer.
In 2011, I was approached by Graham Bradley to take over from him as President of the Business Council of Australia. I held that role until 2014. It was a baptism of fire, dealing with the Labor Government which was certainly not pro-business. Fortunately I was blessed with a great CEO in Jennifer Westacott and a first-class board.
Typically, I then overreached and accepted the role of chairman of the National Commission of Audit appointed by the new Abbott Government. We were challenged to find solutions to bring the budget back to surplus by 2023. We had four months and a $1.5m budget to cover $408 billion of Commonwealth expenditure.
Peter Crone (ex BCA) was the head of the secretariat and a terrific team from Treasury and Finance all who worked extremely hard to bring it together. I reckon about a third of our recommendations have been implemented in one form or other and are helping budget recovery and better government.
Our basic conclusion was that our welfare system (including the aged pension and family tax benefit) and our health care system are unaffordable and unsustainable with an ageing population. We also concluded that the federation was broken.
But there has been progress. Dependency on the welfare system is at a 30-year low and our often reviled resources sector has kept our terms of trade strong and been a major contributor to budget reform. As Finance Minister Senator Mathias Cormann remarked recently: “If the proportion of those on welfare had remained at the same level it was under Labor in 2013, Australia would have an extra 350,000 people on welfare compared to where we are at today.”
There is of course a lot more work to do.
Work begins on the Sydney Harbour Tunnel (1986-92), one of several major infrastructure projects Shepherd has managed.
Challenges
Over the years I have been involved in some tough public debates. Some we won and some we lost. Fortunately, I was on the winning side on Sydney Harbour Tunnel, Melbourne City Link, the redevelopment of Walsh Bay, Eastlink in Melbourne and WestConnex in Sydney.
In each case we enjoyed strong political leadership and support. Without such support success in Australia is extremely difficult.
More recently we won the debate on the need to replace the Sydney Football Stadium. We lost out on the “reform” of Fair Work Australia under Labor, which made a bad arrangement even worse.
It was difficult to find public corporate support in this campaign with the notable exception of Alan Joyce. Who could forget the incredibly gutsy decision in 2011 to ground the entire Qantas fleet after ridiculous demands by the unions? A decision which was vindicated by Fair Work Australia who point-blank rejected the union’s extortionate demands.
The early months of the Abbott Government saw a number of reforms enacted, which had been promoted by the BCA. Of course a hostile Senate was and continues as a major limiting factor to reform.
I’m not saying business has a monopoly on ideas when it comes to shaping policy. But it is important that business steps into the policy arena.
As Assistant Minister to the PM, Ben Morton recently said corporate Australia has been too quiet on issues which will grow our economy, make Australia more productive and create more employment. He wants corporate Australia to speak up. He wants corporate Australia to argue for policies which would grow jobs and the economy. He lauded the BCA for its campaign for a company tax cut and for lifting the image of big business by promoting the benefits it provides.
To quote him: “The BCA campaigned for company tax cuts, opposed Labor’s 45 per cent emissions target, supported personal income tax cuts in full and is supporting workplace integrity legislation.” He wants more large corporates to follow suit and make a policy contribution.
Before corporates think about supporting a social cause, they should invest in economic policy development. Too few business fail to speak persuasively for the interests of the Quiet Australians, to those people who are earning less than $70,000 per year. Or to but it another way, in the national interest rather than the narrow, post-materialist interest often within the prism of identity politics.
There are no businesses without a strong economy. Economic policy risks being warped without business input. In fact Bob Hawke pushed for the formation of the BCA so corporate Australia could engage more actively in the debate about economic reform. This is the Maslow hierarchy of needs in which business must improve.
Of course there are good people in the public service, think tanks, community groups and the unions. I have to admit In the case of the latter I would like to see another Bill Kelty. However each of these groups look at business from a different perspective.
a) The public service tends to look at business as an untrustworthy self-interested sector.
b) Some of the think tanks can be overly theoretical and look at business as bit players in the supply and demand market.
c) The modern union movement has a tendency to portray business as rapacious capitalists who have no concern about the welfare of their employees.
As a very general statement all three fail to recognise the centrality of business to our economy. The confidence and success of business is fundamental to our prosperity. Without business itself talking up its role we risk a vacuum or skewed arguments.
Today, the tunnel takes more than 90,000 cars a day. Australia needs more infrastructure and innovation, Shepherd says.
The road ahead
First things first. I am delighted to see the Federal Government will hand down the country’s first National Population Statement next year to set out plans for future growth on a more realistic basis. This is a positive step following failures in the past by various government agencies to predict the urban congestion crisis facing some capital cities and the unbalanced growth in population across Australia.
There is no doubt failure to forecast population growth more accurately population growth in the past has resulted in poor planning. For example, the Australian Bureau of Statistics projected Melbourne’s population would grow by half a million between 2004 and 2018. They got it wrong. The actual growth was almost three times that at 1.3 million. I wish we had known this when planning Melbourne Citylink and Eastlink!
There is now a new Centre for Population in Treasury which is a great development. It’s expected to underpin the government’s migration settlement policies, settlement integration, and more importantly, hopefully long term infrastructure planning. This is a terrific initiative. Let’s face it, infrastructure, housing approvals and services have not kept pace with the population growth in Melbourne and Sydney diminishing the quality of life of its residents.
More broadly, the Australian economy and its population is too small to support a domestic economy of an efficient and sustainable size. We can only prosper and grow through the export of goods and services. The tariff reforms of the 1980s and the floating of the dollar and the subsequent free trade agreements went a long way to correct this.
Economic reforms are not without pain, but the lessons of the past show us that this can be managed with particular support in the transition period for the disadvantaged whether they be in the community or business.
There has been some excellent work by organisations like the Productivity Commission and the Business Council of Australia on the main ingredients of economic reform. The obvious areas of focus should include:
Regulation at all three levels of government, whether that be in planning, specific business regulation or a bloated and slow moving bureaucracy imposing itself in every facet of our business (and private) life with little regard for the cost or the cause of the problem they are endeavouring to solve. This is coupled with an unhealthy growing penchant for a return to state ownership and reduced faith in markets creating new monopolies. This could take us back to the very system which led to our poor economic performance before the 1980s. A system which has brought Europe to its knees.
Red tape. I congratulate the Prime Minister on giving Ben Morton responsibility for the Government’s Deregulation Agenda.
Since coming to power in 2013 the Coalition’s efforts to reduce red tape by combing through the statute books has unlocked $5.8 billion in efficiencies for business. Now Mr Morton is overseeing the establishment and work of the Deregulation Taskforce, which is working with business and the states to identify and eradicate impediments to investment and job creation. Mr Morton also presides over a process whereby every Government department is charged with looking at the regulation on its books – now from the point of view of business - and bringing forward reductions.
Let me now address some specific issues.
Innovation
You cannot manufacture innovation. All you can do is to create a situation where innovation is encouraged and rewarded.
The ingredients for a fertile market for innovation apply across most of business:
1. We need to develop our domestic skills in engineering and science where we are sadly lacking by global standards which means back to the fundamentals of our education and training system. A system which seems more devoted to the needs of the provider rather than those of the consumer.
2. Our regulatory system should be adjusted to encourage and facilitate new inventions and ideas. The regulatory process needs to be far more adroit and responsive. It takes Cochlear nine months to get regulatory approval for a new device in its home country and six months for the same device in the EU or the US.
3. Our corporate finance system seems to be very risk adverse. This may be driven by our heavy reliance on superannuation as our main form of saving. By definition this form of saving prefers more conservative investment. This is a form of market failure where the Government may have to intervene at least in the short term. The current regulatory environment does not encourage banks to take risks in lending.
4. The level of co-operation between research institutes and business has improved significantly but is still way below world’s best practice.
I’m confident many of these concerns will be addressed in the upcoming Fintech Inquiry which Andrew Bragg is chairing. Andrew has made it clear he wants policies properly calibrated to ensure consumers and businesses reap the benefits of technological advancement. He is the right person for this job. He understands Fintech has a big future in providing jobs and his focus will be on national competitiveness.
Trade
Exports, as I said earlier, are what drive our economy. What can we do to drive exports? Get rid of red tape! And latest data shows that is starting to happen. Seventy per cent of Australia’s two-way trade is now covered by trade agreements, up from 26 per cent when this government came into power.
The most current trade data confirms we are in the longest run in consecutive positive monthly trade balances in 45 years. With one in five Australian jobs now dependant on trade we need an ambitious trade strategy, and I understand the Prime Minister has made an undertaking to complete deals with the EU and the Asian region. The next step is to modernise the global trading system to match the speed of change in E-commerce and embrace opportunities in the digital economy. But I turn now to our parlous industrial relations landscape.
Industrial relations
The current industrial relations system lacks the flexibility essential in the modern business environment and the gig economy.
And I am not talking about more work for less pay; I mean the need for reform. Reforms which should lift the pay and increase the number of available jobs.
Reform is essential to providing a modern and flexible work environment where employers are encouraged to recruit, retain and develop their workforce.
I’d like to drill down on some key points in industrial relations. Points which have put a handbrake on our prosperity. Let me be clear from the outset, a happy and prosperous workforce is the basis of any prosperous business or economy. This is one of the key contributors to improving productivity which in turn is the proven way to increase real wages.
For starters, the unfair dismissal laws do not work. I fully support Small Business and Family Enterprise Ombudsman Kate Carnell when she says the Fair Dismissal Code is not delivering what was intended. A small proportion of cases go through to arbitration because the time and cost of defending a claim is often prohibitive – regardless of the merits. This means that business pays out a dismissed employee, on top of all other entitlements, even though they may have a compelling case to dismiss. In other words, the unfair dismissal remedy is imposing a cost on dismissal, even when the employer has acted entirely fairly.
Is it any wonder that during the first three months of this year the Fair Work Commission received 3583 unfair dismissal applications and most were settled during mediation? Employers will regularly say that there is too little attention to the merits (or lack thereof) and too much attention on avoiding the time and cost of defending a claim.
Of the 172 cases that were presented to the Commission, 111 applications were dismissed because they were legally invalid, in 29 cases the dismissal was found to be fair. In 32 the dismissal was found to be unfair. This doesn’t suggest that employers are acting unfairly.
Kate Carnell held a review which quite rightly calls for separate processes under the code for serious misconduct, conduct and redundancy. Serious misconduct is currently defined in the code as “theft, fraud, violence and serious breaches of occupational health and safety procedures.”
I agree with her when she says the definition needs to be widened to include wilful or deliberate behaviour by employees inconsistent with the continuation of the contract of employment, causing serious and imminent risk to the health or safety of the employee or others, reputational risk, theft, fraud, assault or violence, intoxication at work and refusal or failure to carry out reasonable instructions.
The ambiguity in the code quite simply means too many businesses are being pulled into unfair dismissal hearings which are costly, impact productivity and deter permanent employment.
I support the Attorney-General and Minister for Industrial Relations Christian Porter when he says the Code is not achieving its objectives.
Some of the cases heard just defy logic. Take this one (Deeth v Milly Hill Pty Ltd), where a local butcher was ordered to pay six weeks in compensation to an employee butcher who was dismissed after being charged with being an accessory to a violent murder, and who previously threatened to stab fellow employees. The butcher acted aggressively while sharpening a knife in the shop. Customers said they’d refuse to come to the shop and other employees felt unsafe and threatened.
But the Fair Work Commission found against the small business. While the FWC found the employer had a "reasonable belief" the conduct was sufficiently serious to justify immediate dismissal, it said the owner didn’t have "reasonable grounds" because they weren’t happy with his investigation into the incident. The dismissal was deemed harsh and unjust. The owner was ordered to pay six weeks pay in compensation. But more confusingly the FWC admitted that reinstatement would not be appropriate in the circumstances!
The owner was later to say: “If an employer can’t win in a Fair Work case like this then it is unlikely that anyone can win at all.”
Further, it’s created a cottage industry of what is now known as “go away money.” A situation where ambit claims by former staff include demands of payments for say $60,000 – although it’s believed most employers offer ‘go away money’ of between $1000 and $8000 because they want the stress to go away and believe the process – including hiring lawyers – could be much more costly. The Fair Work Commission itself said in its Annual Report that 79 per cent of cases are settled in this way.
Unfair dismissal laws in my opinion will continue to discourage employment growth.
The Enterprise bargaining system is broken
Enterprise Bargaining was introduced by Labor in the early 1990s and sector-wide bargaining was restricted. Awards moved from being the main way of setting pay and conditions to being a safety net. A set of national minimum standards was introduced in 2006 and these were expanded in 2010 to establish the National Employment Standards.
But this system is simply not serving the nation well enough. If I may quote from a report by my own former organisation, The Business Council of Australia, from August of this year (2019): “The number of people employed on active EAs – agreements that have not reached their nominal expiry date – dropped sharply between 2014 and 2017.
“The large fall indicates that some employers and employees are choosing not to renegotiate agreements that have reached their nominal expiry date, negotiations are taking longer than they used to or employers are choosing not to use EAs altogether. Some employees on lapsed, but still operational EA’s may not be receiving pay rises. This is contributing to the lower rate of wage growth for all employees on EA’s – which is around 2.3% over the past year – roughly the same as the economy-wide average.”
In other words the decline in Enterprise Agreements is one of the reasons employees have been seeing the lowest wage growth in at least two decades.
While the agreements are more common in industries with a strong public sector presence such as health and community services, public administration, safety and education – it has plummeted across several major private sector employers. The most dramatic reductions in the number of EA agreements were in retail trade at minus 82 per cent and agriculture, forestry and fishing at minus 75 per cent.
The process has become a minefield. Too many employers are deciding that the enterprise bargaining system is just too much trouble to be bothered with. These days it provides little benefit because the need to bargain has been reduced and the potential flexibilities from bargaining have vanished.
Quite simply, the enterprise bargaining system needs surgery. If we can at least make the system easier for those who want to use it, this will be a major step forward. Too much reliance on awards is limiting competition and dynamism. The complexity of awards is a major issue – especially for small business.
When moving to the enterprise bargaining system in 1993, Paul Keating told the Australian Institute of Company Directors:
“Let me describe the model of industrial relations we are working towards. It is a model which places primary emphasis on bargaining at the workplace level within a framework of minimum standards … Over time the safety net would inevitably become simpler. We would have fewer awards, with fewer clauses… We need to find a way of extending the coverage of agreements from being add-ons to awards … to being full substitutes for awards.”
Clearly that is not the system that we have now. Along the way – mainly through the Fair Work Act – we now have awards far more relevant and more difficult to avoid than we ever have before.
Conclusion
Australia has had 29 years of growth, a world record in the modern era. We came through the GFC with flying colours due to good governance, a resources boom and prompt government action to ensure confidence in the banking system. The doomsayers are predictably circling but there’s blue sky ahead.
The IMF forecasts our economy to grow 2.3 per cent next year – ahead of forecasts for other developed economies such as the US, Britain, Germany, France, Canada and Japan. Our debt-to-GDP ratio is about 20 per cent, a quarter of that in the US and Britain and less than a third of the OECD average. Our AAA credit rating has been maintained, welfare dependency is at a 30-year low, we have a current account surplus for the first time since 1975 and after 11 years the budget is back in balance.
I am encouraged by Treasurer Josh Frydenberg’s words when he says he does not see a budget surplus as a trophy on the table.
It is about paying down debt to reduce our legacy $19 billion a year interest bill while building resilience to create the necessary capacity for future fiscal flexibility should it be required.
Unfortunately our continued success has bred complacency. In a volatile geopolitical world experiencing rapid changes in technology Australia can no longer afford to take things for granted. The early warning signs are there: private investment outside of resources is stagnant; real wages are flat in line with low inflation; productivity is low (excluding of course the resources sector); business and consumers are cautious despite record low interest rates and lower taxes.
A return to surplus will give us some capacity to safely provide a fiscal stimulus in the event of a serious downturn.
However, we risk leaving it too late to undertake the economic reforms essential for redimensioning our economy in line with the modern reality.
Reform in an actual crisis is far more difficult and painful. We should move on industrial relations as we have on deregulation. Our 29 years of continuous growth in prosperity is a direct result of the economic reforms of the 80s, 90s and 00s. Our failure to continue economic reforms is the basic cause of our poor productivity performance and low growth in real wages. It has also contributed to the lack of diversification in our economy.
With a hostile Senate major economic reform is difficult if not impossible. Therefore reform has to be incremental or administrative unless a deal can be cut with Labor or a majority of the independents. Essentially growth has slowed because of global uncertainty and headwinds and poor productivity performance. This is why real wages are stagnant.
Australians are great in a crisis, but when it’s over we go to the beach. Without more business involvement in policy development, the beach might become unaffordable.
Tony Shepherd is the chair of the Greater Western Sydney Giants and the SCG and Sports Ground Trust, and a former MRC Director. He managed construction of the Sydney Harbour Tunnel for Transfield (1986-92) and was chair of the National Committee of Audit (2013-14), and Westconnex Delivery Authority (2013-15).