03/07/2012 - 10:58

Analysis: the wage and tax debate

03/07/2012 - 10:58

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High wage demands, according to two senior Australian Government ministers are bad for the economy, but high taxes in the form of the carbon and mining tax, are not.

Such a view is, of course, utter hypocrisy, but it is also the only way to explain the contradiction in the government’s position on wages and tax – and its failure to understand that both are business costs.

It goes further, because the wage and tax debate is a symptom of Australia’s most serious economic problem, the fact that it has become a high-cost country, pricing itself out of world markets.

The Ministers who spoke out against exorbitant wage demands ought to know a bit about that the subject given that both are former leaders of the Australian Council of Trade Unions.

Simon Crean and Martin Ferguson were certainly not business-friendly leaders during their time at the top of the ACTU.

But, now they hold the roles of Regional Development Minister (Crean) and Resources Minister (Ferguson) they have a better view of the wider Australian economy, and appear to understand that you cannot simply layer costs on business without hurting job creation.

“If we’re not very careful, current (union) members will do exceptionally well, but future members in 10-to-20 years time will miss out,” Ferguson is quoted as saying.

“In some projects we are getting improvements in wages and conditions which are unsustainable over time.”

Spot on, Martin. But if you can see the wages issue so clearly, why can’t you see that the same job and wealth destructive force is at work in the carbon and mining taxes your government has just created.

In truth, Crean and Ferguson probably can see the damage being caused by the new taxes but find it impossible to criticise policies so close to their leader, the Prime Minister, Julia Gillard.

But, letting the cost “cat” out of the bag will haunt both Crean and Ferguson because it is impossible to acknowledge the destructive nature of excess wage claims, and not recognise the same destructive nature of high taxes.

Big employers, such as the mining giant Rio Tinto, are certainly aware of what’s happening to their business costs and have embarked on widespread cost-cutting campaigns.

The Rio Tinto target is to hack 10 per cent out of the company’s support services budget after the business suffered a stunning 30% rise in “back office” costs last year, and had been budgeting for a further 16 per cent rise this year.

Until mineral prices started to fall last year Rio Tinto was able to absorb punishing cost increases. Not anymore. Costs have become a focus of management because of the way they are corroding profits.

Not all companies can follow Rio Tinto’s lead because they are have already cut their costs as far as existing agreements with suppliers and labour unions will permit with the best, and most alarming example, being the international operations of Qantas.

Already under extreme pressure from foreign rivals with lower cost structures, the international business of Qantas must either undergo a radical over-haul, or close.

Losses in its international operations are tipped to hit $450 million this year with Qantas management moving to separate the loss-maker from its profitable (and protected) domestic operations.

More bad news for Qantas shareholders was released earlier today with the only growth area in the month of May being the low-cost division, Jetstar.

Qantas is a perfect example of the challenge confronting all Australian businesses forced to absorb higher costs than competitors, a situation made worse by the fact that aviation is a service business where poor service causes customers to migrate.

In the case of Qantas, high costs and under-staffing (which is compounding the poor service) has seen its share of Australians flying out of the country drop to 20 per cent, a staggering decline for the one-time national flag carrier which had close to 100 per cent of the market.

Whether Qantas international can survive if it is cut free from the domestic operations will be a massive management challenge, not aided by rigid, heavily-unionised, cost structures of the sort criticised by Crean and Ferguson, and made even tougher by the new carbon tax.

Having started a debate on costs, it will be interesting to see if the two Ministers take the next step and add high taxes to their high wages criticism – not that anyone should hold their breath while waiting for that to happen.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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