Australia needs to think beyond the bust

AS a trading nation, Australia's prosperity relies upon our international competitiveness. The key for us is productivity. We need to be more efficient in both our public and private sectors so that we can produce more and innovate faster, at lower cost. We need skilled people across the board.

The good news is that, relative to other OECD economies, Australia is well placed.

We were fortunate to enter this slowdown with a strong banking system, our strong export ties to Asia - China and Japan particularly - and a national budget surplus.

The picture around the world is not so rosy. While I have a feeling that the worst may be over in the US, there are still some challenging times ahead. The big global banks are recapitalising, but I suspect smaller banks will be exposed to the impact of a commercial real estate downturn.

There is no one-size-fits-all analysis, and that applies to Europe in particular.

It varies tremendously. Spain and Portugal, in particular, have enormous exposure to property. Germany has a big dependence on exports, particularly to the former eastern bloc, which has its own challenges.

The UK is of real concern; London is hugely affected by the financial services crash.

Given these variations, I sense that the current push for over-arching European banking regulation may be a bit optimistic. It seems more likely to me that the different European economies will manage their issues in their own way.

Undoubtedly there will be changes in supervision, but let's see.

Closer to us, Japan, like Germany, is heavily dependent on exports and confronts the enormous challenge of its ageing population. Then there's China, fundamentally a different story, where the flywheel is up and spinning, and continuing investment is providing sustained economic momentum for them, and for us too. I'm hearing encouraging anecdotal evidence regarding growth in China.

At home, I'm pleased that the federal government has committed itself to an array of quality infrastructure projects. Even with some inefficiencies, this should help us construct the transport and communications infrastructure we need to support productivity growth.

But many of these are very long-run projects. And it won't be long before the size of the budget deficit becomes a problem.

So it's going to be very important to ensure there is private sector investment in infrastructure as well.

Taxation incentives and other measures are necessary to encourage the long-run private investment essential to major projects. The government must encourage private funding, not replace it with money borrowed on the national account, leaving a greater debt for our grandchildren.

I have high hopes for the Henry Review of Australia's tax system.

The Business Council of Australia has called for major steps to reform Australia's tax system in line with the demographic, social, economic and environmental challenges of the 21st century. In arguing for a halving of Australia's corporate tax rate to 15 per cent, BCA believes our biggest growth opportunity will come from attracting a larger share of scarce global investment capital.

It sounds like a big call in these difficult times but we must think beyond the bust.

And I can certainly attest to the impact of our corporate tax rates on our aviation competitiveness. Singapore Airlines pays 18 per cent corporate tax; Cathay 17.5 per cent; and Emirates and Etihad pay none at all. We are at a considerable disadvantage.

The overlap and duplication of regulation between federal and state governments - and indeed local governments - is a major impost and a drain on national energy.

Because of the financial crisis, I suspect this item has slipped down the agenda. However I hope not, as we need real action here.

On a separate issue, here in Western Australia it still takes too long to get approvals for new mining developments and associated facilities. The boost to national productivity by rational improvements of this kind would be enormous.

Let me now turn to the Australian industries of the future, which, I believe, will look very much like the great Australian industries of today. But we will have to keep working hard to stay globally competitive.

Top of the list is our resources of minerals, oil and gas which are so vital to WA and the Australian economy overall.

Over many years we have developed the people, skills and technologies to effectively exploit these natural resources. We have also created the legal and institutional frameworks within which our natural resource companies can operate efficiently and prosper. We have created an environment where international players can invest with confidence - we can do more, but political stability counts for a lot.

Australians have been able to play a leading role in the development of mining globally. But further expansion of the mining sector requires major infrastructure upgrades and new facilities. I believe this is best left to companies. But governments have a role to play in this work, through the taxes, charges, depreciation regimes and other influences they have, as I mentioned earlier.

Then we have other key areas of national strength.

Education services is one. Worth nearly $13 billion in 2007, education services is our biggest services export. Every year we educate well over 400,000 foreign students. But the recent furore over a series of attacks on Indian students on the east coast is a reminder how quickly things can change. We cannot assume Australia will always be seen as a safe, desirable destination.

We have to keep working at it.

Agriculture will remain important. And medical services will increase in value.

Tourism is also a very important opportunity, especially because it offers great potential for small-to-medium-sized enterprises in regional, rural and remote Australia. We have lost our way on tourism in recent times, and lost our relative position in the ranks of world tourism destinations.

The future for all these industries depends upon the skills of the people within them. For instance, a generation of engineers and accountants is ageing, which means there is a major skills shortage looming over the long term.

The solution may require more skilled immigration and we should not be afraid of that. Meanwhile we should do everything we can to encourage students with aptitude and interest to enter university and study science and maths-based subjects - if that means more places for fee-paying students then so be it.

We need more, and more highly trained, teachers in the fundamental subjects of maths, physics, chemistry and so on. And we have to make it attractive for them.

Another big factor affecting future national productivity will be how we as a nation contribute to minimising the production of greenhouse gases.

The government's scheme of emission trading that is being presented to the parliament has theoretical benefits and has the merit of a market-based approach to the problem. However, once commenced, the intricate valuing, trading and system-management that it requires will all come at a cost, some unintended.

To give just one example from an aviation industry perspective, domestic flying will be taxed, while international flying will be exempt. At a time when we are trying to boost domestic tourism, a trip from Perth to Bali will improve in value compared to, say, the Gold Coast or Melbourne.

My personal feeling is that it would be better to have the certainty provided by a carbon tax - easier to implement, simpler for everyone to manage, and much more flexible. The tax can be targeted quite specifically and raised or lowered as its impact is assessed. As an offset, some have suggested personal taxes could be lowered.

However, I've said before that the debate has moved on, although I have to say I can't remember the debate taking place.

Australia has entered this very difficult economic period with the benefit of a significant surplus and a strong banking system. Notwithstanding the challenges of our budget deficit, we have the opportunity to come out of it in better shape than most economies.

This won't happen without some strong action in the short term.

So let's focus on getting the private sector into infrastructure development, reforming the tax system, cutting the red tape between the Commonwealth, the states and local governments, and building the skills we need for the great Australian industries of the future.

n This is an edited extract of a speech delivered by Qantas chairman Leigh Clifford to the Committee for Economic Development of Australia in Perth.