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Economic Gloom for Australia?
On many levels, Australia is one of the most expensive places in the world to live in. With over 750,000 people unemployed and rising, a potential bout of inflation through the depreciating Australian dollar and a tax increase inevitable later this year, this should be of major concern to many people.
On the positive side, the currency’s decreasing value would help create an environment for potential new export industries if the economy could again become competitive in the world market. The hope is the Australian export base would diversify from minerals and expand to include innovation driven products.
A lower cost of living, especially translated into a lower cost base for entrepreneurial start-ups, might help increase economic activity. This is needed if a recession is to be avoided in the near future. Unemployed can also be gainfully put back to work.
So what is causing Australia's high cost of living and how can the impact of this be lessened to improve Australia's competitiveness?
The previously overvalued currency made Australia expensive for tourists. That same exchange rate made imports cheap as well. However, what is important is how much a currency unit can really purchase in terms of purchasing power parity. A dollar gets you nowhere. Just look at the price of a cup of coffee, or a Coke or a public transport ticket. Go to a country like Malaysia and RM1 [US$0.253], in many places buys a cup of coffee (just), or a light meal. Thus the PPP of the Australian dollar is a true indication of how high the cost of living really is.
This standing comes from many factors. Urbanization has many costs associated with it. Business premise rentals are high. Public transport is expensive. Tolls are expensive, as well as local government rates, as are general operating costs including wages.
Add to urbanization the cost of imported goods and the practice of multinational companies geo-blocking Australia as a high-price market. This generally makes many branded goods more expensive than other countries. A can of Coca-Cola costs only A$0.60 in a corner store in Thailand or Malaysia. Logistics costs are high. It costs just as much to ship something around Australia, given infrastructure problems, as it does to ship the same good around the world.
The retail sector in Australia is not competitive. Three organizations, of which two control 90 percent, dominate the grocery market. This goes for most sectors. There are four major banks, two department store chains, and no more than a handful of discount store chains.
The Australian lifestyle is a travelling one. But the costs of travel by car or public transport, parking, tolls, and any outside food and beverages all start to add up. A family day at the movies could cost hundreds of dollars. Tickets to an AFL football match start at A$25. Even a ticket to the Royal Melbourne Zoo starts at A$15.80 for a child and A$31.60 for an adult. Cigarettes and beer in Australia are among the most expensive in the world. People are now paying for things they didn't pay for in a do-it-yourself world, like childcare, gardening and housekeeping.
Finally, state governments have promoted gaming as major recreation through the granting of casino and jackpot machine licenses to over 7,000 premises. As a result, gambling losses amount to A$1,144 per person.
Underlying Australia's structural problems is the small population base. A country of only 23 million is not considered a large enough market for most multinationals to manufacture in. It's very hard to develop economies of scale in high volume manufacturing within Australia. The relatively high cost of outbound shipping deters the thought of Australia being a manufacturing base.
Historically Australian wages have been very high. Weekend and overtime pay are double customary pay rates, and employees are paid extra during holidays. In addition to wages, businesses must pay a payroll tax, a tax on employment. Many other expenses involve keeping employment and salary records.
Taxes are very sophisticated, starting with local government rates, goods and services taxes (GST), company taxes, and personal income taxes. The cost of compliance with taxes is very high, where extremely detailed records are mandatory, and onsite inspections made by tax officers on a regular basis.
One of the major tasks facing successive governments over the past decades is fiscal management, with many demands upon public money from education to healthcare, to infrastructure development and maintenance, to defense, and social security. The strain of spending during the 2008 recession, military spending, and other fiscal responsibilities has maintained the budget in deficit for the last decade.
It is therefore inevitable that the tax base must be widened and taxes increased if the government is to continue meeting its commitments. There are calls this week to raise the GST to 15 percent to fund healthcare expenditure. This will be one of the predominant political/social issues facing the present and future governments. This prevents governments from governing with a vision. They are now financial managers rather than designers of the future.
A major influence upon Australia's cost of living is the burden of regulation. Australia has more than 130 national regulatory agencies, a federal and eight state and territory legislatures, and around 500 local government jurisdictions, making up three levels of government. There is much duplication. Each year more and more laws, regulations, and orders are put into effect. This regulatory burden puts Australia at a competitive disadvantage.
Although the intention of regulators is to provide a safe and healthy environment, the costs of compliance are enormous. Many simple building and renovation jobs require massive protective structures with safety officers which inflate the costs of the activity many-fold. Regulation effects production, storage, transport, labeling, food safety, competition and fair trading, and occupational health and safety.
The costs of starting up a business are now horrendous. Even setting up a small restaurant can cost up to A$500,000 to satisfy food safety, OHS regulations, zoning and so forth. The dream of starting one's own business and being one's own boss is quickly disappearing. According to the Global Entrepreneurship Monitor (GEM) 2014 Global Report, the new venture start-up rate in Australia is in the bottom 40 percent in the world. Retail, warehouse, and factory rents are extremely high and require long-term commitments. Business failures keep people in debt for the rest of their lives.
The Australian Industry Group 2014 National CEO Survey reports that small business owners complained that regulatory compliance costs are expensive and time consuming. These include payroll taxes, OSH compliance, GST records, waste and storage regulations, and labor laws covering union right of entry to premises, unfair dismissal, long service leave, and holiday loadings.
According to a World Bank Doing Business Efficiently Report 2015, urban zoning certificates are required in Australia, but not required in Finland, France, New Zealand, or Singapore. New Zealand's regulations are streamlined in implementation, where enforcement is predictable. In Australia they are not. International trade procedures are cumbersome, ranking Australia only 49th in terms of efficiency. The same report ranks Australia's tax compliance procedures 39th in the world in terms of efficiency.
The cost of living has been built by high debt levels. According to a Barclays Bank survey, Australian households are the most indebted in the world. Australians have taken mortgages and personal loans, use credit cards heavily and rely heavily on overdrafts to get by. Current household debt is over 130 percent of GDP.
Demand for housing facilitated through easy mortgages has played a role in increasing urban housing prices. The concept of negative gearing has encouraged speculation in housing which has been fueling the housing market. Negative gearing has also been a source of high rental charges for properties, as most of the rent paid covers mortgage repayments. High debt rates make consumers susceptible to changes in interest rates and any future economic downturns.
The demise of great Australian icons like Fletcher Jones, Ansett Airlines, Surfboard manufacturers, Darrell Lea, Ernest Hillier, Borders, and Angus & Robertson, are signs of what could come. Unlike Greece, Australia has no party to bail it out.
However the solutions to lowering Australia's cost of living and making Australia more competitive would take measures that very few would ever agree to.
A lower exchange rate would make imports much more expensive, but should at the same time provide opportunities for the revitalization of local industries. This clearly gives some scope for innovative entrepreneurs to take on imported multinational products, which happened up to the 1980s and 1990s. Why should a shampoo, toilet cleaner, or food product be a multinational product?
The Australian spirit of competition against multinationals should be rekindled. The consumer product industry was once filled with products manufactured by locally owned family businesses, and there is no reason this couldn't be the case again.
Debt reduction is a necessity, beginning with school education. Negative gearing should be abolished to help put a damper on housing and property speculation. Regulations need to be lessened and streamlined. This would have the effect of both lowering compliance costs in business and saving government operating expenditure.
The concept of returning to the concept of small government needs to be revamped and discussed at a national level. Immigration has to be drastically increased. An aging population is is both lowering the tax base and increasing aged and health care requirements. Increases in immigration would broaden the tax base and help expand the size of the Australian market, which local enterprises need to manufacture with any sense of economies of scale.
Increasing the incidence of population could be the means of developing the North of Australia as a 'gateway' to Asia. Darwin has potential as an Asian food supplier and financial center, truly linking Australia with the region.
There needs to be wage reform which would by far be the most unpopular move any government could make. Overtime and penalty rates need to be removed. Today it really doesn't matter whether the hours you work are on a Sunday or a Monday. Work should be work, and paid on the basis of hours and not the time of these hours worked.
Finally 'Enterprise Australia' needs a jump start, where a massive entrepreneurship drive is required. This is badly needed for suffering FIFOs and senior citizens who want to remain active due to their good health and longer lives. Entrepreneurship is also needed for the youth of Australia, where a fair percentage have never worked before.
There is a long term challenge to the viability of the economy, which must be discussed now. Australia needs to be brought together on this, where potential paths are discussed, so a national plan can be drawn up for the nation to follow. This plan must be completely holistic, and answer the question 'what type of Australia do Australians really want?' It needs to discuss all aspects of Australian society, the economy, where the future drivers of the economy will come from, taxation, health care, defense, and the role of government.
Unfortunately it is hard to see in the present political climate how this could be done. What is certain is that if this generation doesn't have this discussion, the next generation will be left with our mess, locked up in a cocoon of a high cost of living, tied up with debt.
Murray Hunter is an Australian academic and development specialist. He is a regular contributor to Asia Sentinel