The Coalition is planning to resurrect National Competition Policy if elected in September, including paying state governments to privatise.
It’s also looking at ways to encourage infrastructure spending by providing Commonwealth guarantees and attracting investment from super funds, and it’s also considering keeping accelerated depreciation for business investment.
Basically Australia has had an eight-year holiday from microeconomic reform thanks to the rising terms of trade, otherwise known as the resources boom. That holiday has to end whoever wins in September, but the Coalition is now drawing up specific plans to raise Hilmer from the dead, as it were.
As Reserve Bank Governor Glenn Stevens told a private audience of company directors this week, there are only two sources of rising national income – productivity and the terms of trade. With export prices declining, there is now only one.
National Competition Policy, described as Australia’s landmark microeconomic reform program, was born in the recession of 1991/92 when the Labor government appointed Fred Hilmer, Geoff Taperell and Mark Rayner as the National Competition Policy Review Committee.
Their report, known as the Hilmer reforms, led to 10 years of deregulation and privatisation by Australian governments, building on the financial and labour market deregulation driven by Bob Hawke and Paul Keating between 1983 and 1992.
But by 2005 reform exhaustion had set in. Happily it coincided with the emergence of China following its entry into the World Trade Organisation four years earlier and a resulting rapid rise in Australia’s terms of trade beginning in 2004.
Phew, Australia said, we don’t have to do the hard stuff any more, which was true for a while. Tax revenue windfalls were recycled into welfare transfers, income tax cuts and public service pensions via the Future Fund, and WorkChoices became the much nicer FairWork.
Household debt cheerfully ballooned as incomes rose with real estate values and share prices, and a wonderful time was had by all – until 2008, when America’s debt-fuelled housing bubble came to a crashing end.
Australia’s resources boom continued for another three years – that is, the terms of trade resumed their climb – because of China’s massive stimulus in 2008/09. But the terms of trade peaked decisively in 2011 and with China now settling into economic growth in the seven-point somethings and possibly six, rather than above 10 per cent, that decline will clearly continue.
The National Competition Council, which came out of the Hilmer reforms, still exists but it is no longer the barnstorming body it was under Graeme Samuel, when it critically examined 2500 pieces of legislation in a few years and doled out money to state governments for privatisation and other reforms.
As I understand it, the Coalition will re-energise the NCC and offer to return company tax receipts from newly privatised state enterprises for 10 years.
This has been a particular issue for the Queensland government in thinking about the privatisation of its electricity assets, adding to the difficult politics of it. The Labor government in Canberra has so far refused to consider donating any tax receipts from those businesses back to the state once they are privatised. A Coalition government will offer to do it for 10 years.
On infrastructure, I understand the Coalition is looking at several models, including some form of government-guaranteed infrastructure bonds.
One model being considered is the NBN, where the government owns the infrastructure and raises the capital for, say, a decade while it’s being built and then privatises. The advantage of this model is that the debt is “off balance sheet” for the government.
Alternatively the government could “rent” its AAA rating to private infrastructure developers. Coalition staffers are currently thinking about how much of the project risk should be assumed by the Commonwealth and how the contingent liability might be handled in the government’s books.
I understand they are looking at guaranteeing performance risk on infrastructure projects, but not construction risk.
Yesterday the Industry Super Network, led by chairman Steve Bracks, was in Parliament House in Canberra to launch a report called Building Australia: Super Investment Initiative. It said industry funds could invest up to $15 billion in infrastructure in the next five years, and that if other sectors of the superannuation system “stepped up” and invested to the same extent, there would be $100 billion available.
One of the key problems identified in the report was a lack of liquidity for infrastructure. Shadow Treasurer Joe Hockey has said he’s looking at addressing this with longer dated Commonwealth bonds – up to 50 years – to support long-term infrastructure projects.
As for accelerated depreciation to encourage investment in plant and equipment as well as infrastructure, Hockey has to persuade his party to drop its policy of abolishing it.
Labor re-introduced it as a pay-off from the mining tax, which didn’t raise any money. The Coalition has said it will abolish the mining tax, as well as the carbon tax, along with the business tax benefits that go with it.
However, just as Malcolm Turnbull turned the Coalition around on the NBN, Hockey has to do the same on accelerated depreciation.
If Australia is to keep growing national income as the terms of trade decline it needs a big increase in both infrastructure and operational capital investment.
Alan Kohler will be hosting two Ashes lunches with Gideon Haigh and Stephen Fay (former editor of Wisden and author of books about The Bank of England and the collapse of Barings) on June 25 in Sydney and June 26 in Melbourne. To book a table click here.