Taxing Australia's future

At a lunch in Sydney last week Vodafone Hutchison Australia chief executive Iñaki Berroeta pointed out that Australia’s fixed line telco costs are amongst the highest in the world and observed how this hurts the country’s business competitiveness.

Berroeta observed that Vodafone’s transmission cost were three times what’s charged in similar markets around the world. It's an observation that underlines a serious problem for Australian industry, our costs are running out of control.

While the business community and the political classes tend to focus on the pay rates of workers, the problems raised by Berroeta are part of a far deeper structural problem in Australian business costs.

Same product, higher cost

One part of that structural problem is gouging by foreign suppliers as illustrated in last year’s Parliamentary review of IT prices that found Australians pay anywhere between 50 to 100 per cent more for IT-related goods than their overseas counterparts. (IT price inquiry spells out 'Australia Tax, July 29, 2013).

Sydney photographer Christopher Shain summarised the problem facing Australian businesses in his submission to the inquiry: “The photographs I produce are used all over the world and I compete with similar photographic businesses from other parts of the world, I’m not sure why my business costs are higher in Australia when the product and service are identical.”

Those increased supplier costs also have consequences for the Australian retail industry – the nation’s biggest single employer – as consumers find cheaper products overseas. As every savvy online shopper knows, even if the retailer lobby achieved their aim of having GST and duty levied on overseas internet purchases, the price differential is so great the roughly 15 per cent in taxes would make little difference.

Asking the wrong questions?

IT costs are an important factor for a modern economy, however, they are far from the biggest. Energy costs are an increasingly higher factor and Australia’s have been soaring in recent years.

At the Sydney B20 summit two weeks ago, GE’s vice chairman John Rice flagged that instead of the carbon tax Australians should have been focusing on why electricity costs are rising.

"You’re asking the wrong questions,” Rice told a panel which included the Treasurer Joe Hockey.

His concerns echo those perennially raised by Dow Chemicals’ CEO Andrew Liveris, who on regular visits to the country of his birth, has flagged that gas export policies are going to cripple Australian industries as costs soar.

Liveris’ latest warning has also been illustrated by fertiliser manufacturer Incitec Pivot which found Australian gas supply prices are five times what’s on offer in the United States.

Comparisons with cost the United States often draw this sneering reply “well that’s okay if you want to work for $2 an hour and rely on tips for a living wage”, but while that view ignores the complexity and diversity of the world’s biggest economy, Australia is expensive by European standards as well.

The Australian Financial Review last month looked at the differential in Australian infrastructure costs against other nations. They found local freeway tunnels were costing 50 per cent more than their French equivalents. France can scarcely be called a low labour cost country.

On a personal anecdotal level this writer’s father posted a 10kg package from Germany to Australia last year for 45 Euro. The cost of sending it the other direction is $115 – a mark up that would make even the staunchest CEO blush.

The high cost of Australian postage is crippling local e-commerce business and puts our local beleaguered department stores at an even greater disadvantage against their better run and innovative global competitors.

So something is wrong in Australia where we have some of the world’s most profitable banks, telcos and supermarket chains at the time where prices are running well ahead of wages. In fact cutting costs, the answer to Australia’s productivity problem, so beloved of many business and political commentators, may well turn out to be deeply counterproductive in an economy which depends upon domestic consumption.

A nation of price takers and price fixers

Comparisons against countries like the United States, Germany and Singapore are useful if Australia is to accept it has become a high cost business country; there’s nothing wrong with this – it indicates citizens have a high standard of living – but to maintain that lifestyle means producing high value goods the rest of the world wants.

The nation’s policy makers and business leaders believe the opposite. In a 2010 speech to the Australia Industry Group, Reserve Bank governor Glenn Stevens sneered at those advocating Australia diversify its economy into more value adding industries.

“Australians were told by more than one prominent visitor that year that we lived in an ‘old economy’, with the implication that we needed to shift towards the production of IT goods.” Stevens said told the business leaders.

The one prominent visitor Stevens was sneering at was a certain William Henry Gates III. Bill, as we like to call him, had the temerity to suggest that Australia needed to diversify its economy into fields like software.

We’re now facing the consequences of the Stevens Doctrine with an economy hopelessly dependent upon high property prices propping up domestic consumption and an export sector increasingly focused on bulk commodity exports.

Australia has become a price taker with a local business sector locked into cosy oligopolies. We are a nation of price takers and price fixers.

International business leaders like Gates, Rice and Liveris are raising alarm, as are global corporations like Vodafone. Australia has to start addressing the real reasons for our high cost  economy.