WITH the federal election months away, the Australian Chamber of Commerce and Industry chief economist Greg Evans (pictured), advocates for economic policy change.

Few Queensland business operators would disagree that overall demand conditions remain challenging and the latest news on the economy supports this view.

The federal budget is under stress with lower than expected revenue growth, while little has been done to prune back spending. Inevitably this has led to unhelpful signs that business once again will have to plug revenue gaps and face the likelihood of higher taxes.

The official cash rate has fallen to an historic low. This will of course reduce borrowing costs where banks pass on the reduction and will hopefully stimulate greater demand across the economy. However it also underscores the fragility of the domestic economy and it is fair to say a ratcheting back of the Reserve Bank’s much more buoyant view about the economy.

With the federal election now three months away business is becoming more focussed on what the next government needs to deliver. The clear message is that mainstream business places prudent stewardship of the economy as the number one priority.

ACCI is seeing a pattern where many businesses especially smaller operations are hibernating until a clearer and more optimistic economic outlook appears likely to take hold.
Business lending remains flat as proprietors play a safe game and show a reluctance to extend facilities in a period of uncertain demand. This impacts expenditure on both plant and equipment and building and structures, despite favourable timing opportunities with a strong currency affording potential cost savings. Evidence also suggests continuing weakness in the labour market with job shedding taking place in sectors including construction and retail.

Our own business surveys which are amongst the largest and long running in Australia reiterate this subdued performance. The round of our March quarter surveys indicated that general economic conditions, sales revenue, profitability, investment and employment remain in contractionary territory with specific indicators at or near historic lows.

A well-recognised feature of the domestic economy in recent years is the uneven nature of economic growth. The peak of the capital investment stage of the mining and energy expansion is expected to occur in 2013 which will encourage more broad-based economic growth.

There is no formula how this transition might take place or necessarily any economic precedent to follow and it is not an automatic response.

The record high terms of trade and accompanying income boost derived from higher commodity prices was a welcome and perhaps longer-than-expected dividend for the national economy and for public revenues.

However it provided a security blanket which delayed the need to act more quickly on productivity-enhancing reforms which would have helped business. It also bolstered revenue to government delaying the urgency for proper public expenditure discipline and encouraged more indulgent spending across the wide sweep of government.

There are four economic reforms a new government should implement.

1. Provide for a balanced budget: Strong fiscal management underpins a healthy economy and despite the budget challenges we cannot afford to settle for a vague and ever receding surplus objective. It’s an important economic benchmark that Australia returns to surplus as soon as possible and begins the task of reducing public debt. To achieve the surplus objective, ACCI considers this will require an independent rootand-branch review of government spending.

2. Reduce the overall tax burden and restore incentive: Addressing our fiscal position provides the basis for not just tax reform but lower taxes which will lead to enhanced economic activity. Our taxation system needs to be tilted to provide the incentive to invest, encourage workforce participation and for small business it needs to reward risk taking and entrepreneurship.

A period of policy stall has left us with an increasingly uncompetitive and productivity detracting taxation regime. In addition to calls for a reduction in company tax, personal income tax cuts remains a priority area of reform. High personal rates distort efficient decision making including workers choosing not to return to the workforce or encouraging income to be spent on consumption rather than saving and investment. Importantly personal income tax is not just a tax on wages and salaries. Personal income also includes individual.

Personal income from unincorporated businesses which can be particularly responsive to the level of tax activity and willingness to take on risk.

3. Curb the growth in regulation: A future government needs to recognise the impost of red tape on business both its direct cost and the way in which it alters decision making by business owners – and have a commitment to reduce its burden. The growth of regulation and the weight of existing regulation is an endemic problem across all modern economies and to mitigate its growth lawmakers will have to be committed to resisting legislative responses as their first reaction. They also need to acknowledge it is not up to government to create a risk-free society for as many of its citizens as possible.

4. Reduce energy costs and abolish green programs: For a country that built its postwar industrial base and urban expansion on the provision of accessible and affordable energy it is a monumental failure of policy that many Australian states and territories now have close to the highest retail electricity prices in the developed world. Running at odds to the government’s message of support for the manufacturing sector, we are beginning to see evidence that high energy costs are inducing a deindustrialisation trend in the economy.

The next government should abolish the carbon tax, the renewable energy target and other green programs.

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