Our economic dream run is over

Moira Geddes talks to national economics editor Jessica Irvine about the state of the economy and what it means for interest rates.

Australia is at a crossroads ... Catherine Livingstone, The Business Council of Australia president. Picture: Attila Szilvasi Source: News Corp Australia

AUSTRALIA is sleep walking its way towards economic demise.

After two decades of uninterrupted economic expansion, the rot of complacency is setting is.

Growth has slowed; joblessness is on the rise.

UNEMPLOYMENT RATE: At 10-year high

Our once in a century mining boom — which boosted national income — is coming to an end, and we have precious little idea what will replace it.

MINING BOOM: Households miss out

The Reserve Bank has done all it can to stimulate growth by slashing borrowing rates to record lows.

If businesses can't muster the confidence to invest, we will stagnate. The election of a Coalition government was supposed to act as a circuit breaker.

It hasn't.

The morass of minority government has been replaced with the instability of a so-called Starwars Senate. In its hubris, the Abbott government has proved even more inept in pushing through its agenda than Labor did in its last term.

Government's get one chance to fix the books.

But it's now abundantly clear Abbott's first budget — too soft by his Treasurer's measure and only half as tough as Howard's first budget — has failed to hit the mark.

Many of the measures announced on May 13 will never see the light of day.

POLL: Abbott backed over MH17 but not Budget

First Budget is a failure . Prime Minister Tony Abbott must know many measures will never be approved. Source: AP

Australia's budget balance remains on course to remain in deficit for at least a decade to come.

Over time, as incomes grow, the tax system will catch more people in its web, raising income tax paid and helping to restore the budget to balance.

Left untended, the garden of our tax system will go to seed. Individuals will pay higher taxes on their labour. Already our top marginal tax rate is approaching 50 cents in the dollar, once Medicare levies, surcharges and debt taxes are included.

Companies too will be left to pay a higher corporate tax rate that, at 30 per cent, is already higher than many of our other international competitors.

Reliance on these direct sources of taxation will grow. Meanwhile, a growing proportion of our spending — on health, education and food — will escape the tax net thanks to carve outs from the GST base.

Costly tax loopholes, that largely benefit the rich, will also grow. Superannuation tax concessions will balloon.

Tax breaks on housing, like capital gains tax concessions and negative gearing, will continue to feather the nests of the already well off.

These forces which will slowly drag the economy down are already in motion.

It's time, after the failure of the budget, for the government to refocus on phase two of its reform agenda: tax reform.

If we can't reform taxes to unshackle growth, we'll be left essentially relying on the American and European solution of artificially cheap debt to inflate our economy.

The president of the Business Council of Australia, Catherine Livingstone, this week correctly identified Australia as at a crossroads. But her prescriptions for growth — reducing red tape, harmonising regulations and a greater government focus on promoting winning industries like mining, agriculture and energy — fall short of the mark.

The truth is, business should not be looking to government to set the agenda.

Has done all it can to stimulate the economy ... Reserve Bank Governor Glenn Stevens at the RBA in Sydney Source: News Corp Australia

Reserve Bank governor, Glenn Stevens, said it best last week: "My sense is that in a lot of areas of business people are sitting around tables saying yeah somebody needs to do something and we're waiting for someone else to do it."

All governments can really do to help business in the long term is to get out of the way as much as possible. The main way governments interfere with the market is through taxation.

As a party committed to small government, the Coalition should be a natural champion of reforms to increase the base and rate of the GST and use the revenue to fund tax cuts on the rewards from labour and profitmaking investments.

But if a government can't sell the need to increase excise on petrol to the Greens, what hope have we that it can mount the case for a higher rate of GST — a great big new tax on everything?

Glenn Stevens again: "The key question might ultimately be really whether the current processes can result in collective confidence in the country that we can actually grapple with difficult issues, long term issues, have a sensible conversation and come up with some solutions."

Australia's economy does stand at a cross roads; it's time to push ahead on the path of economic reform.

Prime Minister Abbott has demonstrated honourable leadership on the international stage in the wake of the MH17 tragedy.

At some stage, it will be time to return thoughts to home and the reform challenges we face.

That time is fast approaching.

JESSICA IRVINE IS NATIONAL ECONOMICS EDITOR

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