IR changes diversion from real need to generate growth

This speech was delivered by Bill Shorten to The Economist's Foreign Investor Roundtable in Canberra on June 21, 2005.

Ladies and gentlemen thank you, in particular to The Economist and international CEO forum, for the opportunity to be part of this discussion.

I apologise for pulling out a script. I am in the habit myself - especially when talking to employers - of speaking off the cuff or the top of my head or from the heart, according to which is more available at the time.

But this is an occasion with a special hazard. I am facing a den of financial lions who, like subscribers of the Economist, are not going to be impressed by a wealth of accurate knowledge (even if I had it!) so much as by omissions, and slips.

I would like to talk today about what I have learned since I left the law to arrive at the AWU on April 11, 1994. I learned that in the AWU there is one enduring standard by which every AWU representative, every AWU officer, every AWU leader must inevitably be measured when representing members.

It is not whether you secure the best pay rises or whether you reverse unfair dismissals or whether you do more kilometres or whether you organise the toughest sites.

These may all be attractive credentials one may wear, modestly or otherwise.

But when the decision crunch is on in the workplace, or in the union, or indeed any business, most matters are merely casual descriptions.

What does count, the ultimate and only gauge is: Do you have growth? Have you grown the membership? Grown the union? Grown the pie? Grown the business? Grown the value? Grown the wealth?

I have not come here to tell you about the redistribution of wealth. What I will talk about - and what is more important to me as an official of the Australian Workers' Union - is the creation of wealth.

Unions are concerned with creating wealth for our members.

Working in the real economy, we get the power of growth.

We get that the future living standards of our members and their families - like that of all Australians - requires growth

We get that better opportunities for our members and their children to reach their potential requires growth

Growth is union business.

And growth should be a test of government policy.

If we agree growth is good, let me get to the main point without delay; the industrial relations changes are not only unfair and disruptive, but a detour from the real deal of generating growth in Australia.

The reason the government is introducing the new laws is politics not economics - that is to weaken its critics in organised labour.

Instead, I believe we need a generational shift in thinking in Australian politics. Australia would benefit as a nation from new attitudes to:

· business
· productivity
· trade and foreign debt
· infrastructure
· R&D
· chronic skills shortage
· participation and education
· regions

In other words, a new story of the modern Australian economy.

Sadly, the Howard Government is still fighting the last war in their approach to industrial relations.

Let us put aside the old left-right ideological split.

Let us put aside the old and unscientific theory of labour versus capital, workers versus bosses, employers versus unions.

Instead, let us consider wealth creation and then the fair distribution of the national income as the goal for a new Australian settlement.

Instead let us consider whether the Howard Government's IR agenda contributes to growth and productivity.

Building on Australia's growth

Looking at the economy generally, I am disturbed that without significant reforms, this may be as good as it gets.

· Our terms of trade (1),
· labour force participation rates and
· the working age population
are at historic highs.
But there are dark clouds on the horizon.

We face a debt crisis. (2)

The average ratio of household debt to income has almost doubled. (3)

Health and aged care costs are spiralling. (4)

And if we're to believe our host's magazine The Economist, Australian housing prices are experiencing their biggest bubble ever.

Our agriculture sector is yet to feel the full impact of climate change and other environmental degradation.

Our dangerously optimistic refusal to treat drought as a permanent fact of life not a temporary phenomenon - or in other words a tour in an Akubra is not a replacement for good policy.

We are ignoring green house gas emissions with an indecisive wait and see policy.

Productivity growth is in freefall.

Productivity - not the most important issue, the only issue

What will be the drivers of growth into the future? What will be the industries of the future?

Our ageing population sets serious limits to growth.

The gains available from current immigration levels are minor.

Government research confirms the poor outcomes from recent welfare-to-work programs.

Therefore policies to increase the working age population and labour market participation rates - while important parts of the solution - cannot alone sustain growth into the future.

Only productivity can be the primary driver of future wealth creation for Australians. Economic policy should focus on the principal components of productivity growth. You know the story:

· education and training,
· science and technology,
· research and development, and
· infrastructure and investment.

But these critical areas of economic policy have been neglected by the Howard/Costello Government. Their "hands-off" approach to our most important economic challenge constitutes an alarming dereliction of national leadership.

Apart from introducing new taxes, the Prime Minister and Treasurer are spectators at the game of national economic development. They're content on the sidelines, or more likely reclining up in the comfort of the Members Stand, while Australia takes on the Rest of the World.

I know before the start of the 1990s, productivity growth in Australia averaged 1.7 per cent (for about 20 years).

I know the reforms of the Hawke and Keating Governments set the path for the better performance of 2.05 per cent plus achieved throughout the 1990s.

I know now we've slipped to around 1.75 per cent again.

I know we are lagging behind the rest of the world. (5)

I know we need to restore productivity growth rates to the level of the 1990s and do even better. (6)

National Leadership - irreplaceable

National governments must demonstrate leadership to increase productivity and competitiveness.

Australian Governments historically have supported sectors that offered access to the most modern production techniques or technologies, for example, cars, aluminium and energy.

From Deakin to Chifley, Curtin and Menzies, the national interest justified building new industries.

In the 1980s and 1990s, the Hawke and Keating Governments co-ordinated industry plans that effectively restructured the Australian steel, automotive and wine industries.

Unions have delivered time and time again to productivity growth as essential participants in these industry plans.

Much of the hard work in delivering productivity improvements has been achieved in older, unionised industries.

Ironically, most of the challenge for future productivity growth is in the mainly non-unionised services sectors.

I don't forget about the AWU leadership and wage restraint of our steelworkers during the restructuring of the 1980s and early 1990s.

Without it, we wouldn't have an Australian steel industry, much less one with its current export strength.

We have new industries to grow.

The knowledge industries of the future where Australia enjoys comparative advantages include geoscience, agricultural science, and animal and plant biology.

More recently, biotechnology, engineering and commercial services are emerging as stronger performers.

Education, aged care, medical research, renewable fuels and environment and water industries are our future industries for competitive development.

Activist government policy to facilitate these infant industries should be a national priority.

Trade and Foreign Debt

The decline in Australia's export performance since 2000 is troubling (7)

· In 2003-04 the value of our manufactured exports fell by over $6 billion and remains miserably stagnant
· our manufactured export propensity has retreated
· Only four per cent of Australian firms are regular exporters, down the bottom of the OECD table.

Australia's net foreign debt stands at $425 billion while the trade balance has turned in its worst performance in 20 years. (8)

Currently, for every $3 generated in the economy, $2 is owed in net foreign liabilities.

Foreign debt will continue to accelerate faster than the economy grows unless Australia produces a significant trade surplus, last seen 30 years ago.

We are not encouraged to save. We are borrowing overseas to consume imports.

Foreign lenders will start to insist on a risk premium in Australian interest rates as the response to our national inability to save.

Some analysts have identified China and the currency as principal causes of the decline in exports, but I would add a third problem - the hands-off policy complacency by the current government - it's "spectator" approach to economic management.

Our major trading partners, Japanese and Korean manufacturers have enjoyed an expansion in exports to China, in particular of capital goods and have taken full advantage of China's investment boom.

Infrastructure - prerequisite to growth

The Prime Minister's recent Exports and Infrastructure Taskforce called for leadership in facilitating efficient investment in infrastructure, especially in transport. I hope the Taskforce's positive recommendations are not too little too late.

We do need:
1. to speed up timeframes and logistic impact assessments for regulators,
2. to expand AusLink to include major ports,
3. to demand better coordination of government departments and regular infrastructure audits by the Productivity Commission.

I would like to see the government go further to get major projects underway (9), including by backing long-term investment strategies.

Instead of the market index obsession that dominates so much decision making.

Instead of trying to micro-manage and politicise the IR arrangements of construction contractors.

Why not consider funding alternatives for strategic infrastructure, such as US-style bond schemes? The Commonwealth could allow State and Local governments, and private companies, to issue tax-free infrastructure bonds for approved projects, which, unlike the previous infrastructure bonds, would not be able to be negatively geared.

Despite the scale of Australia's infrastructure problem (10) the Government presides over under-investment in everything, from roads to sewerage to drainage. It prefers to maintain its audience role rather than to be an actor in the challenge of national infrastructure development.

Research and Development - the numbers are unnerving

The levels of Government expenditure are in line with the OECD average, but Australia's business expenditure on R&D is one of the lowest of any country measured.

There are insufficient incentives for Australian business to invest in research and development

I remember in the decade to 1996 business R&D annual growth averaged 11.4%, but slumped to 2% under Howard between 1997 and 2002.

I remember manufacturing R&D growth over the same period fell from 10.5% per annum to -1.9% per annum.

But I didn't know that each of the world's top 20 multinational companies spends more on R&D than Australian industry combined.

I do know the trade deficit in R&D intensive industries, including office machinery, computers and electronics, has bloated under the Howard Government (1996-2002) while the deficit for pharmaceuticals has almost doubled.

We know that the CEO turnover rate in Australia is high compared to the global average. Average tenure periods of less than five years are less than the widely acknowledged minimum five-year cycle for the payoff from investment in R&D. The Government needs to recognise the short-term time horizon of Australian business in making these investments.

Australians are world class at innovating new techniques and ideas. We have world-class medical research centres and our scientists are internationally recognised for their research work. We are a world leader in cataract treatment, so why aren't we a world leader in the downstream interocular lense manufacturing? We all know of other examples.

Much more can be done to support the local development of these applications instead of selling them or value adding them offshore. (11)

Why can't we imitate the Canadian Government which has established more than 1300 new research professorships across scores of universities? We can beat them at the Commonwealth Games, why not in the universities?

The Australian Government by contrast remains sidelined in such long term policy planning. Having cut the former Labor Government's 150% tax concession for R&D shortly after coming to office in 1996, the Howard Government has remained a spectator as the nation's R&D fortunes decline.

Participation and Education - we can't dumb our way to greatness

Total Government spending on education has fallen as a percentage of GDP.

This is despite a small increase in private spending on education.

Australia has been unique in failing to lift public education spending commensurately with the increase in private spending.

Education improves not only productivity but also participation, particularly in older age groups. Male participation rates in the age group 70-75 in 2001 were, for those with a degree, around double for those without a degree. Considering the ageing population, so-called life long learning - training and re-skillling for people already in work - should be a major priority. (12)

The Howard Government has priced tertiary education too high for many people.

The share of 15-19 year olds enrolled in post-compulsory secondary education is lower than in many OECD countries.
The skills shortage - warned about by unions - is now a matter of record.

There are no incentives for companies to employ apprentices.

Simply promising 26 new TAFEs around Australia without a plan to work with industry and unions to provide better TAFE support is band-aid politics.

Instead of taking responsibility for boosting public investment in education and training, again the government is assuming a spectator role, sitting by and watching as education becomes increasingly privatised and more costly. (13)

Industrial Relations - Bonfire of the vanities

The Government hasn't released most of its industrial relations changes yet. I guarantee that there'll be all kinds of technical problems and uncertainty and confusion once we get the detail, requiring years of litigation and legislative amendment.

But from the published outline, we do know that we're in for an attack on vulnerable sectors of the labour market where there will be downward pressure on wages and working conditions. This is likely to be concentrated among lower skill workers in smaller and medium businesses, whose employers are being encouraged to use the abolition of unfair dismissal laws as a lever to force people onto individual contracts.

Removing minimum wage fixing and agreement making powers from the Industrial Relations Commission will extend the downward pressure on wages and conditions across the economy. (14)

So we can expect real cuts to minimum wage rates extending to all award classifications - that is real wage cuts for around 1.6 million workers, mainly retail, hospitality, services, horticulture.

Many more will lose money through the abolition of redundancy payments, weekend penalties and shift allowances.

Competing on minimum labour costs is a zero sum game for advanced economies like Australia. There is little if any increase in productivity achieved by further restricting wage rises for the low paid. If the aim is to get down to China's 65 cents an hour, then the Government should say so.

The truth is more of the wages share will shift into profits, which is particularly unfair because many of the affected industry sectors have experienced better than average productivity growth over the last few years.

One result will be a further polarisation of the labour market. As unions meet the challenge of protecting wages and conditions through enterprise bargaining, non-union minimum wage workers will fall further behind as there is no incentive for their employers to bargain with them.

We don't have the time to go through all the arguments, but I just can't understand how anyone in this room can seriously tell me that that the current minimum wage of $12.75 per hour before tax is too much. Apart from all the theories, just look at the record. The current minimum wages system has been associated with Australia's longest sustained period of productivity improvements, overall growth, low inflation and falling unemployment.

The truth is the IR plans will not bake a bigger economic cake but rather pinch some of the slice that goes to workers.

The current IR legislation is about smaller slices not a bigger cake.

The economic case for the industrial relations changes has not been made out. They are not the answers to the problems of debt-driven consumption, skills deficits, infrastructure shortages, lack of research and development or our ageing population.

The Government cannot have it both ways. Unions cannot be a critically important problem and so irrelevant as to be facing extinction (in 15 years' time according to Workplace Relations Minister Kevin Andrews). On one hand they point out that 80% of employers do not even deal with unions, but on the other they make them a central plank of economic policy.

The downward pressure on non-wage conditions is particularly concerning in the areas of occupational health and safety. This is bad policy and may involve significant cost shifting - we know who ends up paying for workplace fatalities, injuries and disease. (15)

I know many of the employers I work with intend to continue with enterprise bargaining because it has delivered the productivity, certainty and industrial harmony that serve their business interests.

But there are always some employers who like to push the limits. I expect that they will cause some big disputes, which will attract international attention.

That the government's changes promote conflict and disruption at a time when the level of industrial disputes is at an historic low is another signal that these changes are politically driven, not based on economic reasoning.

To foreign investors in Australia, the industrial relations changes will mean a period of uncertainty that you should be prepared to factor in to your decision making. Long-term national economic policy should be above partisan politics and legislative instability under changing governments, but that's exactly what these changes will mean. There is a trade-off to Australia's low sovereign risk. For a century Australian democracy has included collective industrial rights and institutional workplace regulation. Abolishing those aspects of the historic national "settlement" means political uncertainty.

I would infinitely prefer the peaceful path to productivity than that of aimless and protracted conflict that compromises economic growth. Banning industrial action does not create a cooperative and productive workforce. Strikes are not the only form of protest or disobedience. And you won't create a loyal and harmonious and productive workforce by minimising wages and conditions, sacking people without reason or introducing compulsory individual contracts.

There are other downsides for business in these industrial relations changes. Lower wage rises means less consumer demand for many industries and less savings for investment. There will be an undermining of the positive role of unions in coordinating workforces and providing efficient bargaining services. Union militancy will be rewarded at the expense of moderate union behaviour.

Apart from opposing and ameliorating the changes in every way we can, unions will work within the new IR system when it takes shape. Unions will go on with their core business - bargaining for better wages and conditions, standing up for members in whatever forums are available. And we will continue to be successful for the reasons we have in the past - that is wherever workers are organised and effectively exercise their collective power.

I believe these changes are a political blunder by John Howard. The unions' advertising campaign getting underway this week emphasises the greater insecurity facing millions of people. We are working with groups across the community to inform employees about how seriously they could be affected.

Government MPs will be targeted to justify the changes to their constituents. I have spoken to hundreds of workers since the changes were announced and not one of them likes the idea of being sacked without recourse or being forced to accept an individual contract. I assume a lot of these people have voted for John Howard in the past but now are not so sure.

So there is a lot of political pain to come. This campaign is not just about the hip pocket nerve. Most Australians are politically middle of the road. Dismantling the fair go in the workplace is radical and extremist policy.

Conclusion

The Howard government has consistently collected higher than forecast revenue from the GST and income bracket creep. But this has also allowed the Government to neglect the real challenges for long-term economic growth - instead relying on windfall tax receipts to retire Commonwealth debt.

Your companies invest in Australia for a range of reasons;
· the biggest economy in SE Asia
· excellent law and order
· rules of investment that mean you get what is promised in commercial contracts
· rules that don't keep changing
· good legal, health and education systems.

In short, you seek the benefits of a liberal democracy. We do not have the military or religious factions or corrupt industrialists dictating the rules. A check and balance in a functioning liberal democracy with its low commercial risk is a free functioning trade union movement.

Try investment in countries without a free functioning trade union movement. You know the list - North Korea, Syria, Burma, Zimbabwe.

I mentioned earlier that it seems as if the Prime Minister and Treasurer are just spectators at the main game of economic reform in Australia. There they are - sitting by - up in the Members Stand, watching the game on imported plasma televisions, served by a minimum wage worker on a soon to be stripped hospitality industry Award.

But time is running out in the match of Australia versus The Rest of the World. Fiddling with the tax system or beating up on low paid workers are not the answers. Howard and Costello have to stop being spectators and get into the game. If they don't start kicking a few goals for Australia soon, then as a nation we are all going to lose.

I would like to leave you with a few questions about the priority for economic policy in Australia. They are questions that should be asked if we're serious about promoting long-term productivity and building competitive industries, rather than punishing the government's political critics in trade unions.

I'd like to ask what would be better for your business - a reliable supply of graduates and tax deductibility for the cost of training staff, or converting one collective agreement for 200 workers into 200 identical individual contracts for one workplace?

What would be better for your business - resolution of transport and energy infrastructure bottlenecks, or not paying overtime to loyal staff members who stay back to finish the job?

What would be better for your business - accelerated depreciation allowances for capital investment for technology purposes, or having the Australian Electoral Commission have to come out to you business every time a decision is being taken on any form of possible industrial action?

What would be better for your business - a long-term commitment to 150% tax concession for investment in research and development, or legalising unfair dismissal for businesses employing less than 100 employees?

What would be better for your business - a long term export development program involving government, employer and employee cooperation, or keeping the minimum wage below $13 an hour?

What would be better for your business - predictable long-term economic policies for productivity, or the uncertainty and conflict of politicised and bureaucratic industrial relations laws?

Thank you

Bill Shorten
National Secretary
The Australian Workers' Union

Footnotes

1 According to the Reserve Bank, the terms of trade are likely to have increased by around 50 per cent over the period 1987-2006, unwinding the decline over the preceding 30 years.

2 At 7.1 per cent of GDP, Australia's current account deficit is unsustainable in the longer term. Export volumes are falling and domestic consumption rather than exports has been fuelling Australia's economic growth.

3 Under the Howard Government to 105 per cent, (55 per cent under Hawke and Keating).

4 Demographic change has the Federal Treasury warning of budget deficits of 5 per cent of GDP by 2040.

5 The OECD has recognised that productivity measures consistently show that output per hour worked in Australia remains below that of technologically leading countries - in 2003 Australia's GDP per hour worked was 80 per cent of the US level. In 2003, Australia ranked 16th in the OECD's productivity rankings.

6. This would increase real GDP in 2044-45 by nearly $10,000 per person, according to the Productivity Commission

7 During the 1990s, export volumes grew strongly at about 7.5 per cent a year with growth in manufacturing export volumes at 12.5 per cent per annum or around $70 billion. Since 2000 total export volumes have grown by only 0.9 per cent, with growth in manufacturing export volumes slowing to around 3.8 per cent

8 In particular, imports of Information and Communications Technologies (ICTs) goods and services which were $19 billion higher than exports in 2004 - are fueling the trade deficit and making up a growing share of the trade deficit overall (see Australian Computer Society Annual Report prepared by John Houghton, Centre for Strategic Economic Studies, Victorian University).

9 I've spoken before of my support for plans for a Melbourne-Brisbane regional railway linking rural communities through Victoria and western New South Wales. Apart from its improvement to business transport, this development could be essential for building up regional centres as our capital cities outgrow their limits. Why haven't we got this project happening already?

10 A recent study by the Australian Council for Infrastructure Development estimated there had been a $25 billion under-investment in everything from roads to sewerage and drainage in recent years. A BCA study estimated that fixing export bottlenecks as well as water, energy, road and rail transport services could mean an extra $16 billion increase in economic growth per year.'

11 Australia has much strength in Information and Communication Technologies (ICTs) but we are not capitalising enough, particularly in our services trade, such as innovative software engineering and project management.

12 Labour force participation rates among 55-64 year old Australians are low compared to other OECD economies. The Department of Employment and Workplace Relation's pilot study on bringing Disability Support Pensioners back into the labour force found that only 24 per cent of those studied secured full time, non-casual employment. This compares with 60.6 per cent for the economy as a whole. Most of the jobs were casual and part time with lower levels of productivity, making the Government's welfare to work policy extremely inefficient.

13 The OECD has indicated that it does not want to see tinkering but radical reform to stop labour force participation from flat-lining in the face of Australia's aging population. A range of policy prescriptions is recommended to lift participation rates by retaining those already in work and by assisting those out of work into work (OECD, Aging and Employment, Australia, June 2005).

14 To give some idea of the likely extent of the pressure on wages, we can look to the Government's submissions to the unions' minimum wage cases since it was first elected in 1996. Under the Government's proposals, the minimum wage now would be $50 less per week - that is $434.40 per week instead of $484.40. In the last case decided by the commission last month, which awarded a $17 a week increase, the Government argued for only $11 - that is 2.35% or less than inflation.

15 The changes also facilitate dangerous and extreme hours of work. Trying to balance work with family and personal responsibilities is already difficult enough for most people. Making it even harder is likely to have a negative impact on participation rates.