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Reserve Bank of Australia deputy governor Philip Lowe has backed the Productivity Commission’s call to boost the flexibility of the industrial relations system while fixing what he described as unequal bargaining positions in some parts of the labour market.
Warning against allowing the current national “soul searching” about the post-resources future from mutating “into chronic pessimism,” Dr Lowe said growth in living standards wouldn’t ultimately be driven by Reserve Bank interest rate decisions.
“Instead, the improvement in our living standards rests on our ability to improve our fundamentals and enhance the flexibility of our economy so that it can take full advantage of the opportunities in our ever-changing world,” Dr Lowe told a conference in Sydney on Tuesday.
Highlighting how Australia’s economic fortunes over the past few decades have benefited from unforeseen opportunities – including the rise in workforce participation, the rise and fall of Japan, as well as China – Dr Lowe suggests the best answer on how to anticipate the future relies on four areas that are outside the influence and control of the central bank. All four are largely in the political realm.
The first is maintaining a competitive environment for companies to ensure they “find better ways of doing things” and move more quickly to seize opportunities lest a competitor beat them.
“I think it is fair to say that few businesses really like competition, but, often, it is competition that drives them to do better and respond to new opportunities,” he said. “And competition benefits us all as consumers, bringing new and lower-cost goods and services to market. So, we need a regulatory environment that is conducive to new entry, including by those who are able to harness new technologies to reinvent how things are done.”
Second is ensuring the incentives embedded in the tax and regulatory system support a culture of “accepting risk and appropriately rewards risk taking.”
Third is the labour market, which Dr Lowe said has worked well over the recent boom, keeping the very large wage increases “mainly confined” to the areas where skills were in shortest supply and not allowing them to spread across the economy as a whole.
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More recently, he said the slowing aggregate wage growth has helped employment grow reasonably strongly despite soft economic growth.
“From a cyclical perspective, the labour market has proved to be quite flexible and things have worked reasonably well,” he said.
However, Dr Lowe said it was an more open question whether the country’s industrial relations system is flexible enough for structural change.
“We are more likely to be able to capitalise on our strong fundamentals if our system of workplace relations helps businesses and their employees respond quickly and effectively to new opportunities.
“This is especially so when business models and the preferred working patterns of Australians are changing. As the Productivity Commission’s recent draft report on Australia’s framework for workplace relations concludes, it should be possible to simplify and improve the responsiveness of our current system while, at the same time, addressing the sometimes unequal bargaining positions in the labour market.”
The final area involves ensuring the education system finds the right balance between readying people for an unpredictable world by developing specific technical and professional skills versus more general “cognitive skills” that are central to flexibility.
Dr Lowe highlighted that his list did not include the level of interest rates, which while important for keeping inflation low, would be unlikely to dictate growth in living standards.
The speech, titled Fundamentals and Flexibility, covers the need to both question the future sources of growth but not fall into losing sight of the nation’s strong fundamentals.
“We do need to be careful that the uncertainty that we feel about the future – and that is sometimes the undercurrent to these questions – does not mutate into chronic pessimism. If that were to happen, many of the opportunities that we do have are likely to go begging.”
Examples of how difficult the future can be to predict include the fact that many Australians did not anticipate the loss over the last 25 years of more than 100,000 manufacturing jobs – had they done so “there would have been a sense of despair about the future”.
“Yet, over this period, we have enjoyed a strong rise in our living standards, the unemployment rate has come down substantially and we have generated around four million new jobs across the economy, mostly in the services sector.”
Similarly, very few anticipated the major shifts of the global economy over the past four decades. Dr Lowe said Australians might have feared for their future in the 1970s – as Japan’s industrialisation super-charged Australian exports – had they known what would happen to that country’s economy in the late 1980s and 1990s, when it began a long quarter-century stagnation.
Japan’s slowing demand for exports was replaced by other parts of east Asia, with China most recently. “None of these big shifts in our trade patterns was widely predicted.
“The point of these various examples is that, while we might wish for certainty about the future, it is not possible to have certainty.
“Technological progress is unpredictable and when it occurs it opens up possibilities that today we have trouble even imagining.
“And patterns in the global economy will no doubt continue to evolve. While we can hazard a guess about what this evolution might look like, the future does have a way of surprising us.