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May 4, 2012

Checking the docket on how expensive it is to do business in Oz

The business claim that the government is making Australia more expensive to invest is is completely wrong.

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Update below

Australia is a high-cost place to do business, apparently.

I know because I read it in the papers regularly. Tom Albanese, of Rio Tinto, complained this week about the high cost of doing business in Australia. BG Group saying the cost of its Gladstone coal-seam gas project have blown out. The Business Council cited high costs back in April. One of those absurd “business roundtables” the AFR conducts, back in February, was given over to business executives lamenting “we’re becoming a high-cost, low-productivity nation”.

Usually the fault is laid at the blame of the government. Labor was “anti-business”, complained Graham Bradley in February, mainly because of the Fair Work Act. But the carbon tax cops criticism too. Today the head of the AIG complained that the carbon tax was creating uncertainty because, unlike the GST, businesses couldn’t calculate its impacts.

So let’s look at the evidence.

Has the Fair Work Act increased costs for business? Let’s look at the ABS’s unit labour cost index. When the index is above 100, wage pressures are assumed to exist. How has it fared under this government?

So, this is pretty much the only government in 30 years to eliminate wage pressures for business. The only area where the government has failed to curb wage pressures has been in executive remuneration, which continues to relentlessly increase at rates well ahead of inflation.

How about industrial disputes? Let’s have a look at the long-term trend. This is the number of days lost to industrial disputes per thousand employees. There was a much-vaunted spike in disputes in the September quarter last year, mostly driven by aggressive employers, but otherwise the level of disputes remains at historic lows.

What about the business cost that is in the direct control of government, tax? Last year’s budget papers tell us the ratio between company tax to corporate gross operating surplus:

That is, outside mining, the overall tax take from business has fallen as a proportion of gross operating surplus. Plus, there’s the small matter of the corporate tax cut the government wants to introduce, which the Coalition and the Greens are opposing. In fact, this is a low-taxing government compared to its predecessor. Remember the Coalition’s rhetoric about being the party of small government, then have a look at tax revenue as a proportion of GDP and figure out which side of politics taxes less:

What else could the government be doing? Well it could avoid stimulating the rest of the economy so companies in the resources sector such as BG Group that need construction workers and material aren’t competing against the rest of the economy. And, lo and behold, the government is engaged in a massive fiscal contraction even before we get to the issue of a budget surplus for 2012-13.

What about the carbon price? Is that really a major source of uncertainty for business? Innex Willox of the AI Group laments that the impact of the carbon price is harder to calculate than the GST. But the carbon price impact will be small compared to that of the GST. Work done by the CSIRO and AECOM for the Climate Institute shows the price impact from the carbon price will be 0.6%, barely above the impact of Cyclone Yasi last year (0.5%), less than Cyclone Larry (0.8%) and less than a quarter of the impact of the GST (2.5%).  Treasury’s assessment is that the impact will be 0.7%.

That’s the impact on consumers, not businesses, but it gives a clear idea of the scale of impact compared to the GST that Willox believes was so much easier.

The historical data suggests that, when it comes to labour and tax costs, the claim that Australia is becoming more expensive is dead wrong. In fact, it’s the reason why the wage share of national income is currently only just above its historic low of 52%, while the profit share is higher than at any time before 2008. And that’s why capital expenditure is at record levels — nearly 30% of GDP. The business decisions of investors contradicts the claim that we’re driving business away with high costs.

The issue is not so much whether Australian is becoming a more expensive place to do business, as whether Australian business will ever be satisfied or whether it will continue to push for ever more wage cuts and corporate tax cuts at the expense of the rest of us.

Update: The ACTU’s Matt Cowgill says I’ve misused unit labor costs – see comment 2. For a detailed treatment of the issue (esp. minimum wages) see pp.44-54 of the ACTU minimum wage submission linked to above (and here).

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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53 thoughts on “Checking the docket on how expensive it is to do business in Oz

  1. Jackol

    Mundi Mundi writes some nonsense:

    How can tax recipients as a percent of GDP be steady, while the governments budget as a percent of GDP has continuously raised?

    It has continuously raised has it? Where are the figures for that? I’d be fairly confident that you’re just making this up. Government expenditure did increase to cover the GFC, but it has been falling since then.

    This is because not all payments to the government count as ‘taxes’. If you have to buy a permit, or a forced to buy a government ‘service’ this is not a tax, yet its still a cost to a company. Try start a bank you will be down millions to the governments before you even lose a single cent in tax.

    You have no idea what the figures include or exclude. To work that out you’d have to go back to the original ABS stats, and I believe that they include all Federal government revenue; I could be wrong, but you’ll have to provide a reference to show that.

    Fundamentally, government revenue fell off a cliff during the GFC and hasn’t recovered to anywhere near pre-GFC levels; it has very little to do with government policy, it has been a structural change related to the essential de-leveraging being undertaken by both consumers and businesses (or to put it another way, the pre-GFC economy was distorted by an unsustainable debt expansion that should not be used as a reference point for “normality” by anyone).

    There is a lot going on, but the stats don’t bear out the contention that the cost of doing business in Australia has gone up in any way that is controllable by the government (the exchange rate is basically out of their hands).

    Additionally the “productivity trolls” are out in force again – productivity is GDP per hour worked – paying people less does not improve productivity; it may improve profitability, but if you start off by saying “productivity has been falling and therefore X and Y and Z”, you need to understand what productivity, as it is measured by the ABS, actually means. It is patently obvious that most business spokespeople either do not know what affects productivity, or they figure they can get away with slogans about productivity on the assumption that the general public is too uninformed to work out that the business representatives are gilding the lily.

  2. mundi mundi

    I think the author is a bit out of his depth here. None of these graphs have anything to do with the cost of doing buisness.

    How can tax recipients as a percent of GDP be steady, while the governments budget as a percent of GDP has continuously raised? This is because not all payments to the government count as ‘taxes’. If you have to buy a permit, or a forced to buy a government ‘service’ this is not a tax, yet its still a cost to a company. Try start a bank you will be down millions to the governments before you even lose a single cent in tax.

    The unit labor cost index is missleading because it does not take into account entitlements earned. The unit cost for 9-5 labor has gone down, the unit cost for non 9 to 5 labor has exploded and is at an index of over 250, yet he conviently ignores this graph.

    Low working days lost per thousand employees proves nothing. If minimum wage and entitlements increase, of course industrial action will decrease, not to mention that under the current fair work act, any industrial action apart from complete shut down is not possible by the employer. The government have basically made industrial action illegal – for both sides. This doesn’t magically make it cheaper to run a buisness or even suggest that new laws are making a more stable economy – it just forces the bucket to be kicked along – ensuring that when companies do go down – they will go down in flames quickly.

    The GOS graph is flat. There are only 2 points in the latest down trend. This is not staistically significant to indicate anything.

  3. Simon Mansfield

    Matt – I wasn’t suggesting regulation was the cause of higher costs in Australia. The Aussie dollar has been a central problem for many businesses – along with the high cost of material inputs and real estate costs.

    As to productivity – BK and GD have trotted this issue out regularly as a stick to hit business with. Calling them lazy, lacking in innovation and whatever this week’s anti-business sledge might be.

    Today’s article is just another take on the same theme. Due to the green/left nature of the Crikey readership it plays well to the peanut gallery and reinforces the prevailing prejudices of many Crikey readers who have an inbuilt bias against business.

    Statistics hide all sorts of trends in the local economy. Many businesses that are exported exposed have actually become much more efficient – but as revenues in local dollar terms have fallen so much it’s hard to see the productivity improvements.

    Of course many of these businesses now employ a lot less people and have used improved IT processes among many actions to reduce local costs and remain in Australia as operational businesses.

    But when the mining boom ends in the next 18 months or so and the dollar corrects back below 90 cents – we could well see a very quick improvement in a whole slew of businesses. The trick is to keep as many of these businesses going for a bit longer and hope they are still around when the dollar does correct.

    If it wasn’t for the feral opposition the government would have a lot more room to move – but given Labor is facing annihilation it might as well damn the torpedoes and do what needs to be done to defend the national interest and to hell with Abbott and his fifth columnist mates at Lies Ltd.

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