There is no question that Australia’s budget position needed urgent attention. The extent of the immediate ’crisis’ is perhaps another story. However there is a far more profound, longer term crisis unfolding in our economy. The productivity of Australian business poses one of the most difficult and long term challenges for our ongoing prosperity.
Australia has, in relative terms, enjoyed an unprecedented period of growth. Our Gross National Income (GNI) has risen steadily over the last decade at rates seldom seen since federation. According to the Productivity Commission and Australian Bureau of Statistics, Australia’s long term growth rate in labour productivity from 1973-74 to 2011-12 stands at an impressive 2.2%. Our overall growth in income or, if you like, our prosperity as a nation has been buffered by a heavy reliance on our terms of trade boosted by a bullish demand for our minerals. However, the forecast paints a much gloomier picture. Australian Government Treasury forecasts that the composition of our growth in income per capita will change dramatically in the next decade. We will have a much lower reliance on our terms of trade to boost our prosperity.
The economic stop-gap to this game changing turn of events will be productivity. In the next decade, we will become significantly more reliant on local businesses producing goods and services faster, smarter and cheaper than rivals. The reliance on productivity to just maintain our national income levels requires a seismic shift in policy. Small business must continue to rise in prominence as a source of fundamental economic reform. That is reform that drives productivity of small business up which in turn ensures Australia’s ongoing growth in prosperity.
So how do you unleash the potential of small businesses to produce goods or provide services that are faster, smarter and cheaper?
Faster:
We don’t just need to look at the cost of regulation, which is of course important; we also need to recognise that one of the greatest finite resources a small business owner has is time. We should be prioritising the unnecessary regulations that cost businesses time and remove them. This time can be reinvested into the business to enable it to grow and enhance productivity by boosting output.
Smarter:
Immediate concessions should be granted to small businesses to enhance their research and development capabilities with a specific focus on deployment of technology to improve production processes, streamline operations and leverage data. Consideration should also be given to direct assistance to ensure small businesses are positioned to capitalise on social media commerce.
Cheaper:
Consideration should be given to provision of tax concessions to small businesses that undertake innovative practices, deliver a productivity dividend or develop an innovative strategy to employ and up-skill new or existing employees. This will lower the input costs and provide a greater productivity yield.
The Government should be setting a lofty goal of turning Australia into the best place to start and operate a small business in the world. This means a preferential taxation system, long term investment in technology, simpler industrial relations and importantly a focus not just on barriers to entry, but on barriers to exit. That is, ensuring the competition parameters are set to enable a greater level playing field between large and small entities and where possible preferential procurement and swift dispute resolution mechanisms made available to small business. The relative success of the competition reforms which created the National Access Regime for access to important infrastructure could be considered as a mechanism to support small business sustainability as a means to prevent early small business exits.
By international comparison Australia has no option but to act swiftly to boost productivity through the small business sector. Whilst the global multi factor productivity (MFP) contracted by 0.3% in 2013, Australia’s contraction was alarmingly one of the highest at -1.3%. This would not normally cause massive concern if it was an isolated event; however this is not the case. According to the Australian Bureau of Statistics, Australia’s MFP has contracted consistently since 2007: -1.2% from 2007-2011, -1.3% in 2012 and -1.3% in 2013. This downward trend is statistical proof that it has been getting tougher for small businesses due to rising input costs driven by the cost of the small business supply chain. Whilst it may be difficult in the short term to address many of the input costs (with the exception of tax reform), reductions in regulatory time, increased incentives to use technology and enhance competition protections would greatly assist in boosting output and in turn our nation’s productivity.
