The third way: why business and unions are both wrong

So, you can bet that industrial relations, which for employers amounts to keeping the lid on salaries if production isn't also increasing, is again about to hit the headlines and become contentious. Like the unions' logic that wage increases will help increase effective demand, that these should not be allowed to occur unless there is a corresponding increase in productivity also seems a valid proposition. Both sides are partly right.

However, as our economic performance worsens, the inevitable outcome of rapidly hardening attitudes between unions and business is likely to be greater strike action and IR conflict. Whilst this tension between labour and capital is age-old, neither side offers resolution to the immediate problem of ineffective demand.

If unions have their way with pay rises, it will be inflationary and put further pressures on business to reduce staffing levels. If business holds its line on no further pay rises, from whence shall effective demand arise?

If the current approaches of labour and capital can be seen not to address the problem, is there any alternative to these rapidly bifurcating attitudes? Must we find ourselves in one camp or the other?

Let us consider how to provide wage increases without adversely affecting business or generating inflation.

The Henry review of the tax system seems to offer the only solution for Australia. Ken Henry's panel strongly argued the need to abolish many inefficient taxes that adversely affect business, increase its costs and add to consumer prices.

The tax inquiry showed a transition to a greater reliance upon natural resource rents and reformed State land taxes, both being in the nature of a community-generated surplus product, otherwise known as economic rent, won't add to business costs if a greater part of it is captured to revenue coffers.

As natural resource-based revenues do not add to business costs is the one point on which all economists do agree, it's a pity neither of the major parties has been prepared to take this up and educate the public to that effect. Vast ignorance exists on this critical point, and the parties remain fearful and delinquent in not mentioning it.

It is therefore clearly possible that tax cuts can deliver increased incomes both to businesses and consumers without being inflationary.

Is this not the solution to the impasse currently confronting unions, businesses and all Australians? Would not this action assist debt to be paid down whilst also restoring consumer confidence that the tax system is finally providing better signals, namely, that increased productive effort will be rewarded instead of punished?

If the public tax forum to be held in Canberra on 4^th and 5^th of October fails to grasp this nettle, Australia's economic future appears certain to grow increasingly bleak.