The Budget - working harder does not mean smarter

A Malaysian friend recently reflected on her experiences working in the Malaysian and Australian corporate sectors. “Compared with you beach-dwelling, boozy Sydnersiders”, she said, “Kuala Lumpur and Singapore work much longer hours”. But the difference, she opined, lay in productivity, efficiency and innovation. A 14-hour day sounds impressive on paper but when two-thirds of it is spent complying with needless formalities, giving face to superiors and gazing out the window, 6 productive hours in an innovative Australian business trumps our competitors.

It would be reassuring to believe this favourable comparison. However, we live in times when the tightly regulated French labour market records productivity levels well ahead of Australia and when the factor advantages of our regional neighbours, China and India, guarantee that their exports, in manufacturing and low-end services respectively, will exponentially outperform Australian competitors.

And in the midst of this, Treasurer Peter Costello has delivered a Budget whose central message to the nation is that we must work harder and the Government will invest its surplus money to help us do it.

The Government’s cash bonanza comes mostly from increased company tax revenue. In turn, increased corporate profit comes mostly from companies engaged in the sophisticated and highly original business referred to by economists as “digging stuff up, putting it on bloody big boats, and sending it to China”.

That insatiable demand for commodities comes from a Chinese economy fuelled by an enormous pool of domestic savings, applied by poorly governed state-owned banks to debt finance for inefficient and frequently corrupt enterprises, with wanton disregard for their ability to meet interest payments or to securitising their assets as collateral for the principal sum.

The numbers are terrifyingly big. Standard & Poor’s last week estimated that two of China’s big four banks, Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China (ABC) need a combined bailout of US$190 billion to reduce bad debts in order to prepare them for Initial Public Offerings.

In facing a liquidity crunch precipitated by a collapse in China’s prudential system, the country’s central bankers would need to consider calling in some foreign reserves. And where are those reserves currently deployed? In funding the United States’ current account deficit, of course!

Australia’s free trade partners in the land of milk and honey currently spend US$540 billion a year more than they earn. And the only way to spend more than you earn is to borrow money, in this case, from the Chinese public sector and the Japanese public and private sectors.

It’s not difficult to imagine a scenario: China’s financial sector collapses, ending any hopes of an upward revaluation of the Renminbi and all of a sudden, nobody’s buying US Treasury bonds; the Greenback crashes and America itself is plunged into a credit crisis. Chinese production slows, commodity prices fall, and the industrial sector receives an efficiency shake-up, maintaining or even increasing the competitiveness of Chinese exports. Australian manufacturing disappears altogether and customer, financial and legal services required by foreign and domestic clients of Australian service industries are outsourced to India, where a corporate solicitor will work for a quarter of the salary of an Australian.

Sure, it’s a worst-case scenario, but how do Australia’s politicians feel about the risks? “Relaxed and comfortable, maaate.”

It’s been called the miracle economy of the industrialised world, but it’s more like the “She’ll Be Right” economy. Donald Horne’s point was the same when he wrote The Lucky Country. There are few individuals in the Australian Parliament who have any inclination to consider how one might position Australia, as a small economy, to safeguard against such risks as that described. One of them is Bob McMullan.

In a paper recently delivered to the Australia and New Zealand School of Government (ANZSOG), McMullan described the complacency problem affecting our politicians. Tracking our economic performance in comparison to other OECD countries over the 20th century, he showed that Australia was one of the three worst-performing economies. Our per capita wealth fell from top of the table in 1900 to a middle ranking in 2000. Economic history suggests that Australians are happy for property price inflation and commodity booms to do the work for us, leading to delusional complacency about our productivity levels.

Peter Costello’s solution, in this Budget, is that more of us must work harder. Scant regard is had to working smarter, rather than harder. We invest the profits of a serendipitous resources boom in increasing labour inputs in the Australian economy to ease social security pressures on the fiscal bottom-line. We do this by forcing single mothers with a Year 10 education into the workforce, on threat of being forced to “reskill” by digging ditches and planting trees on work-for-the-dole projects. But there’s a flaw in this strategy.

Practice at digging ditches increases a person’s ability in only one skill: digging ditches. And however effective the Government’s schemes are, our 20 million (roughly a quarter of Guangdong’s population) will never beat China at digging ditches.

All of this means that we have to be good at something other than extracting minerals or leveraging our housing equity to buy SUVs. Yet out of $17 billion in additional tax revenues for fiscal 2006, Mr Costello lavished $31.9 million, or 0.19 per cent, on higher education.

The university sector loses $586 million per year because of the Government’s refusal to index funding to growth in average weekly earnings. So, at a time when our top university ranks 16th in the world, with ground-breaking research in biosciences, plasma physics and the delivery of social services, the Treasurer is able to find $32 - count ‘em - $32 million dollars for the entire tertiary research and training sector. The lion’s share went to two institutions, the University of Western Sydney and James Cook University in northern Queensland, which are coincidentally located in marginal electorates.

It must be galling for John Howard to be told by the editorial writers of the Financial Review that “after a decade in power the Government still struggles to match the reform record of … Paul Keating and Bob Hawke”. The only right-wingers silly enough to have John Howard as a pin-up boy are the many who are insufficiently independent of mind to realise that Bob Hawke is the most right-wing prime minister of recent history. Hawke’s achievements in floating the dollar, large-scale privatisation, deregulation and investment in incentives for scientific research and development make Howard look like a socialist.

Globalisation has eradicated low-skilled jobs in developed economies. However, evolution has not kept pace to the point that yesterday’s manual workers suddenly have the abilities in abstract thought and symbolic manipulation to be redeployed in up-stream, knowledge-based jobs. Even more acute than in other developed economies, given our size and sensitivity to international financial events, is the need for Australia to develop high-tech industries and innovative services based on indigenous intellectual property and genuine workforce re-skilling in order to sustain export-led growth. Oblivious as our present parliamentarians may appear, this is the debate we have to have.