The federal Treasurer tells Tony Featherstone about his long-term outlook and explains why Australia’s “greatest-ever era” is tied to Asia.
Nobody could accuse the federal Treasurer, Joe Hockey (Twitter @JoeHockey) of thinking small. In a speech to company directors, he outlined a grand vision to expand global markets for Australia, improve business efficiency, and get government out of the way.
A packed room of South Australia’s business, not-for-profit and political leaders heard the Abbott government’s plan to capitalise on the coming boom in Asian middle class consumers; export billions of dollars of services to emerging markets; and transform the Australian economy through start-up entrepreneurship and innovation.
“I can say with great confidence that Australia is on the threshold of its greatest-ever era,” Hockey said.
Even by the Treasurer’s standards, the vision was bold and defiant. Directors might have expected Hockey, dressed in black tie, R.M. Williams boots and blue socks, to focus on compliance, regulation, and the government’s 2015 agenda as it affects boards. But bigger issues were on his mind at the 2014 annual dinner of the Australian Institute of Company Directors’ South Australia/Northern Territory division, held at the Adelaide Convention Centre.
Refreshingly, Hockey spoke about a reform agenda that, if implemented, would have a huge payoff for Australian business over 10, 20 and 30 years. Those in business who bemoan short-sighted government policy surely welcomed the long-term view.
Hockey was emboldened by the signing of a Free Trade Agreement with China, the government’s third such agreement in less than 12 months and a critical win for business. He was also energised by Australia hosting the G20 Summit in Brisbane, and the government’s role in driving global initiatives around infrastructure and modernising tax arrangements for multinationals.
Clearly, Hockey saw an opportunity to remind Australian business and boardrooms that a period of uncertainty and volatility would be worth it in the long run – and that the government’s reform puzzle, challenging as it is, is coming together.
The honeymoon is over
However boards are tiring of government rhetoric. A day before Hockey’s speech, company directors delivered a stinging rebuke of the government’s performance. The honeymoon from its September 2013 election win, consummated with higher business, consumer and director confidence, has soured.
The latest Company Directors’ Director Sentiment Index (DSI) found that directors’ confidence in the federal government had slumped to its lowest level since the election. Almost half of all directors surveyed rated the government’s first-year performance in office as “poor” or “very poor”.
That finding grabbed business headlines around Australia and created a few awkward moments when Hockey was questioned about it in front of more than 400 directors at the event. He pointed to other surveys showing business confidence is near its long-term average.
Hockey spoke of “very positive growth shoots in the economy”. However, directors are increasingly pessimistic about the future health of the Australian economy, the DSI found. About 40 per cent said their organisation’s growth had weakened in the past six months and they were more pessimistic about the business outlook.
The Treasurer repeated the government’s commitment to reduce red tape. The DSI showed a third of directors believed red tape has increased in the past 12 months.
He spoke about lifting productivity, but the DSI found productivity growth was the chief concern for directors, replacing infrastructure for the first time in the survey’s history.
Hockey also commented on the importance of good governance and commended Company Directors for its work. Yet he has taken an axe to the number of statutory and advisory government boards this year, sometimes brutally. This has led some governance observers to question why the government was discarding – and disrespecting – years of board knowledge about government enterprises and weakening bridges with the governance community.
The disconnect between the Treasurer’s view and that of company directors could scarcely be greater. “We are moving from an investment phase in mining, which is still continuing, to firing up the other 90 per cent of the economy,” Hockey said. “That transition is creating some dislocation, but it will happen. We are starting to see a rise in the rest of the economy, and if we can open up markets and become leaner, we will see massive growth in exports.”
Timing might also explain some of the governance community’s disillusionment with government. Hockey’s vision of business exporting more services to Asia, and developing the next great global technology business through a greater commitment to start-up entrepreneurship, is years in the making.
Although boards take a longer-term view, many directors are worried about their organisation’s budget next year and any fallout from government reform. Or perhaps their bird’s-eye view of current and future business conditions in Australia suggests Hockey is too optimistic and over-confident. Falling consumer confidence, record-low wages growth and fears in November about the size of a budget “blow-out” could rattle business.
Directors’ concerns about balance of power issues in the Senate, highlighted by the latest director survey, add to this widening divide between government and the governance community. As Hockey talks about a sweeping reform agenda, business wonders which reforms will survive, in what shape, and when they will be implemented.
Regulatory change is just starting. The government has a packed reform agenda, or a “full dance card” as Hockey puts it, including the Industry Innovation and Competitiveness Agenda, the Financial System Inquiry and the Harper Competition Review, from this year; the Intergenerational Report early next year; followed by a key debate on tax and federation reform, run in parallel; and the May 2015 Budget and the government’s quest to find more cost savings.
The Abbott government risks even greater opposition from the states and the Senate next year as debate over federation reform, and federal funding for the states, intensifies. The upshot could be more uncertainty for boards that must weather a period of turbulence in business, as Hockey attempts to lay a platform for a stronger, vibrant Australian economy with a deeper global presence.
Hockey says better communication between the government and business is needed. “Our message is not always getting out there. But the more time we spend on communication, the less time we have to do things and get on with the job. We have to get the balance right.”
The government, Hockey says, is eager to hear from company directors about reducing red tape for boards. “Give us your ideas and proposals. We are all ears in regards to that.”
As Hockey extols business to “have a go”, a bigger debate on how the government can help directors do just that, through a revised business judgment rule and better legal protection, is sorely needed. But the Treasurer did not want to answer questions about reducing director liability.
A stronger connection between the government and directorship community, led by Hockey, makes ample sense. Hockey’s long-term vision would surely be welcomed by many boards, provided the transition is managed in a sensible, calm and transparent way.
Whatever one’s political colours, nobody can doubt the government’s willingness to tackle big issues that have been unattended for too long: dysfunctional federal/state relations; an inefficient government sector; a messy, antiquated tax system; industrial relations reform; an ageing population; and, in Hockey’s words, a dangerous “age of entitlement” among consumers and business. Nor can they doubt Hockey’s zeal to pursue the government’s agenda.
The Treasurer says he wants to open up global markets for Australian business and “provide the opportunities that many other countries do not have”. He wants to remove obstacles in the way of Australian businesses so they can exploit the greatest opportunity of them all in the next two decades: the rise of a middle class, service-driven economy in Asia. And he wants leaner, less intrusive government – a view that received cheers from the audience at the Company Directors event.
As Hockey outlined his grand plan, on a balmy Adelaide evening, it was clear the directorship community, at least for now, was not fully behind him. Hockey likens the government’s reform agenda to “climbing a mountain”. He can see an extraordinary peak – exporting more healthcare, aged-care and financial services, in addition to commodities, to Asia. But taking business and boards with him is among the government’s greatest challenges in 2015.
Here is an edited extract of the Treasurer’s open interview at the annual dinner, where he took questions from the floor. A full copy of Hockey’s speech at the event is available on his website (jbh.ministers.treasury.gov.au).
Company Director: Treasurer, the latest Company Directors’ Director Sentiment Index shows almost half of all directors rate the government’s performance in its first year in office as “poor” or “very poor”. Why is there such a disconnect between your vision for business, and how business sees the government today?
Joe Hockey: There is some disconnect because in some ways the government has failed to communicate properly, because we have been getting on with the job rather than spending time communicating, and I am partly guilty of that. Second, there were huge expectations with the change of government. We are delivering [on our promises], but never said it would be easy. It’s hard to climb a mountain and you can’t change your mind halfway up.
On Budget night, I announced the equivalent of eight new Snowy River Schemes in the next decade in terms of additional infrastructure, in what was the biggest infrastructure program in the country’s history. It [the message] got a bit lost, but the infrastructure is happening and rolling out around the nation. We said we would deal with border security and we have done that. We said we would open up markets and we are doing that with free trade agreements.
CD: The survey also shows a noticeable decline in sentiment among directors in 2014. Should directors be nervous about the prospects for the Australian economy and business conditions in 2015?
JH: Don’t be. Our economy is getting better. The world economy is getting better. Yes, there are challenges. Europe is going through a difficult time, but Germany has capacity to fire up the region. The United States is coming back quite strongly and has stopped buying government debt, which is good as it could have caused enormous gyrations in the global economy.
China will continue to grow, because it must grow. It needs to create 13 million new jobs a year. It needs growth to do that and will do whatever it takes. Japan is challenging; it is printing almost the same amount of money now that the United States did during its peak.
Overall, I am positive. The emergence of the Asian middle class means another two billion middle class global consumers. Think of the combined buying power of Europe and the United States, and triple it over the next 30 to 50 years. You start to get a picture of what the opportunities are for Australia.
CD: Treasurer, you have signalled that more budget cuts are on the way. What can business expect when the mid-year economic and fiscal outlook budget update is revealed later this year?
JH: I don’t want to turn it into a mini budget, like the previous government, which had two budgets each year. I want people to go into Christmas feeling confident. We have budget challenges. The iron ore price is down 30 to 40 per cent on original estimates, and as 10 per cent of Australia’s exports, this has a big impact on our income. That said, we are not going to be silly about how we fix the budget. We will be measured and focused, and have a medium-term plan to ensure the government lives within its means.
CD: Is the revenue side of the budget much worse than you feared?
JH: I don’t fear much when it comes to budgets. There will be gyrations. But the best way we can grow revenue is to grow the economy, and that comes down to a partnership between business and government.
CD: The DSI showed boards are concerned about low productivity growth, weak consumer confidence, the global economy, and balance of power issues in the Senate. How can the government help unleash the animal spirits of business next year, so that boards feel confident to approve big capital investments and create jobs?
JH: Have a go. Government can only facilitate growth, not deliver it. Only business can create the jobs, and our job is to make it easier to do so. Cutting red tape for directors is something I am open to, but you [the directorship community] have to give us your ideas and proposals. We are all ears in regards to that.
Right now, we are starting with high-level reforms. Having a government that does not have shock value every three weeks is a good start. Every day under the previous government you would pick up a paper and read about things out of left-field. Their five versions of the mining tax undoubtedly had an impact on the confidence of BHP Billiton around Olympic Dam [BHP’s copper-uranium mine]. The carbon tax undoubtedly had an impact. We are removing that uncertainty and instability, removing obstacles, growing market opportunities, and trying to make government more lean and efficient. It’s difficult work but we are doing it.
CD: Lots of Company Directors’ members govern small enterprises, and I know you are very passionate about small business. How can the government help build a stronger culture of innovation and entrepreneurship among SMEs in Australia?
JH: By getting out of the way so that entrepreneurs can have a go. We are determined to reduce red tape and reduce company tax. We are changing the tax treatment of employee share plan schemes by allowing options or shares that are provided at a small discount by eligible start-up companies to be excluded from upfront taxation, so long as the shares or options are held by the employee for at least three years. That is a globally competitive initiative.
We are also giving start-ups more time to be competitive and succeed, by extending the maximum time for tax deferral from seven to 15 years. This will help start-ups and encourage greater entrepreneurship, so that good ideas can be commercialised across Australia.
CD: The DSI consistently ranks infrastructure development as a top priority for government to address. What will the government’s infrastructure plan look like in 2015?
JH: We are rolling out and facilitating $125 billion in new infrastructure over six years. It will vary from state to state, but I have said [to Premiers], if there is an asset you can sell, I will pay you an upfront bonus if you deploy the proceeds into new infrastructure.
The federal government has not got a construction company, thank God. Look at the mess the previous government got into with the National Broadband Network.
It was a catastrophic disaster. What was meant to cost $5 billion turned out to be $70 billion and it is still being rolled out.
We need the private sector to get involved and develop infrastructure. We will see massive infrastructure transformation across Australia.
CD: How will the Free Trade Agreement with China change Australian business?
JH: There is a heavy emphasis on [exporting] services to China. If we develop a bigger market in exporting healthcare, aged-care and financial services, the opportunities are enormous.
CD: Do you support a higher, broader Goods and Services Tax (GST) as part of overall tax reform?
JH: I support simpler, fairer, lower taxes. Please don’t narrow the tax debate down to GST. A friend recently visited me from the United States, and called Uber for a taxi on his American phone, and paid for it on his American credit card. I wondered if Australia would ever see any tax from that transaction. The bigger questions are: will the GST be around in 30 to 50 years and what will the company tax rate be, given capital is so mobile?
CD: How far will the government go on federation reform?
JH: Government has limited funds. We can no longer afford federal and state governments competing to fund the same things. The states have beaten each other up over payroll tax and other taxes, and slowly eroded their revenue base. They are saying to the Commonwealth: “You raise the money, you go through all the political pain and give the money to us”. We are saying to the states: “If you run it, you should pay for it”. The best person to run any asset is the person who has their money on the line. That’s a message business knows.
The Commonwealth is ready to help build a leaner, more efficient federation. It is not about passing the buck to the states – that’s pathetic. It’s about ensuring we can fund our future, and that we don’t end up with people going to the Commonwealth to bid for one thing, and to the states to bid for another. Ultimately, every dollar we spend comes from the taxpayer, and when governments play the duplication game, you [taxpayers] end up paying more.
CD: Treasurer, you have had an eventful first 15 months in the job. What learnings from 2014 will you take into 2015?
JH: Keep going. I am absolutely determined, and the government is absolutely determined, to do what is right, and if that comes at a political cost, then we’ll deal with it. We didn’t hang around through the Howard government and then in six years in opposition, to say: “We’re back, it’s all done”. We have a huge job to do and we’re doing it.
Extracts from the speech by the federal Treasurer, Joe Hockey, at the 2014 Australian Institute of Company Directors’ dinner in Adelaide on 6 November:
- “We need an Australia that is future-fit. We need to be ready to grasp opportunities at a time when technology is levelling the playing field.”
- “The opportunities for Australia, living on the doorstep of Asia, are enormous. This rising middle class of Asia wants what comes from Australia’s farms and our gas fields. They want to come here as tourists, attend our universities, and they need our financial sector to manage their wealth and plan their retirement. They want our quality of life with good housing, roads and transport, clean air and excellent quality health services.”
- “An extra 330 million people [in China] could use our professional health services, fund managers, accountants and our insurance and superannuation industries. We need to be ready to service this huge growth opportunity through digital technology, software innovation, and flexible but trustworthy regulation.”
- “If we continue with a mindset that Asia is too far away for commerce then we will be left behind. Asia is not waiting for us. The entire region is opening up its services sector to a global marketplace.”
- “The speed of growth and the cycle of prosperity is now faster than ever. It is based on ambition and innovation.”
- “Government needs to get out of the way, and not burden companies with bureaucracy and red tape across varying levels of government. We have to remove overlap and duplication.”
- “Let me make it clear: we want taxes that are lower, simpler and fairer.”
- “We all want an Australia that is diverse, contemporary, innovative and competitive. Many of us hold great hope for a prosperous future. Yes, there could be some bumps along the way, but that is to be expected. The world economy is changing and so must we. But that represents an opportunity rather than a threat.”
- “I can say with great confidence that Australia is on the threshold of its greatest-ever era.”
What the latest Director Sentiment Index, released on 5 November 2014 said about the federal government:
- The effect of the federal government’s performance on business decision-making and consumer confidence has become increasingly pessimistic since the 2013 election, although sentiment is more positive than under the Labor governments.
- More directors now disagree that the federal government understands business.
- Negative sentiment has increased regarding the federal government’s performance and its impact on business, with almost half of directors claiming the government’s performance is affecting their business decision-making negatively, and almost 75 per cent claiming it is negatively affecting consumer confidence.
- Almost half of directors would rate the government’s first year in office as “poor” or “very poor”.
- The majority of directors perceive the balance of power in the Senate as having a negative impact on business and consumer confidence, federal Budget outcomes, foreign investment in Australia and major infrastructure projects.
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