Australian Productivity Commission predicts Australia’s living standards are expected to grow at a lower rate or even fall over the next decades. Australia’s population is expected to grow from 23 million in 2012 to 38 million by 2060. The forecasted lower participation rate combined with tremendous growth in aging population will put increasing pressure on the resources available for the Government to provide key services in to the future.
The scenario presents both challenges and opportunities for Australia. There has been extensive debate around potential solutions by enhancing productivity, jobs growth and promoting competition to achieve the sustainable income growth to maintain higher living standards in Australia.
The financial system plays a critical part in achieving higher productivity, enhancing competition and promoting jobs growth. There are various challenges and opportunities which require careful analysis, policy framework and determined execution on a medium to longer term basis. Some of these topics are briefly discussed below:
Challenges and opportunities
- Focus on Small to Medium Enterprises (“SME”): SMEs are the cornerstone of the Australian economy. According to its report by Department of Innovation, Industry, Science and Research in 2011, SME sector employed more than 70% of total the work force and contributed almost 58% of the total industry value addition. There is a plenty of room to grow for this sector particularly in its exports contribution beyond its current levels. A well designed policy framework is required in promoting the growth, innovation and fostering the efficiency in the SME sector. An efficient and flexible infrastructure together with easy financing for the growing and start up businesses will be the key to the future success.
- Efficient tax system: The current taxation system is complex and laden with various inefficient taxes at all levels of the government. Simpler, broad based and lower tax rate system is required to attract capital and growth of the existing businesses. There were some reviews of the state of existing tax system which came up with worthwhile recommendations to pursue. The tax system requires detailed review and to aligns its objectives with the aim to future economic prosperity for Australia. The focus of the tax system should be to enhance innovation, support SMEs and provide incentives for new ventures.
- Self Managed Superannuation System (“SMSF”): SMSF is an attractive retirement savings option for the rapidly growing number of Australians. There are approximately $500 billion of assets under the SMSF pool. SMSF is critical to the integrity of the whole Australian retirement savings system. At the same time, a flexible and long term policy framework is required for this investment to be channelled into priority areas with good returns where private or public investment is otherwise hard to manage. Through good policy framework, SMSF could be used to fill up the gaps in the priority capital intensive sectors.
- Infrastructure and capital investment: With growing population, Australia needs huge investment in infrastructure and capacity building on a medium to longer term basis. May it be roads, rail, airports or ports massive investment is required. There is competition among countries to procure limited capital available for the big capital projects. The challenge for Australia is to provide creative products, incentives and solutions which provide attractive returns for the investors on one hand and on the other hand, efficient planning and execution of infrastructure projects is critical to boost nation’s productivity.
- Knowledge economy: In order to maintain and grow the living standards for Australians going into the future, Australia needs a visible shift towards knowledge economy. The focus on creating value addition and innovation for its products and services should be on forefront of robust debate. More funding and incentives may be considered for both commercial and academic research.
- Western Sydney: Western Sydney is a high growth region for the Australian economy. It is represented by diverse and young community which is growing at a rate of 1.6% which is well above NSW average rate of 1.1%. The community is represented by more than 100 nationalities. Western Sydney’s annual Gross Regional Product (GRP) is of about $95.6 billion in 2010-11. This is nearly one third of the Sydney Metropolitan GRP. Nearly 60% of businesses operating in the area are self employed companies, with more than a quarter of these employing less than 5 employees. [Source: NSW Government: Premier & Cabinet].
The region presents a huge opportunity to boost trade and investment with emerging Asian countries through its diverse resident labour force and businesses. A balanced and strategic plan is required at all three levels of Government to put major focus on this area for future growth and productivity initiatives.
- Asian century: This century is called Asian century. Australia is placed in a unique position with close physical proximity to the fast and emerging economies of China, India, Indonesia and other Asian nations. Asian countries are aiming for higher growth to overcome their infrastructure bottlenecks and population needs. Australia is in a good place to take strategic advantage of the situation. Australia has both economic and regional interest in this area. Australian businesses are already undertaking major trade and investments. The region presents a huge export market for Australian goods and services. Further initiatives and planning focussing through Australia’s SME sector may be explored to fast track links with the region and exploring non traditional area of high end research to benefit both sides.
- Financial markets and regulation: An efficient and transparent capital and financial markets is the key to achieve Australia’s future economic prosperity. Global financial crises highlighted the need for regulation of the market. A number of regulations and legislations have come in to force to regulate these markets by different market and banking regulators. However, there has to be some balance between over regulation and free flow of capital. It has a direct impact of increasing the cost of doing business in Australia. A flexible funding mechanism is needed for SME sector and for entrepreneurs to easily access finance for their ventures and business growth.
- Corporate governance and disclosures: A robust corporate governance and disclosure framework is fundamental to efficient functioning of capital markets and smooth flow of investment in the Australian economy. The focus should be on self regulation and international best practices in this area. A coordinated approach is required among leading regulators across the world to ensure efficient governance framework and harmonisation. Australia has one of the best corporate governance practices. Australia should lead and develop a market for its products across the world. Free trade agreement with different nations should prominently include exchange of restraint free professional services.
- Climate change action and economic impact: In future, climate change action will again be on top of the agenda at world stage. It has natural economic impacts for most of the nations. Australia is not immune to this additional economic cost. However, it presents an opportunity for Australian technology and business to develop and export its products. At the same time, a longer term strategic approach is required now to address this economic issue at the micro level. Business opportunity and any potential significant infrastructure investment should be at the centre stage for any meaning full discussion on climate change action plan.
Growing and aging population presents both economic challenge and opportunity for Australia. Australia has a strong economic and infrastructure base with a range of opportunities in front to define the space for its future economic prosperity. The key lies to enhance productivity and competition through specific measures including transparent and less regulated financial system. A consistent economic policy framework is fundamental to plan and achieve the income growth required to sustain Australia’s position as one of the top economic destinations.
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