The depth, diversity and ever-changing nature of structural change mean that attempts by governments to dictate the shape of industry are inevitably frustrated. Attempting to delay adjustment to structural change through regulatory means is likely to increase the degree of dislocation ultimately involved. Governments, both in Australia and overseas, have increasingly recognised the economic costs of trying to stand in the way of structural change. The benefits are recognised of policies which do not constrain employers, employees, consumers and producers from judging themselves how to respond to change so as to maintain or improve their own well-being - and thereby add to living standards overall. Much microeconomic reform both here and overseas since the early 1980s has been directed to that end: the reduction or removal of unnecessary government regulation that impedes the translation of structural change into changed commercial opportunities.
The overriding aim of microeconomic policy must be to provide a flexible economic structure capable of taking advantage of emerging opportunities by facilitating the movement of resources between and within industries. Macroeconomic policy has a supportive and complementary role in providing a stable economic environment conducive to sound investment decisions by business and to encouraging workers to invest in upgrading their skills to take advantage of new employment opportunities. The interactions and synergies between these two areas of policy have long been emphasised by the IMF and OECD in reporting on the observable factors that contribute to economic success, viz: 'Experience in recent years has confirmed that economic success requires sustained efforts at both structural reform and macroeconomic stabilization and that efforts over a broad range of policies are mutually reinforcing. It has become particularly apparent that a failure to tackle serious weaknesses in some areas may increase the short-term costs, and delay the positive effects, of those policies that go in the right direction. More comprehensive and better balanced policy approaches are necessary if a greater number of countries are to realize their full growth potential.' [12]
Sound macroeconomic and microeconomic policies thus provide a policy environment conducive to flexible adjustment by industry to ongoing structural change. The conjunction of sound microeconomic and macroeconomic policies provides a general framework for industry which offers the potential of higher medium term growth for the economy overall. Industry policy involves the combination of macroeconomic policies that provide a stable environment in which businesses and workers can plan for adjustment to change and microeconomic policies which allow business, employee and consumer alike to respond to new opportunities presented by structural change. Despite the important complementarities between macroeconomic and microeconomic policies, each of these policies has a separate contribution to make.
In recent years substantial progress has been made in addressing inflation and to a lesser extent current account deficit constraints. The current cycle has been characterised by low inflation, with monetary policy being conducted on a more forward looking basis within the framework of keeping underlying inflation consistent with the RBA's target range of 2 to 3 per cent, on average, over the cycle. Last year the Government introduced a new framework for the conduct of policy, clearly recognising the Reserve Bank's role and endorsing its inflation objective. The clarification of policy responsibilities, and recognition of their observance in practice over time, together with an accumulating record of low inflation, are likely to have a continuing positive impact on lowering inflation expectations and creating confidence in a sound investment environment.
Australia's large structural current account deficit reflects both inadequate national saving and inadequate investment returns overall. On the saving side, the principal cause is a deficiency in public saving especially at the Commonwealth level. The Government through its fiscal consolidation programme, is addressing this problem and has put in place a policy framework that will maintain the adequacy of the Commonwealth contribution to public saving. Statements 1 and 2 spell out in detail the fiscal strategy, including improved transparency and accountability practices, and implementation of the strategy in the years ahead. The benefit of a more soundly based fiscal policy is likely to be seen over time in the capacity of the economy to sustain faster rates of growth than would otherwise be the case. While it is too early to be able to point to any concrete results with confidence, the 1997-98 economic outlook presented in Statement 2 suggests that higher saving in prospect next financial year will help to constrain the current account deficit.
The importance of unit costs is not set aside by innovation. As discussed earlier, ongoing technological change and innovation are significant drivers of change - with innovation often resulting from the desire to obtain a competitive edge. Unit costs remain a crucial consideration as the products arising from innovation are made and sold: substitute products, for example, are an ever-present threat and the competitive advantage from innovation is usually of limited duration as others seek to share in the advantage.
Controlling unit costs requires restraining the costs of all inputs, be they material, labour, capital or taxes. That there is frequently a focus on labour or taxes reflects no more than that, historically, they have proven to be least amenable to control. Controlling unit labour costs does not require lowering wages: it requires that the combination of labour costs (wages and non-wage labour costs) and labour productivity yield competitive outcomes.
The central role of microeconomic policy assisting that process lies in minimising the constraints faced by enterprises and industries, ie in fostering adjustments including by minimising governments' contribution to unit costs by way of taxes and regulation.
The Government is addressing these sorts of issues on a number of fronts including reducing regulation, labour market reform, competition policy, training, small business deregulation, financial system regulation and transport.
Government intervention and regulation is a normal feature of modern market economies, recognising that markets do not necessarily operate with optimal efficiency and that there is a wider role for government in pursuing community and social objectives. A good example is the desirability of regulation, such as the Trade Practices Act 1974, to secure competitive outcomes (including where unregulated markets deliver inefficient outcomes) and to protect consumers. Despite there being such legitimate reasons for well-targeted regulation, experience in Australia and abroad shows that regulation, introduced with good intent and often as a temporary measure, has a tendency to become entrenched over time and accepted as part of the economic landscape. It follows that an important policy priority is to keep such regulatory practices under review and ensure they are achieving their intended and legitimate purpose.
Consistent with this, the Government has announced that it will place much greater reliance on competition to keep price increases in check and much less reliance on direct regulation of prices through the Prices Surveillance Act 1983. The price declarations under the Act of a number of products such as beer and cigarettes have been rescinded and in the future prices surveillance will only be applied in those markets where competitive pressures are not sufficient to achieve efficient prices and protect against excessive price increases. The Commonwealth has also announced that it will review by the year 2000 all existing Commonwealth legislation that restricts competition. All together some 90 reviews have been scheduled with the aims being to:
A key labour market reform is embodied in the Workplace Relations Act 1996 which came into operation earlier this year. It encourages labour market flexibility by promoting enterprise-level wage bargaining, by providing greater choice in the way enterprise bargaining agreements are negotiated and by limiting the award system to a safety net of fair minimum wages and working conditions. The success and effectiveness of the new arrangements in achieving more flexible work practices and remuneration will be critical to the task of reducing unemployment.
An important objective of Government education policy is increasing the skills of the work force at the entry level, to enhance workers' abilities to move between jobs and to increase their productivity. A new regime of entry level training incentives designed to encourage employers to take on trainees and apprentices and to promote training at higher levels is introduced in this Budget.
The Government also gives high priority to reducing the regulatory burden on small business. In March, in response to the Bell Taskforce, the Prime Minister announced a range of measures aimed at cutting red tape faced by small businesses. Among the measures is an exemption for businesses with 15 or fewer employees from Federal unfair dismissal provisions in respect of new employees until they have been continuously employed for 12 months. Other measures are designed to lower compliance costs in the areas of fringe benefits and capital gains tax, lower regulatory burdens through a single registration for various government authorities, and increase small business' access to finance.
The Wallis Inquiry into the financial system made a large number of recommendations to improve the regulatory framework, noting that even a 10 per cent improvement in efficiency in the financial sector would translate into cost savings for the economy in excess of $4 billion per year. The Government will consider these recommendations over the coming months, assessing how best to adapt the regulatory regime to the changes produced by globalisation, technological advances and consumer preferences.
Transport is a key sector of the Australian economy. Transport provides the link between major cities and forms a critical lifeline throughout regional Australia and between it and the major centres. It provides a key input into many industries, in particular export industries. While there have been recent improvements in productivity in parts of the sector, elements of Australia's transport sector operate at below world best practice (as evidenced by the international benchmarking studies conducted recently by the Bureau of Industry Economics). To improve the efficiency of the transport sector, a range of reforms have been introduced or are being examined, including:
