Statement 4 (continued)

Supporting future growth in living standards

For living standards to be maintained and grow in the future, Australia needs a sustainably strong economy and policy settings that maintain the ability of all households to participate in the opportunities created by growth. Having better standards of living in the future will also require governments to have the capacity to provide goods and services and income support to the community, and to respond to external shocks.

This will require change in policies and mindsets, particularly given the outlook in the years ahead. Income growth is projected to be below its 20‑year average over the next few years, reflecting the decline in terms of trade and subdued wages growth. The challenge for governments, businesses and the broader community is to address the constraints to potential economic growth and make the most of our opportunities.

Improving the flexibility and competitiveness of the economy

An important role for government is ensuring that policies support private effort and enterprise. Priorities include removing impediments and disincentives to work and initiative, such as subsidies to unviable businesses and poorly‑targeted income assistance. The Government is firmly of the view that an attitude of entitlement removes incentives for change and progress, and reduces the scope for improvements in living standards over the longer term.

Government can also improve conditions for growth by facilitating trade with other countries and maintaining Australia's openness to foreign investment. Open markets give Australians access to overseas goods, finance and new business opportunities, and require domestic firms to be more dynamic and competitive in order to prosper.

Australia's continued openness to trade and foreign investment will also facilitate access to new technologies and ideas, which will be a critical driver of future productivity growth.

To this end, the Government has concluded free trade negotiations with Japan and Korea, and will seek to conclude negotiations with China and the regional Trans Pacific Partnership later this year.

More broadly, Australia's exporting sectors will have a number of new opportunities over the decades ahead, including those provided by anticipated increases in demand for services, agricultural products and high‑value manufactures from emerging market economies. Foreign investment and measures to facilitate trade will allow Australia to harness these opportunities and benefit from growth in other countries, particularly in our region.

Competition in both input and product markets is one of the most important drivers of productivity and income growth. It provides incentives for businesses to be more efficient and to respond to the needs of their customers, both other businesses and consumers, creates the incentives for resources to be allocated to their most value‑adding uses, and puts downward pressure on prices. The pressure exerted by well‑functioning capital markets also encourages businesses to innovate and to raise management performance.

The flexibility and competiveness of the economy can be enhanced by removing government regulation where it is not required, or lessening its burden, and ensuring that frameworks for promoting competition and the efficiency of our labour and capital markets are suited to the needs of Australia's evolving economy.

Evidence suggests that there may have been increases in some forms of regulation over recent years.²⁸ Removing unnecessary obstacles to business formation and investment by start‑up companies is a critical part of establishing an effective innovation system. High costs of entry and exit have the potential to discourage the type of start‑up companies that often pioneer new technologies and work practices, and may also shield incumbent firms that may be less efficient from new competitors.²⁹

The Government has embarked on a programme to reduce regulatory burdens and it will review the policy frameworks that promote the competitiveness of businesses.

Governments also have an important role in ensuring that the markets for infrastructure, education and innovation work well, and investing where this will produce benefits to the broader community.

This Budget provides for substantial investments in infrastructure to support productivity in the long term. Investment in infrastructure will also be important to generating economic activity in the near term as the economy transitions from resources investment‑led growth.

Budget prudence and government efficiency

It is important that the Budget be restored to a sustainable basis and that government improve the productivity of its operations.

The process of restoring the Budget to a sustainable basis can help drive improved economic conditions in a number of ways. Productivity can be enhanced when governments live within their means, by allowing expenditure to be redistributed to productivity‑supporting investment and requiring public sector providers to increase their efficiency and look for innovative solutions.

A sustainable Budget position will also place downward pressure on interest rates and exchange rates over time and enable fiscal buffers to be built, helping to support private sector investment activity and providing capacity to respond to future external shocks.

Government can improve productivity by simply getting out of the way of business and individuals. As many government entities do not directly face the discipline of a competitive market, they are generally less efficient, so reducing or eliminating activity that can be performed by the private sector can also increase productivity.

Further, the Government can increase public sector productivity by ceasing activities that can be performed by other levels of government, which reduces unnecessary duplication and overlap, and undertaking those that it is best placed to do.

The Government's medium term strategy of returning the Budget to a sustainable surplus and reducing the government share of the economy over time will free up resources for the private sector to drive economic growth and create jobs.

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28 For example, international data on the burden of government regulation score Australia 2.8 (out of 7, 1 being most burdensome) in 2013‑14, compared to 3.2 in 2009‑10. Some sectors, for example the small business sector, have unduly borne the burden of these changes (Productivity Commission, 2013b).

29 Dolman and Gruen, 2012.