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Our recommendations to the government are made in the context of a looming economic crisis, which has the potential to rival or even surpass the recession of the early 1990s. After more than two decades of prosperity, driven by booming prices for mineral exports, Australia now faces the real prospect of a sustained fall in living standards. A deteriorating federal budget and higher unemployment are obvious symptoms of our predicament. But at the core of the nation’s economic problem is its failure to lift business productivity for much of the past 15 years – which is to say that Australia’s businesses collectively are barely more efficient than they were at the start of this century. The mining boom, while it lasted, was an adequate cover for the economy’s failings. Now that the boom appears to be over, Australia’s underlying economic vulnerabilities have been exposed and remedial action is needed. While much of the public and media focus tends to be on big business, it is clear that lifting productivity in the small and mediumsized business sectors will hold the key to our chances of avoiding recession and directing Australia into a new era of prosperity. The challenge cannot be overstated. Prolonged stagnation in the productivity performance of small and medium-sized businesses is borne out in an alarming series of statistics and survey data from the Australian Bureau of Statistics, which have been analysed in detail for the first time in the IPA Deakin White Paper.
Among the survey findings are that:
■ Australian firms have been going backwards since 2007 on seven key indicators – product differentiation, profits, productivity, exporting, outsourcing, training and IT expenditure.
■ Only 1 in 7 businesses consider innovation is important.
■ Only 1 in 8 businesses have an international market presence.
■ Many medium-sized, well established firms with the potential to expand into international markets consider only the national market as their end goal.
There is a large body of research and evidence indicating that governments and small business need to focus on three key elements or ‘pillars’ – human capital (people), financial capital (investment) and technological change (innovation) – to achieve the end goal of building a more productive and dynamic small business sector. And to achieve the best outcomes, the three pillars must work in combination. It is only when firms have a strong pool of skilled and talented people that it makes sense to invest in new technology, plants, machinery or research and development. This has clear implications for government policy: it will require well-targeted and co-ordinated responses across the various departments that deal with these issues.
While we acknowledge that the government faces severe fiscal constraints, we believe that well targeted policies and programs that boost overall productivity across the economy are in the best interests of Australia in the short, medium and longer terms.
This submission contains a number of key policy recommendations, focusing particularly on the key pillars required for a more productive and dynamic small business sector.
Recommendation 1 – loan guarantee scheme:
To help increase the availability of much needed affordable loan finance to the small business sector, the federal government should introduce a state-backed loan guarantee scheme. Australia is one of the only countries in the developed world without such a scheme, which would provide a limited state-backed guarantee to encourage banks and other commercial lenders to increase loan finance available to small business.
Recommendation 2 – venture capital fund:
The federal government should introduce a publicly supported venture capital (VC) fund by either providing a significant proportion of funds to assist VC managers to attract other institutional investors to publicly supported VC funds or by becoming an institutional investor in a range of individual VC funds. This type of support by government to small business equity finance will improve the entrepreneurial environment in Australia and act as a catalyst in identifying and overcoming hurdles to successful and profitable investment.
Recommendation 3 – innovation:
Innovation policy is strongly encouraged to support innovative SMEs in Australia. This can be achieved via governments providing strong support to R&D; enabling better linkages between cutting-edge universities and industry; providing support to firms to adapt existing technologies and innovation; and encouraging firms to develop their ability to search for new options, evaluate them and successfully implement and adapt them to their specific context. Accordingly, public innovation policy should encourage value capture and business-model innovation more generally, including measures that nurture the diffusion and uptake of existing innovations to a broad range of firms, as well as assisting new innovations. Moreover, firms should be encouraged to adopt ‘continuous improvement’ methods to embed incremental innovation, as this will generate large productivity improvements quickly. In addition, public policy towards entrepreneurs should shift from increasing quantity to increasing quality, with the focus being on encouraging the growth of a smaller percentage of firms that have the potential to grow, rather than encouraging more new entrants, regardless of quality.
Recommendation 4 – education and training:
To address the significant skills deficit in the Australian economy, governments (federal and state) need to immediately tackle and reform the education system’s ability to increase and improve the stock of knowledge-based workers available for employment. These results also suggest that governments should consider the inclusion of enterprise training at all levels of the education system from early school years through to further and higher education institutions.
Recommendation 5 – taxation and superannuation:
To encourage growth, productivity and employment, the government needs to implement tax policies that will drive business activity and entrepreneurialism across all sectors of the Australian economy. The IPA has made 27 recommendations relating to tax and superannuation. These include: a concessionary rate of tax for small business income; legal privilege for registered tax agents; continue with the promised tax white paper; review FBT legislation; reintroduce loss carry-back; finalise the ESS changes; adopt a small business entity structure; rewrite the taxation of trusts; greater use of safe harbour initiatives for small business; reform accountabilities between the layers of government; consider deductibility for financial advice; limit deductibility for BAS preparation to registered BAS agents; fix trustee resolutions; discount for interest income; fix the PSI rules; fix GIC application; reform Division 7A; fix GST adjustments and operational issues; and recommendations relating to superannuation and financial services, including a review of LRBA rather than an outright ban as recommended by the Murray Review. To read the full submission, go to https://www.publicaccountants.org.au/2015budget
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