Fears of a slow-economy China contagion
The Treasurer announces a review of competition rules as China’s accelerating downturn threatens to put the economy into reverse.
China’s accelerating downturn threatens to put Australia’s economy into reverse over coming months, as the Albanese government prepares a strategic blueprint to boost engagement with southeast Asia and a shake-up of competition policy.
Ahead of the release of the Intergenerational Report on Thursday, the Treasurer has announced a review into sharpening national competition rules as a way to boost the country’s flagging productivity.
The taskforce will be supported by an expert panel with members including the chief executive of the Grattan Institute, Danielle Wood, and former Chair of the Australian Competition and Consumer Commission, Rod Sims.
The move, revealed today by The Australian, is aimed at countering Australia’s declining productivity performance with the government concerned at Australia’s high market concentration across key parts of the economy.
Jim Chalmers and Assistant Minister for Competition Andrew Leigh on Wednesday announced the review would look at “competition laws, policies and institutions to ensure they remain fit for purpose.”
The government says an update to competition law is needed to ensure the country can make the most of digitalisation, the growth in services, the net zero transformation and provide support to the nation’s most vulnerable.
The “competition taskforce” established within Treasury will be “progressed over two years and involve targeted public consultation.” Labor said the taskforce would “provide continuous advice rather than a formal report, so progress can be made over time.”
It will consider the proposals put forward by the ACCC around merger reform, as well as other competition law issues. Co-ordinated reform options with the states and territories will also be progressed through the Council on Federal Financial Relations.
Labor also said the taskforce would look at obstacles that restrict workers from shifting to better-paying jobs and provide advice on competition issues raised by new technologies, the net zero transformation and growth in the care economy.
While Treasury officials remain optimistic the nation will avoid a recession, they do not expect that the 2022-23 budget surplus – estimated to be a little over $20bn – will be repeated in this financial year as the post-Covid employment boom dwindles and the jobless rate begins to climb through this year and into the next.
With Labor’s employment white paper and major migration review due to be released over coming weeks and months, Jim Chalmers is planning significant reforms to competition rules as a central plank of the government’s agenda to boost economic dynamism.
The pressing need for a wide-ranging reform plan to underpin Australia’s future prosperity will be highlighted in the Intergenerational Report, which will show Australia sliding towards a new era of slower growth and higher taxes as a result of an older population and less-productive economy.
The Australian understands the Albanese government will not be pursuing any further changes to taxes in this term of parliament, beyond the scheduled stage three personal income tax cuts, and flagged changes to taxes on multinational companies and superannuation accounts over $3m.
While the Intergenerational Report will highlight the huge challenges to fund rapidly growing government spending on health care, aged care, NDIS, debt interest and defence from a dwindling revenue base, the difficulty of pushing through large-scale reform means Labor will be pursuing only an incremental approach to tax reform.
Two former chairs of the Australian Competition & Consumer Commission told The Australian on Tuesday that existing merger rules – which require the competition watchdog to apply to the Federal Court to have mergers halted – were not fit for purpose and should be updated.
Allan Fels, the inaugural ACCC chairman from 1995-2003, said stronger competition policy was “a key ingredient for achieving higher productivity” and the ACCC needed to be “in a stronger position to apply firm but sensible merger law decisions”.
“Over long-term periods, such as contemplated by the Intergenerational Report, an effective merger law makes a very big difference to the structure of the economy and economic outcomes,” Professor Fels said.
He also warned of the possibility of competition problems becoming entrenched in the climate and energy transition. “There will be huge government and private sector activity in this field and a special need to prevent much of it being anti-competitive – eg, the establishment of new monopolies,” he said.
Rod Sims, who was ACCC chairman from 2011 to 2022 said competition laws needed to be updated to make the watchdog the “first decision maker” in approving mergers instead of having them fought out in the courtroom.
“It would be really important,” Mr Sims said. “It may only affect two or three mergers a year. Over time that makes a big difference. Australia’s market is one of the most concentrated in the world. That has an effect on productivity.”
Current ACCC chair Gina Cass-Gottlieb has proposed a range of changes to the nation’s merger regime that would bring it into line with other OECD countries.
Ms Cass-Gottlieb has warned that the current system is “voluntary and enforcement based”.
She has proposed a model that would ensure the ACCC was “notified of mergers above specified thresholds, a requirement for transactions to be suspended from completion without ACCC clearance, and upfront information requirements”.
Dr Chalmers will use the Intergenerational Report to highlight the need for ongoing fiscal responsibility, after pushing back on calls for further cost-of-living support, despite announcing the nation would record a surplus of more than $20bn for 2022-23 – the first in 15 years.
Some private-sector economists have forecast the potential for back-to-back surpluses, but The Australian understands that labour market and commodity price developments have tracked Treasury’s May forecasts, and officials expect the budget will plunge back into deficit as structural spending pressures continue to grow.
The May budget projected a deficit of $13.9bn in 2023-24, which will blow out to $35.1bn in the following financial year. Treasury expects the nation’s finances to remain in the red for at least the next decade.
While the Intergenerational Report will reveal the long-term outlook for the country, Treasury has forecast only marginal quarterly economic growth over the coming year, leaving the country vulnerable to domestic and overseas shocks that could push growth below zero, raising the risk of recession.
The mounting toll on spending from the most aggressive series of interest rate hikes in a generation could tip the nation from slight growth to outright contraction over the coming year, as consumption slows more quickly than anticipated.
The Reserve Bank – which has signalled an extended cash rate pause at 4.1 per cent – is waiting to see whether its monetary policy tightening has done enough to slow the economy and bring inflation under control.
Another danger to the outlook is the rapidly deteriorating Chinese economy. Economists have slashed their growth forecasts for the Asian giant over recent weeks following a string of poor data suggesting China’s property slump is dragging heavily on activity.
While much of the world struggles to contain inflationary pressures, China is suffering through a damaging bout of deflation. Chinese consumers have become deeply pessimistic, exporters are struggling, and more than one in five young people are out of work.
Previous slowdowns have been met with generous stimulus packages that have recharged growth. But President Xi Jinping has so far proved reluctant to announce any major policies to prop up activity.
The travails of Australia’s largest trading partner come as the government over the coming months prepares to release its Southeast Asia Economy Strategy to 2040, led by former Macquarie Group chief executive Nicholas Moore. The document will outline how Australia can boost engagement with regional partners, as part of a wider strategy to diversify trade and investment partners amid a more fractious geopolitical environment, including a less reliable and more aggressive China.
After Covid-19 exposed the weakness in global supply chains and accelerated a trend towards geopolitical fragmentation – with major countries such as the US turning more inward – the government is focusing on building national resilience and securing more reliable investment partners. The Australian understands Dr Chalmers is working to streamline foreign investment rules to make it easier for trusted overseas investors, predominantly private sector players but also pension funds, to navigate the strengthened Foreign Investment Investment Review Board tests.
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