Treasurer tells CEOs: get positive

Business backs Frydenberg’s productivity rallying call, but warns more needs to be done to increase competitiveness.

Australian Federal Treasurer Josh Frydenberg ... “Our productivity growth over the last decade has slowed and we cannot simply rely on high commodity prices to boost national ­income,”. Picture: AAP

The Business Council of Australia has backed Josh Frydenberg’s rallying call to businesses to invest for growth, but warns the global market is dragging the Australian economy down and more needs to be done to increase competitiveness.

BCA Chief Jennifer Westacott welcomed the treasurer’s address, in which he called for higher productivity to lift living standards and boost wages by $3000 a year.

“This is more than just a speech, it is a crucial signal to companies that the government is backing the economy, backing business and backing investment,” she said.

Ms Westcaott said Australian businesses were determined to expand and invest in innovation but their efforts were being undermined by concern about the global economy and Australia’s relative competitiveness.

“As the Treasurer says ‘there are no easy answers or silver bullets’,” she said. “Improving productivity will take a concerted effort from business and the government working together to remove the roadblocks that are holding our nation back.”

Ms Westacott said higher productivity was the key to better living standards and Mr Frydenberg’s push to create the right incentives for workers and businesses mirrored the Business Council’s call for action to make the nation more competitive.

“This involves lower taxes, cutting red tape, building infrastructure to address congestion in the cities and attract people to the regions,” she said. “Giving Australians the skills and training they need to keep pace with workforce changes, and ensuring workplaces operate in the best interests of everyone.

“We welcome the Treasurer’s acknowledgement that the right settings need to be in place to encourage business investment and his decision to place the need to improve productivity on the Treasurers’ COAG agenda.’’

Mr Frydenberg earlier issued a rallying call to company bosses to ­invest more in new technologies — rather than returning excess cash to shareholders — in a bid to kickstart flagging productivity and boost wages by $3000 a year.

In a wide-ranging address to the Business Council of Australia, the Treasurer has questioned whether the nation’s biggest corporations have been “aggressive enough in the pursuit of growth” or too heavily focused on returning extra capital to shareholders or sitting on idle piles of cash.

Amid calls for all levels of government to address sagging productivity growth as the economy stagnates, Mr Frydenberg also signalled the government’s ­intention to pursue “evidence-based, pragmatic” overhauls of the industrial relations system, while raising the prospect of further incentives to get businesses to invest and grow.

According to the Treasurer, getting productivity growth back to a target of 1.5 per cent from its current level of about 1.1 per cent would help grow the economy over the next 10 years and ­increase the pay packets of workers by thousands of dollars a year.

“Our productivity growth over the last decade has slowed and we cannot simply rely on high commodity prices to boost national ­income,” Mr Frydenberg said. “What is in our control is our ability to ­influence productivity with the right policy settings and business practices.

“Should we get our average annual productivity growth from 1.1 per cent back to 1.5 per cent, then annual incomes per person will be over $3000 higher by the end of the decade. GDP growth and real wages will also be 4 per cent higher and the economy $70 billion bigger overall. That is a lot to play for.”

While declaring the battle over reducing the corporate tax rate is dead, Mr Frydenberg put the potential reform of state-based stamp duty taxes and zoning laws on the agenda for a treasurers’ meeting in October. He has written to the states and territories asking them to put forward reform priorities for the Council on Federal Financial Relations, where the productivity crisis will be a stand-alone agenda item.

In a warning that Australia may not be able to guarantee rising standards of living unless ­action is taken to restore productivity growth — which has fallen by more than 50 per cent since the 1990s — Mr Frydenberg will tell the most powerful business chiefs in Australia to “back yourself and use your balance sheet to invest and grow” rather than shift profits to shareholders through buybacks and one-off special dividends.

“If we are going to create new jobs and enable people to earn more for what they do, we need businesses to increase their capital expenditure and to adopt new technologies and business practices that effectively integrates capital with labour,” he says. “Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates. But is a buyback ­always the best option for the future growth of the company and therefore the economy?”

But Labor’s treasury spokesman Jim Chalmers blasted Mr Frydenberg’s speech, saying his rallying calls for increased business investment “was not an economic policy.”

“He claims his policy settings are right but so far his approach has been a recipe for the slowest growth in the ten years since the Global Financial Crisis, weak business investment, declining productivity growth, stagnant wages and declining living standards,” Mr Chalmers said.

“This is what happens when a Government has a political strategy, but not an economic policy or plan. “

According to Treasury research, about 95 per cent of Australian companies have “barely” improved their productivity over the past 15 years, due to companies failing to adopt new technologies or invest in their businesses amid a shift to the less productive “services” economy. Even the 5 per cent of Australian firms considered “frontier firms” — doing better than most and which account for almost all of the country’s productivity growth — have not kept pace with global peers.

The unusual intervention from Mr Frydenberg into corporate ­financial behaviour comes after ­almost 80 per cent of Australian corporations opened their books for the August reporting season, revealing a flurry of special dividends and buybacks worth billions.

Mr Frydenberg used his ­address to call out the almost $30bn that has been returned to shareholders in the form of buybacks and special dividends over the past year — a 140 per cent increase on the average $12bn over the previous four years.

Last week, Qantas announced a $400 million buyback, adding to the more than $4bn the airline has returned to shareholders since 2015. Packaging giant Amcor has announced a $740m buyback program, while health insurer Medibank announced a $70m special dividend. Supermarket giant Coles also announced a special dividend, along with Coca-Cola Amatil, BHP and Rio Tinto.

In recent decades, share buybacks have risen in prominence as a preferred way to return capital to shareholders, rather than dividends, as repurchasing stock can boost not only share prices but also increase earnings-per-share — a metric against which executive ­bonuses are awarded.

Since 2013, US companies have poured $4.2 trillion into stock buybacks, stoking controversy.

Australia’s productivity rate has plunged from an average of about 2.5 per cent in the 1990s to about 1.1 per cent in recent years, with Mr Frydenberg blaming the fall in business investment or “capital deepening” for much of the decline. While noting that management may want to be prudent when dealing with unexpectedly large cashflows or proceeds from selling unwanted divisions, Mr Frydenberg argued that taking “appropriate risk” is part of the long-term growth strategy of successful firms.

He said he understood the “frustration” about the failure to cut the corporate tax rate to 25 from 30 per cent and made clear the government’s plan was to look at alternatives to “more ­effectively encourage business ­investment”.

“This is not about providing tax breaks for companies to do what they will be doing anyway, but rather putting the right settings in place to enable them to go a step further and back themselves to grow,” he says.

“We are interested in further workplace relations reform that is evidence-based, pragmatic, protects workers’ entitle­ments and produces clear gains to the economy and working Australians.”