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Why retailers need two budget deficits

BusinessmanIn his song Trouble Man, Marvin Gaye sings about taxes, death, and trouble.

Today, the chorus of media commentators, politicians, economists and the Reserve Bank sing a similar tune – one about interest rates, sluggish economic growth, and the deficit.

The quartet mostly agrees that economic growth is slowing, and the primary factor preventing it from dropping to zero by mid-next year are the big natural gas export contracts we have in place for the next 18 months. But, this buffer will not last and the looming economic stagnation is a concern for retailers in Australia.

While the current retail trading figures look reasonable, retailers expect to face less favourable conditions in 2017. And the following year looks even bleaker.

These impending economic challenges should give retailers cause for reflection, and impetus to fortify their businesses in preparation for tougher times ahead – including lobbying key decision makers to do what is best for the industry, and the country at large.

Why policy makers need a nudge in the right direction

The typical reaction to economic malaise is to slash interest rates to help drive investment. However, the rates in Australia are already at a record low and can be cut no more than another 0.25 per cent and even this is now being questioned.

This fractional reduction would be inconsequential anyway, as the current interest rates are not to blame for lackluster borrowing. Businesses are reluctant to borrow because they see fewer opportunities to make profitable investments.

Politicians would like us to believe that the ever-growing budget deficit is at least partially to blame for Australia’s economic problems and the lack of investor confidence. Consequently, policy makers want to increase taxes and cut expenditure to address the issue.

The proposed split between these two measures varies depending on the political orientation of the legislators, but, regardless of the mix, the end package will make only a small dent in the deficit and further stall the economy.

Does this mean that Australia has run out of options? Are we about to enter an era of gradual economic and social decline?

I argue that we are definitely out of easy choices, but there are still ways to navigate away from the emerging economic maelstrom. To change course, systemic improvements to our economic management are needed. Attempts to further tune the old system can no longer yield better performance. It is time to upgrade our economic engine. Below I detail two such overhauls.

Increase economic freedom

Economic freedom is the extent to which an individual has autonomy to control his or her labour and property. This is a key driver for entrepreneurial spirit, innovation and spontaneous economic growth.

This is why the government, with full cooperation from the opposition (perhaps it is time for a six-year Liberal-Labor coalition?), should establish a Task Force to restore economic freedom in Australia.

The most enviable global economies, such as those of Singapore and Switzerland, have higher economic freedom indexes. Singapore scores 88 out of 100. Five years ago, Australia scored 83, but is now tracking around 80 with a downward trend.

If you look at the per capita income in Singapore, you will find that Australians, Australian retailers included, pay a heavy price for the bloated and restrictive rules and regulations that anchor our economy.

The restoration of economic freedom in Australia would mean changes to liberalise labour laws and the labour market, government spending, and taxation.

The simplification, and in some cases removal, of government regulation is also a part of economic liberalisation. Such structural changes would reinvigorate the economy for the next 15 to 20 years. It would be a godsend for retailers.

End the debate about a single national debt figure

In addition to economic liberalisation, we need to initiate a mature debate about two separate budgetary deficits rather than a single national debt figure.

Politicians must stop the oratory around the general level of debt and the merits of economic surplus. Instead, the discussion must cover two separate topics: an operational deficit and capital borrowings.

Anyone who works in the commercial space knows the obvious – if you run your operation at a loss, sooner or later you will face bankruptcy. Therefore, it goes without saying that the national operational deficit should be zero. This is the figure we need to use to assess whether or not we are living within our means.

Capital borrowings are different. Again, commercial parallels help here. If a project delivers benefits that allow for progressive repayment of the borrowings and covers the interest, the nation can borrow freely.

If such rules were in place a few years back, they would have prevented politically motivated ventures such as the NBN, where the benefits were said to be, “so great that economic assessment was not required”. The project never made any economic or technological sense. 5G networks make cable connections obsolete.

To fund profitable ventures, the government’s 2017 agenda should be to borrow and stimulate the economy via numerous projects that would substantially improve Australia’s infrastructure and services, opening new opportunities for the nation. Examples of this include fast railway links between capital cities and regional centres, safe nuclear power to eliminate emissions, water projects to move surplus water from the Northern to the Southern states, better roads, centers of breakthrough scientific research, and much more.

Just these two initiatives: to free the economy and to start spending government money wisely (including borrowed money) would transform the Australian economy and save retailers a lot of future pain. The retail industry would be re-invigorated.

But, do we have the necessary political will to make it happen? As long I remain a lone wolf howling in the forest, I remain a pessimist. I call the retail pack to join me, including the ARA, to help drive action at a government-level.

Andrew Gorecki is managing director of Retail Directions and a 30-year veteran of the Australian retail industry. He can be contacted at

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