Small Business Overlooked in the Intergenerational Report
They entirely overlooked small business in the Intergenerational Report (IGR). It is a report produced every five years by the Productivity Commission.
There was an article in the Australian recently by Luke Achterstraat. He is the CEO of the Council of Small Business Organisations Australia (COSBOA). In it, he made a couple of prescient points.
The first was the observation that “small business” does not appear once in the entire document.
The author goes onto say that the omission is “disappointing at best and alarming at worst.”
I think he could say more about that omission, that it portrays an alarming focus on the big end of town. It reveals an appalling disinterest in the engine of Australia’s workforce participation and productivity. It is ignoring the vehicle that will absorb the population growth Australia is undergoing.
Creative Destruction in Small Business
An important component in pursuing productivity which the government has given up on is the process of change and dynamism. This is an old idea described famously in the term ‘creative destruction’ by economist Joseph Schumpeter in the early 1940’s.
It means out with the old, in with the new. Or more precisely out with the outdated and in with the more productive.
We typically think small businesses to be concentrated on cafes, restaurants, and accommodation. However, they play an important role in providing construction, professional, technical services and more.
These are important places of innovation and dedication, with many owners working over 38 hours per week.
The proof that small businesses are the engine of our prosperity is in the breach. In the same report that assumes a much lower level of productivity over the next four decades than in the last four, there is not one mention of small business.
The two go together. Australia is at a crossroads whereby the dominant businesses, which comprise mostly banking and mining, have been around for a long time. Often more than a century.
They have benefited from a lack of competition which characterises the Australian economy. Not innovation.
Outside of the IGR, we see small business in a paternalistic way. Their major role is to mop up an overflowing workforce in a rapidly growing population rather than as a critical source of productivity in the economy.
When a small business gains scale, we beset it with high levels of regulation and choke off the nimbleness that allows it to reap gains from productivity.
A critical feature of small businesses is that they account for most of the new entry and exit in the economy. This churn, what is also called ‘creative destruction’, is what drives competitiveness that adds to overall productivity growth.
Monopoly and Concentration
Instead, we have increasing market concentration, a rise in mark-ups in pricing and a reduction in dynamic forces across the economy.
One thing that would help in fostering the small business sector and lead to better economic outcomes would be to help small business to access finance.
Our current system of finance is good at providing finance to purchase passive assets. Especially residential property. The ready accessibility of this type of finance is the main reason that property prices in Australia are so high. [find the article I wrote some time back about the impact of finance on property prices]
Another thing that would help small businesses would be to lower the levels of tiers of regulation that a business must contend with as it grows. It is not unreasonable to expect a business to contend with a greater regulation as it grows. The steeply progressive way in which this occurs is an impediment to developing larger businesses.
Luke Achterstraat shows that there is a failure in the global view that the IGR has taken of the Australian economy over the next 40 years. It has not inserted the role of small businesses into that view. By its own assumptions, it has condemned us to a future of lower levels of productivity growth. It has written a story about us of a slow but steady decline in prosperity.
We are losing the race.
If we are to address the many aspirations we have as a society, we must address the many structural challenges we face.
A Closer Look
Some aspirations include:
- To provide housing for a growing population before those who want to slow our population growth win the argument.
- Properly fund our rapidly growing NDIS costs.
- Building a care sector that can combine the need to industrialise the care sector with a capacity to maintain the dignity of those who we care for.
- Increase our defence capabilities so that we can decide for ourselves rather than let others decide for us what our strategic priorities are.
Some of the structural challenges we face include:
- Having an industrial relations system that means we routinely blow big nation-building projects way out of budget and way over time.
- Having a tax system that will place burdens on the dwindling income of the young rather than the growing wealth of the old as time passes.
- Relying on a pervasive tax and transfer system to spread the wealth of relatively industries and sectors across the population.
Some remedies include:
- Broadening base and increasing the rate of GST.
- Replace the sugar hit of stamp duties with the regular nutrition of a form of land taxes.
- Reduce the complexity of participating in the labour market from an employer’s point of view and a gig economy worker’s point of view.
- Be choosier about where a government should intervene in the economy directly and move back to a judicious use of market mechanisms.
- Establish a new city, in the middle of nowhere where land is cheap. Build roads and a fast rail to it, a nuclear power plant and a dam to provide energy and water for manufacturing and agriculture jobs. Call it Harrenceville.
This will help pay our way in the world by exporting things other than what we dig out of the ground.
We should be ambitious in what we expect of our fabulous country as we march forward. It has attracted the cream of populations around the globe. It has produced ideas and inventions that have benefited humanity. It is the land of a great democracy.
Where not only is everyone provided with equal opportunity, but we celebrate a spirit of egalitarianism at the core of our national character.
My previous article “Business Brokers and Small Business” talks about small business in more detail and the role business brokers play to create markets for their sale.
