Fair Work Act Review 2012

REFORM OF THE AUSTRALIAN WORKPLACE RELATIONS SYSTEM

1. The scope to reform the workplace relations system is relatively unencumbered compared to previous decades.  Legal and constitutional impediments have receded.  The High Court in its 2006 decision upholding the legality of Work Choices confirmed that the Commonwealth was able to use the Constitution’s corporations power to regulate workplace relations.  This offers more direct and sweeping powers than were available by reliance on the conciliation and arbitration power.

2. A list of reforms is presented.  The key tests to support the reforms were that each proposal would facilitate:
   1. workplace flexibility;
   2. job creation and security;  and
   3. investment in Australian ventures and jobs.

3. The obvious objectives of a workplace relations system are to provide:
   1. real incomes growth;
   2. jobs growth;
   3. improved productivity;
   4. fair pay and conditions;
   5. easy access to jobs;
   6. encouragement to try innovative work practices;
   7. a safety net for more vulnerable workers;  and
   8. a credible system to resolve entrenched disputes.

4. Unions have a legitimate role in workplace relations.  However, they have been given a privileged and powerful position under the fair work system.  It is estimated by the Australian Industry Group that the Fair Work Act 2009 (FW Act) contains 100 new union rights.  This expansion is unjustified when their representation in the workplace has declined so dramatically.

5. It follows that some of the proposed reforms curb the excesses of union power.

6. The deficiencies of the fair work system are numerous.  The main deficiencies are outlined in Attachment A.

7. Many of the features of the fair work system are reminiscent of decades past.  A credible workplace relations system must be suited to contemporary conditions.  The reforms proposed in this paper are suited to these conditions.  The features of a modern workplace are outlined in Attachment B.

Agreements

8. Choice of agreement type should be reintroduced.  The system should allow employers, employees and unions to choose an agreement type best suited to their circumstances.  The agreement types on offer would be:
   1. union collective;
   2. non-union collective;
   3. individual;
   4. union greenfield;  and
   5. non-union greenfield.

9. Collective and greenfield agreements could be a multi-employer agreements in limited circumstances, for example to cover employers of a common franchise.

10. All agreements would have to satisfy a no disadvantage test against the National Employment Standards.  An individual agreement would be subject to an additional no disadvantage test against a collective agreement that applied in the workplace to employees in the same category.

11. The approval of agreements has become an elaborate bureaucratic process.  Approval should be the responsibility of the regulator, the Fair Work Ombudsman (FWO) and not the tribunal, Fair Work Australia (FWA).  The accessibility of FWO and quick turnaround would be fundamental requirements of the system.

Individual Flexibility Arrangements

12. Individual flexibility arrangements (IFAs) were supposed to offer access to individually tailored workplace arrangements.  It is clear that they have failed;  take up is minimal.

13. The procedures to enter an IFA are complex and cumbersome.  The model IFA clause for awards is highly restrictive in its scope.  Unions demand strict limits on the scope of IFA clauses in enterprise agreements.  It is common for the clauses to restrict IFA content and to require consultation with the union or other employees.  The ease of exiting an IFA engenders reluctance on both sides.

14. Ideally, IFAs should be replaced by individual agreements.  In the event they are retained, substantial amendment is required if they are to attract any genuine interest.  Enterprise agreements should confirm access to an IFA absent the insertion of any restrictions on content or procedure.  An IFA is an agreement between the employer and employee.  Interference or oversight by a union or other employees is unwarranted.

15. Similarly, the model clause used in many awards should be less restrictive.  A no disadvantage test against the award and National Employment Standards should continue to apply.

16. The termination arrangements should be extended beyond the present 28 days’ notice period.  Termination with 6 months’ notice should apply.

17. An IFA lapses with the approval of a new enterprise agreement that covers the employee.  An IFA should continue, notwithstanding the making of a new agreement, subject to the IFA continuing to meet the better off overall test.

18. The maximum term of an IFA should equate with the maximum term of an enterprise agreement, four years.  Therefore, an IFA would apply for a period of up to four years that is agreed between the employer and the employee.

Bargaining and Agreement Making

19. Bargaining and agreement making are now more complex and the unions have an enhanced role.  Employers are reluctant to pursue innovative agreements with employees.  Instead they tolerate what the system and unions dictate and adjust their business activities to suit.  It is not surprising productivity has stagnated.

20. The wide definition of “permitted matters “for negotiation should be reduced.  A menu of prohibited matters should be established.  Unions are pursuing broad negotiating agendas that extend to controlling the running of the business in areas that are traditionally the responsibility of management.  This frequently results in protracted negotiations and disputes.  Prohibited content would include:
    1. restrictions on the engagement and use of contractors, casual and labour hire workers;
    2. encouraging or discouraging union membership;
    3. restrictions on the ability of a person to become a party to a particular type of agreement;
    4. right of entry;  and
    5. discriminatory terms.

21. Australia is becoming accustomed to the emergence of protracted bargaining and lengthy industrial disputes.  We have seen this in the airline, car manufacturing, mining, public and food production sectors to name a few examples.  The trend is partly due to the unions having confidence to extend their claims beyond the traditional pay, conditions and entitlements improvements.  Unions are now adopting bargaining agendas that pursue rights over the business strategy and operations of the employer.  The reintroduction of prohibited content will alleviate some of these pressures.

22. The fair work bargaining system is also at fault.  FWA could be empowered to create an initial period of protected action and to approve the type of action to be taken.  An extension of the period of protected action would require FWA approval.

23. In a number of disputes the unions are frequently employing the tactic of withdrawing notified protected action at the last moment.  This means the employer’s business is disrupted while union members suffer no loss of pay.  Penalties should be imposed on the use of this tactic where the withdrawal is not linked to a settlement of the dispute.  The late withdrawal of notified industrial action would result in the deduction of pay for the employees involved.  The deduction amount would equal pay for the period of the notified action.

24. Genuine choice of agreement type combined with improved bargaining rules should promote productivity improvement.  It is incongruous that union leaders boast about enterprise agreements delivering massive pay increases absent any commitment to productivity improvement.  The most glaring recent examples are the General Motors Holden agreement and the Victorian building industry pattern agreement.  Parties entering such agreements invite a reckoning that will involve business contraction and job losses.

25. The best outcomes for a business and its employees are achieved when both sides have the capacity to entertain improvements that add value to the business and improve earnings and job security.  Inevitably, new work practices and improved efficiency are involved.  Many businesses and their employees in Australia understand they operate in a competitive environment and that the future is not guaranteed.  Genuine choice of agreement type and fairer bargaining are urgent reform needs.

Independent Contracting

26. The gradual incursion of tribunal and union interference in the use of contractors and labour hire workers is damaging workplace flexibility and efficiency.  Many Australians prefer the freedom and opportunity independent contracting offers them.  Unions oppose independent contracting because it limits their influence in the workplace.

27. The regulation of independent contracting and labour hire should be removed from the workplace relations system and transferred to commercial law.  This form of work is common across many sectors of Australian industry.  People who choose to be contractors know the risks and do not need the dead hand of union control to protect them.  A transfer of regulation to commercial law will reassure them that appropriate opportunities and regulation will apply to their endeavours.

28. The unsuitability of workplace relations regulation would be reinforced by having interference with contracting decisions identified as prohibited content that could not be included in industrial agreements.

Regulation of Unions and Employer Associations

29. Events during 2011 highlighted a lax system of union accountability and regulation.  This deficiency is particularly apparent in the management of finances.  Unions collect and spend $ millions of members fees.  They own property, employ large staffs, support political parties, campaign on a variety of public interest issues and engage actively in the media.

30. The High Court’s 2006 decision strongly affirmed the Parliament’s right to use the corporations power to regulate the activities of trade unions and employer associations.

31. Unions are registered and regulated pursuant to the Fair Work (Registered Organisations) Act 2009.  Corporations are regulated by ASIC.  The corporations’ law system is rigorous and highly effective.  Unions and employer associations should be regulated by ASIC with the same level of accountability as applies to corporations.  The ASIC coverage would apply to registration, financial management, conduct of officers, rules of the organisation and elections.  Disputes would be heard by the federal courts.

Right of Entry

32. Union officials should have a right of entry to conduct legitimate business at a time and in a manner that does not interfere with the operation of a workplace.  The fair work system has significantly expanded the rights of entry.  The ALP policy in 2007 was to retain the right of entry provisions that applied under the Workplace Relations Act 1996.  This policy was not honoured.

33. The right to enter to hold discussions with employees should only apply if the official’s union has members at the workplace.  The fair work system permits entry for discussions if a workplace contains employees eligible to be a member of the official’s union.

34. The tests for granting a permit should be applied with rigour.  Similarly, notice of entry requirements should be strictly enforced.  Officials whose conduct contravenes the law would become ineligible for a permit.  Repeat offences would lead to penalties against a union and possibly withdrawal of entry rights from all its officials.

35. The right of an employee to decline to meet with a union official who has gained entry should be clearly spelt out and protected.  Employers should be required to ensure this right is not infringed.

36. Agreements should not be able to include provisions on right of entry.  Right of entry terms should be specified in the legislation and nowhere else.

Transfer of Business

37. In our dynamic economy business structures change frequently.  Takeovers, mergers and outsourcing are common.  Regulations that allow these transactions to occur easily are important to a modern economy.  The fair work system provisions act as a potential disincentive to transfer business and have adverse consequences for job security.  They operate against the interests of both employers and employees.

38. In a takeover or merger employees in the vacating business are more likely to be terminated.  If employees of the vacating business are retained then multiple agreements apply to the employees of the acquiring business.  This results in disharmony and administrative complexity.  Also, out-dated terms and conditions are preserved often to detriment of employees.

39. The “character of business” test should be reinstituted.  The test requires two employers to have the same character before transfer of business implications arise.  Reasonably settled law had evolved around this test.  The current “similarity of work” approach should be removed.

General Protections

40. ALP Governments display a natural inclination to add to the regulation of how Australians lead their lives and go about their business.  This inclination is nowhere more apparent than in workplace relations.

41. The fair work system introduced a particularly pernicious concept of “general protections.” The general protections are an amalgam of the former, freedom of association, coercion, and unlawful termination of employment provisions with some additions.  In particular, the concepts of workplace rights and adverse action that breaches a workplace right have been introduced.  If an adverse action is alleged the reverse onus of proof applies to legal proceedings.

42. Protections against abuse of freedom of association, coercion and unlawful termination have existed in previous legislation.  They have operated satisfactorily.  The new general protections, combined with expansive legal rulings, have the capacity to constrain and damage employer – employee relationships.  Already we are seeing the use of general protections displacing traditional unfair dismissal remedies.

43. The general protections are potentially the most damaging aspect of the fair work system.  They reflect the zealous regulation associated with European labour laws.  Increased litigation about employment decisions and jurisprudence establishing a range of detailed workplace rights will be the result.

44. The general protections chapter of the legislation should be removed and protections reflecting those in the Workplace Relations Act 1996 reintroduced.

45. If this was to take time then immediate changes could be made.  For example:
    1. a workplace right not to include a discretionary benefit offered by an employer;
    2. the standard legal principle of the applicant proving that a contravention has occurred to apply.  The reverse onus of proof removed;
    3. claims relating to termination of employment to be lodged within 3 weeks of the termination;  and
    4. the sole or dominant reason to be taken into account in determining the reason for a particular action.  Decisions are emerging where very contorted logic is being applied in ascertaining the reasons for taking action.

Superannuation

46. Superannuation legislation gives an employee the right to choose the superannuation fund in which they want their money invested.  Awards are required to include a clause specifying “default” superannuation funds.  Default funds come into play if an employee declines to make a fund choice.  Typically the award clause will list up to five funds.  The funds listed are with few exceptions industry superannuation funds.  The Productivity Commission is conducting an inquiry into the selection and assessment of default funds in awards.

47. The investigation is overdue and I support it.  The process is riddled with potential conflicts of interest, appears to be anti-competitive and resembles a closed shop.

48. The treatment of superannuation in enterprise agreements raises equally grave concerns.  Most agreements deny employees choice of superannuation fund.  Some agreements such as a Woolworths agreement state “choice of fund is not available.” The template CFMEU agreement in the building industry provides “no employee shall commence employment unless he/she is a registered worker in the C+BUS scheme.”

49. Most employers and unions are reaching comfortable agreements that mandate payment of employees’ superannuation into one or two nominated industry funds.  This occurs despite most private sector workplaces having few, if any, employees who are union members.  The employers are denying their employees’ the right to choose;  a right that the superannuation legislation supports.

50. Agreements should not be allowed to include terms that deny choice.  However, they should be permitted to nominate preferred funds while allowing an employee to choose an alternative that complies with the superannuation regulations.  The National Bank Enterprise Agreement 2011 provides a model clause offering employees choice of fund.

Demarcation Disputes

51. Demarcation disputes are disputes between unions involving a contest as to which organisation has the right to represent workers.  Employers are expressing concern that demarcation disputes are increasing under the fair work system.  Such disputes are damaging and difficult.  An employer generally can do little to resolve them, yet their business can suffer significant dislocation.  Industrial action in support of a demarcation dispute is unlawful.

52. The rights of entry for union officials to workplaces for the purpose of discussions with workers have been relaxed.  Modern awards apply to employees in an industry or occupation and do not have union respondents and do nothing to partition union representation.  These faults have engendered an atmosphere where in a number of industries contested rights are pursued with vigour with little regard for legislative constraints.

53. The right of entry for discussion purposes should be returned to having members covered by an industrial instrument that applies to the workers at the workplace.

54. Industrial action in support of a demarcation dispute is unlawful.  The core responsibilities of the FWO should include the investigation and prosecution of unlawful conduct associated with demarcation disputes.

Building and Construction Industry

55. The building and construction industry plays a vital role in our economy and community.  The unions and some contractors have a history of showing contempt for the law and decent standards of conduct.

56. I am hesitant to support potent intervention in an industry’s workplace affairs.  However, the workplace relations of the building and construction industry demands strong action.  The Building and Construction Industry Improvement Act 2005 should not be disturbed.  The ABCC should concentrate on its core business of enforcing workplace relations laws on building sites.  The National Code of Practice and associated guidelines should be designed and administered in a fashion that provides a compelling inducement for contractors to comply.

Appointments to Fair Work Australia

57. The credibility of FWA is to some extent compromised by the controversies that surround the appointment of members.  The careers of new appointees are scrutinised and tallies of backgrounds regularly counted.  ALP governments appoint predominately union officials and union-friendly lawyers.  Coalition governments appoint predominately employer related personnel.

58. A new system adapted from procedures associated with appointments to similar bodies overseas could be used.  Nominations to fill the FWA vacancies of Deputy President and Commissioner would be made on a rotating basis by the ALP and the Coalition, irrespective of who was in power.  The appointment of President would be made by the government after consulting the Opposition, the ACCI and the ACTU.

Compliance Advice

59. The fair work system has intensified earlier trends by establishing a complex, prescriptive and legalistic regime.  Legal obligations in employing people can be difficult to understand.  Even large employers such as Spotless, Toys R Us and Hungry Jacks have fallen foul of the legislation.

60. The advice of the regulator, the FWO, is therefore important in assisting employers, especially small employers, understand their obligations.  Small employers lack the financial resources to obtain considered legal advice.

61. However, employers are unable to rely on the advice of the FWO in any legal proceedings alleging that they have not satisfied their employer obligations.  This is wrong.  A government that chooses to impose a complex system on the community has an obligation to provide accessible and expert advice about obligations.

62. An employer who accurately describes their circumstances is entitled to receive written advice about their obligations.  Such written advice should be allowed as a defence in any subsequent legal proceedings.

Public Sector

63. The public sector has a natural inclination to resist workplace relations reform.  All public sectors are susceptible to the one size fits all approach.  Central agencies for budget and personnel management are powerful.  Policies and guidelines are produced with bewildering regularity and scope.  Unions play on these characteristics and support with relish centralised policies and bargaining.

64. Inflexible agreements, one size fits all criteria, elaborate protections against termination or discipline, and mediocrity promoted in preference to reward and incentive are features of most of the systems.  The result is a reluctance to seriously address work practice changes, efficiency and productivity.  Staffing levels have risen and there is evidence too many workers are engaged on mind numbing form filling and processing.

65. Governments appear to endorse the centralised philosophy advanced by unions and their own bureaucrats.  Worse they appear to accept that public sector workers are a unique species that require protections not available to employees in the private sector.

66. Government budgets are coming under increasing pressure.  The call for services and infrastructure is not abating while revenue is not keeping pace.  Reforms to improve efficiency and productivity are necessary.  A key reform to achieve this is to allow individual agencies to bargain and reach agreements with minimal interference from central agencies.  The tests for the approval of multi-agency agreements in the public sector should be strengthened to discourage their use.

Conclusion

67. The reforms that I propose take account of the modern workplace features.  It is fundamental that the country needs a workplace relations system suited to the present and the future.

68. So much of our workplace relations culture remains tied to the past.  A culture characterised by “one size fits all”, that change involves threats rather than opportunities, and that performance incentive, reward for effort and merit are exploitative still flourishes amongst unions, languid employers and stultifying tribunals.

69. The harm caused by the fair work system is that it limits our growth opportunities.  It plays too hard to union dogma.  Investment in our future and securing jobs is put at risk.  The strength of our mining sector disguises the harm being caused in other industries.  This impact is becoming apparent to many involved in workplace decisions.

70. The challenge is to introduce change so that the system is suited to the economy and labour market of 2012 and beyond.  A failure to introduce fundamental change means the applause of unions will ring hollow as investment and jobs are lost in a modern Australia.

---

ATTACHMENT A

THE FAIR WORK SYSTEM – A FAILURE ON MANY FRONTS

71. The Fair Work Act 2009 (FW Act) was heralded as a rebalancing of Australia’s workplace relations.

72. The Government claimed it would promote productivity and provide fair laws that businesses would find flexible.

73. The fair work system has failed to live up to its promise.  Productivity is stagnant, employer – employee engagement is in retreat, and outcomes that enhance flexibility are rare.  Unions have acquired a privileged position and their leaders display a return to militancy.  Industrial unrest has increased.

74. Fundamentally, the fair work system is unsuited to modern workplaces.  It seeks to regulate workplaces in the style of the 1970s.  It represents a threat to future growth in jobs and investment.

75. This paper highlights the key deficiencies of the fair work system.  Some are readily apparent.  Others are more disguised and only recognised as time brings more of the system’s provisions into play.

Individual Flexibility Arrangements

76. Individual flexibility arrangements (IFAs) introduced a new element into workplace agreement making.  They were intended to give employers a capacity to develop innovative employment arrangements with individual employees.  The IFA initiative was used to allay the concerns of many employers and employees about individual statutory agreements, Australian Workplace Agreements, being removed from the system.

77. IFAs have proved to be a glaring failure.  The take up of IFAs is very limited.

78. Detailed and onerous conditions apply to their use.  They cannot be offered as a term of engagement.  An IFA can be terminated with a maximum of 28 days’ notice.  An IFA lapses with the making of a new collective enterprise agreement or modern award.

79. The fair work reforms were presented as a return to collectivism.  The unions embraced this approach as it affords them considerable privileges.  Individual arrangements undermine their influence and as such are strongly opposed.  A key position adopted by most unions in bargaining for collective enterprise agreements is that the clause allowing access to IFAs must be highly restrictive.  Some clauses go as far as giving the union or employees a veto right over any IFA that an employer and employee may wish to enter.

80. In contrast the FW Act allows an IFA to cover and therefore vary any term in a collective agreement.

A Multi Layered and Complex System

81. Australia’s workplace relations system has evolved into a distinctly complex model.

82. Our system now incorporates four intricate layers:
    • national employment standards;
    • enterprise agreements;
    • awards;  and
    • minimum wage orders.

83. In addition there is interaction and overlap between the layers.

84. Awards, curiously called modern awards, represent a re-enlivening of highly prescriptive industry and occupational regulation.  They are a uniquely Australian feature of the workplace relations system.  In most OECD economies the design of workplace relations reflects agreements or contracts supplemented by legislated national standards.

85. The implications of the complexity for small business are dire.  Over 700,000 small businesses employ 4.7 million Australians.  The previous gains in small employer – employee relationships are now jeopardised.  The added complexity of the system, its emphasis on collectivism and more aggressive compliance systems forces many small businesses to fall back onto the award.  This means workplace innovation has diminished and for many employees remuneration and conditions entitlements are below potential.

86. Large employers also complain of the complexity of the system and the difficulty of winning a commitment from unions to work practice change and productivity improvements.

Greenfields Agreements Only Available With a Union

87. Greenfields agreements apply to new ventures where employees have not been engaged.  They feature in many areas of the economy, particularly in construction and mining.

88. The FW Act prescribes that an employer must negotiate a greenfields agreement with a union.  This is a departure from other agreements which are negotiated with employees.

89. Earlier legislation provided an employer the capacity to establish proposed terms and conditions for employees to commence work.  Union involvement was not mandated, although union agreements could be negotiated once the enterprise commenced operations.

90. The time involved in negotiating an agreement with a union during the sensitive start-up phase of a venture can jeopardise the project.  Investors are often reluctant to commit while union negotiations are continuing.  Unions also exhibit a tendency to exploit the vulnerability of an employer at this stage of an enterprise and demand excessive pay and conditions standards.

The Tribunal Has an Enhanced Role

91. Workplace relations that endure are those developed between an employer and employees.  Unions, employer associations, industrial tribunals and regulators can influence workplace outcomes.  A workplace where these outside bodies have a continuing influence will have a limited future.  As Nobel Prize winner Paul Samuelson observed “unions determine how industries in decline are accelerated towards their extinction.”

92. A workplace relations system works best where the role of the tribunal is held in reserve or is seen as a light touch.  The focus of the tribunal should be on assisting the parties to resolve any difficulties that arise in the negotiation or implementation of agreements.

93. The fair work system is said to encourage collective bargaining.  Instead, it expands the role of the tribunal to be an active influence in the affairs of many workplaces.  Fair Work Australia (FWA) vets and approves agreements.  It can review bargaining practices and issue binding orders on how bargaining is to be conducted.  It can arbitrate on the pay and conditions to apply to groups of so called low paid employees.  It can suspend or terminate bargaining and impose an arbitrated outcome on the disputants.  It oversees the finances and the conduct of unions and employer associations.

94. This amounts to an active role with high transaction costs for those caught in the system.  In addition, parties dissatisfied with the role or rulings of the tribunal have recourse to the Federal Court.

95. The trend that had emerged from the early 1990s of reducing tribunal and court interference in Australian workplace relations has been reversed with a vengeance.  Inflexible regulation will inevitably destroy job opportunities and compromise the capacity of Australian firms to compete and grow.

Bargaining Rules Transform Agreement Making into an Adversarial Encounter

96. The FW Act introduced into Australia an American concept of good faith bargaining.  Australia now has a highly adversarial system of agreement making.  It represents a compelling example of a big government, big union and big business model imposed on all workplaces.  It has all the hallmarks of becoming a very damaging innovation.

97. The shortcomings of the system are manifest.  The more obvious are identified below:
    1. the range of matters that can bargained has been expanded.  Unions frequently press claims to usurp management prerogatives that previously could not be bargained.  The bargaining agenda now includes more about rights with less focus on entitlements;
    2. unions have a guaranteed seat at the bargaining table if they have the right to cover any employees of the employer.  They may not have any paid up members in the workplace and the workers may not want them involved;
    3. the bargaining procedures are numerous and complex.  Small employers are choosing not to engage in the process;
    4. unions are more inclined to pursue protracted negotiations.  Union leaders are more confident that industrial bans and strikes will wear down employers;
    5. employers have less capacity to engage with employees not committed to a union or to taking industrial action;
    6. an employer’s response to damaging bans has to meet a proportionate test.  Employer access to the “no work as directed no pay” response is essentially unavailable.  Lockouts and shutdowns are more common.  Innocent employees unnecessarily suffer;
    7. work practice change and productivity improvements are proving almost impossible to win through bargaining.  Where they have been won it is invariably not immediate change but an undertaking to introduce future improvement;
    8. union leaders have responded to their more dominant role by becoming militant.  An employer with the tenacity to reject a union’s claims is likely to encounter fierce and often public repudiation their position.  This is typically followed with threats of industrial action and a campaign to undermine the public standing of an employer;
    9. unions have been afforded the capacity to take industrial action first and bargain later;  and
    10. industrial disputation and disruption are increasing.  The economic cost of the disputation is growing and Australia’s reputation as a place to invest is being damaged.

Right of Entry

98. The FW Act was introduced on the pretext that right of entry (RoE) rules would not be altered.  This is not the case.  Changes have been made and a more relaxed RoE system applies.

99. The right to enter a workplace to hold discussions with employees is linked to a union’s eligibility to cover employees.  Previously it was based on the union being covered by an agreement or award applying at the worksite.

100. RoE clauses are now permitted in enterprise agreements.  It is not uncommon for agreements to confer additional entry rights on unions.  Clauses in construction agreements allow officials to enter without a valid permit, without notice and at times other than meal breaks.

101. This results in the RoE system breaking down.  Mining projects in Western Australia report hundreds of entry requests over a few months.

102. The legislation presents a system based on tightly approved permits, clear notice of entry requirements, on site conduct that does not disturb operations, protection of the rights of employees who do not want to meet a union official and sanctions for abuse of the system.  In reality the system is infringed almost daily.  In many industries unions adopt the practice of entering without asserting the right upon which the entry is justified.

The Content of Enterprise Agreements

103. A distinctive feature of the fair work system is its embrace of collective agreement making.  The support for collectivism is detrimental.  It denies individual initiative and curbs innovation and engagement at the workplace level.  It rests on the premise that most workers are incapable of deciding what is good for them.  A one size fits all mediocrity is favoured over incentive and reward for performance.

104. At the same time the range of issues that can be introduced into bargaining is considerably expanded.  The unions are using this to extend their inclination to constrain innovation into areas traditionally the preserve of those running a business.  The system of determining what can and cannot be included in agreements is complex and confusing.  Similarly, the repercussions for including the wrong material in an agreement is not readily understood by many involved in bargaining.

105. An enterprise agreement is about permitted matters.  Permitted matters are:
     1. terms pertaining to the relationship between an employer and employees covered by the agreement;
     2. terms pertaining to the relationship between an employer and unions covered by the agreement;
     3. deductions of wages authorised by the employee;  and
     4. how the agreement operates.

106. An enterprise agreement must contain the following:
     1. a nominal expiry date;
     2. a dispute settlement procedure;
     3. a flexibility term that allows IFAs;  and
     4. a consultation term.

107. An enterprise agreement cannot contain unlawful terms.  In addition, an enterprise agreement must not contain a term that excludes a National Employment Standard entitlement, modifies a National Employment Standard entitlement to an employee’s detriment, or is a designated outworker term.  FWA cannot approve an enterprise agreement that contains any such terms.

108. An unlawful term is a term that is:
     1. a discriminatory term;
     2. an objectionable term –a term requiring or permitting a contravention of the general protections provisions of the Fair Work Act or the payment of a bargaining services fee.  The general protections provisions are an amalgam of the former freedom of association, coercion and unlawful termination of employment provisions, but with more added in.  The provisions are broader in both application and the type of conduct which is prohibited than what existed under the Workplace Relations Act 1996.  In particular a concept of ‘workplace rights’ which is defined very broadly is introduced;
     3. confers an entitlement or remedy in relation to an unfair dismissal that occurs before the end of the minimum employment period;
     4. modifies access to, or the application of, unfair dismissal provisions in a detrimental way;
     5. is inconsistent with industrial action provisions;
     6. provides an entitlement to right of entry for a purpose covered by the RoE provisions in the FW Act that is different to the entitlement under the FW Act;  and
     7. allows right of entry under state OHS laws different to RoE provisions of the FW Act.

109. In summary, at approval stage, FWA must be satisfied that an enterprise agreement does not contain unlawful terms, designated outworker terms or terms which exclude or detrimentally modify NES entitlements before it can approve the enterprise agreement.  However, FWA is not required to consider whether an enterprise agreement contains non-permitted terms at approval stage.  Therefore an enterprise agreement which contains non-permitted terms can be approved.  Those terms will be of no effect – and it will therefore be up to the employer to know what terms are permitted and what are not permitted.  The underlying purpose of the very confusing scheme is to ensure that an enterprise agreement that has been approved but which is later found to contain a term that is of no effect is not rendered invalid and can continue to operate.

Independent Contracting and Labour Hire

110. Independent contracting and labour hire are forms of employment chosen by many Australians.  It affords them flexibility in the type of endeavour they pursue and how they go about it.  They have a capacity to balance work and family pressures more on their own terms.  They enjoy independence and the chance to run their own business.  They believe that by using their skills, initiative and knowledge that can earn a good living.

111. Unions do not embrace personal initiative and separation from the traditional employment relationship.  The power and influence of unions is undermined.  Most unions are hostile to independent contracting and labour hire.  The ACTU is orchestrating a campaign around the notion of insecure employment as a pretence for limiting access to these forms of endeavour.

112. The fair work system enables unions to demand enterprise agreements that severely limit the use of independent contracting.  For example agreements often contain the following limiting terms:
     1. employers to consult unions and employees 14 days before engaging contractors;
     2. the union to be informed of
        • the name of the contractor/labour hire firm;
        • the type of work to given to contractors to be identified;
        • the number of contractors to be engaged;
        • the duration of the engagement;
     3. contractors to be paid wages no less favourable than ongoing employees;
     4. no ongoing employee can be made redundant while contractors are engaged.

The Oversight and Regulation of Unions

113. The conduct and affairs of unions and employer associations are regulated by the Fair Work (Registered Organisations) Act 2009.  The Act codifies obligations regarding registration, amalgamation, rules of the organisation, membership, elections, records and accounts and conduct of officers.

114. Events that have come to light during the past year raise questions about how effective this regulation has been.  Most unions are large organisations.  They collect $ millions in membership fees.  They are generally designed as federal bodies with branch structures, are active in the media, lobby political parties, have influence over the ALP, are engaged in community interest campaigns and employ large staff.

115. Returns are often not lodged on time.  The latest FWA Annual Report suggests new rules have added to these problems.  Disputes about the conduct of elections and control of unions occur with some regularity.

116. A regulatory scheme that is not robust nor effectively administered involves the risk of fostering an “above the law” attitude amongst officials.

Transfer of Business

117. In a dynamic economy business structures change frequently.  Take overs, mergers and outsourcing are common.  Regulations that allow these transactions to occur easily are important.

118. The fair work system provisions act as a potential disincentive to transfer business and have adverse consequences for job security.  They operate against the interests of both employers and employees.

119. A new “similarity of work” concept has been introduced.  This has disturbed previous concepts and accepted jurisprudence.  The rules specifically apply to the outsourcing and insourcing of work, even if assets do not transfer.

120. The rules focus on transferring employees and only apply if there is a transferring employee.  An employer can avoid the obligations by not employing any employees from the transferring business.  In a takeover or merger employees in the transferring business are more likely to be terminated.  If employees of the vacating business are retained then multiple agreements will apply in the new business.  This results in disharmony and administrative complexity.  Also, out-dated terms and conditions are preserved often to detriment of employees.

---

ATTACHMENT B

THE WORKPLACE OF 2012

121. The Fair Work Act 2009 is often characterised as introducing laws that are reminiscent of the 1970s.

122. At the time when Australia’s workplace relations institutions were forged, agriculture and manufacturing were highly influential in framing workplace attitudes and expectations.  The workplace relations culture of this period prevailed through to the 1970s.

123. It might be attractive for some in the ALP and the union movement to hark back to past glory days of the 1970s.  Days when we had a command economy, centralised wage determination, strong union membership, a managed currency, protection of and rent seeking by key industries and a wide spread 9-5 workplace culture.

124. Those 1970s features however bear little resemblance to the Australian workplace and economy of 2012.

No Job Guarantees

125. The most striking change is that we exist in a highly competitive world.  Nothing can be taken for granted.  No job has a guaranteed future.  Business and commerce is changing rapidly as technology impacts on all aspects of life and work.  New products and services emerge quickly.  The international market place is being transformed as emerging economies mature and old economies stagnate.  Australian firms are employing and locating more jobs overseas.

126. The predominant occupational categories in the workforce are white collar jobs in the services sector.  Many of these jobs are readily transferred between locations.  Others are impacted by technology.  Agriculture and manufacturing jobs as a proportion of the workforce have been in decline for decades.

Union Membership

127. The membership of unions has declined.  Union members represent less than 14 per cent of the private sector workforce.  This is consistent with the experience of most OECD countries.  It is an anachronism then that the Australian workplace relations system affords unions such a central and privileged role.

Family and Work

128. It is now a feature of many Australian families that both adults work and pursue careers as well as raising a family.  They have a different attitude to work and value flexibility to balance work and family demands.  Not everyone regards weekend and evening work as an imposition.  Some will find work at these times suit their lifestyle.

129. In December 2010 an ABS survey of attitudes towards workforce participation and flexibility in Victoria was released.  It estimated that 42 per cent of workers from two parent families with children had requested changes to their work arrangements that involved more flexible hours or the ability to work from home.  A further 28 per cent of this cohort had sought to work fewer hours or to take leave.

Career Pathways

130. The career is now seen as a more adaptable pathway.  Long service with a single employer has become the exception.  Young people in particular expect to work with a variety of different employers throughout their career.

131. The workforce places higher importance on education and skills.  Workers with a higher education qualification jumped from 47 per cent to 57 per cent between 2001 and 2011.  Education and training will be continuous.  Time out for study, family or personal reasons will be accepted as normal.

Independence

132. People value their independence and control over their own destiny.  Many relish the challenge and freedom of running their own business.  Independent contracting, labour hire and outsourcing are entrenched features of our economy.  Both the individuals and business benefit from the flexibility offered by these modes of work.

Part-time and Casuals

133. Part-time and casual work are also playing a greater role in the Australian workforce.  This reflects a number of influences including the competitive pressures on business, the impact of greater workplace regulation and the mobility of younger workers.  The participation of women in the workforce has also increased markedly since the 1970s.

Individual Rights

134. Individuals are more aware of their workplace rights and the capacity for them and their employer to devise mutually beneficial arrangements for work and reward.  The old “one size fits all” approach to managing a workplace no longer applies.  People in many aspects of life value the freedom to make their own life and financial choices.  It is incongruous for them to then come to the workplace and be dictated to by a constraining collective workplace culture.  Reward for effort and performance incentives are valued by many workers.

Older Workers

135. The population and the workforce are ageing.  Workers aged 55 years and over comprised 16 per cent of the labour force in 2010 compared to 10 per cent in 1980.  The labour force participation rate for women 55 years and over rose from 11 per cent in 1980 to 27 per cent in 2010.

136. Early retirement was an ambition in earlier decades, but is now not as valued.  People are encouraged to remain in active employment longer.  Technology affords many older workers the opportunity to adopt work patterns that suit their lifestyle.  Australian workers now recognise the importance of superannuation and wealth creation.  It is accepted that a vibrant and competitive private sector is vital to the future provision of wealth and prosperity in Australia.

Technology

137. Rapid technological change has transformed the workplace and workplace relations.  The traditional lines of authority, the methods of communicating in the workplace and the access to knowledge have been adapted to suit modern technology.  Many businesses use the internet and social media to interact with customers and staff.  A firm that relies on out-dated technology and systems will find it difficult to retain staff.

Conclusion

138. These are some of the key features of the modern workplace.

139. The reforms that I proposes take account of the modern workplace features.  It is fundamental that the country needs a workplace relations system suited to the present and the future.

140. So much of our workplace relations culture remains tied to the past.  A culture characterised by “one size fits all”, that change involves threats rather than opportunities, and that performance incentive, reward for effort and merit are exploitative still flourishes amongst unions, languid employers and stultifying tribunals.

141. The harm caused by the fair work system is that it limits our growth opportunities.  It plays too hard to union dogma.  Investment in our future and securing jobs is put at risk.  The strength of our mining sector disguises the harm being caused in other industries.  This impact is becoming apparent to many involved in workplace decisions.

     The challenge is to introduce change so that the system is suited to the economy and labour market of 2012 and beyond.  A failure to introduce fundamental change means the applause of unions will ring hollow as investment and jobs are lost in modern Australia.

Behavioural economics: an excuse to tax and regulate

Few areas of study are as fashionable as behavioural economics — the integration of psychological factors into economic analysis.

No wonder.  Behavioural economics seems tailor-made for public policy.  If people do not act rationally and do not pursue their own best interests, then perhaps markets aren't that good.  From there, the case for government intervention seems pretty obvious.

Two of Australia's left-wing think tanks, the Centre for Policy Development and Per Capita, have released reports specifically on the implications of behavioural economics.  And it is a rare paper from the Australia Institute which doesn't discuss how market actors are riddled with biases, psychological flaws, and irrationalities.  Therefore, they all conclude, governments need more power.  There's hardly a regulation or tax that hasn't been justified by reference to the behavioural economics literature.

But the public policy implications of behavioural economics are more interesting than that.

The study of behavioural economics has largely focused on the irrationality of participants in the market.  Yet there are two sides to policymaking.  Regulators, bureaucrats, and politicians are just as affected by psychological ticks as consumers and businesses.

A newly published paper in the Journal of Regulatory Studies, ''Behavioural economics:  implications for regulatory behaviour'' makes the obvious point:  if the claims made by this field are right, then it should make us think just as sceptically about government action as consumer action.

After all, it would be no good to destroy the myth of Homo Economicus just to replace it with an equally pernicious myth of Homo Bureaucratus — a clearheaded and efficient policy designer.

There is no reason to believe that someone moving from the private sector to the public sector suddenly becomes more rational and unbiased.  The dispassionate, rational economic actor might be a convenient fiction dreamt up by modellers and theoreticians, but then so is the dispassionate, rational, unbiased policymaker.

The paper's authors, James C Cooper and William E Kovacic, look specifically at anti-trust law, where behavioural economics is commonly used to study business decisions to enter or exit markets, to merge with other firms, or split.  Cooper and Kovacic argue that the bureaucrats who regulate those decisions are likely to have biases that undermine the effectiveness of government intervention.

Regulators are like the rest of us.  They are over-confident, thinking they can understand complex behaviour.  Hindsight bias leads them to believe events are more predictable than they are.  And, unsurprisingly, they are driven by action bias — a tendency to favour interventionist solutions when faced with a problem.

In fact, regulatory biases could be worse than market ones.  Behavioural economics tells us that irrationality is everywhere.  But the marketplace provides firms and consumers with instant or near-instant feedback.  In a competitive market, psychological bias can lead to failure or loss of market-share.  With such feedback, market participants will change their actions.  Make a mistake, lose money ... do better next time.

By contrast, regulators receive little feedback at all.  They operate in a political world, not an economic one.  Regulatory or bureaucratic error is hard to pin down.  It's harder to allocate blame for errors.  It's even harder to quantify the costs of those errors.

Market participants learn from their mistakes.  But regulators are completely isolated from the consequences of their decisions, so it's much harder for them to learn.

Compounding that, confirmation bias — where the introduction of new, ambiguous information leads to the unjustified hardening of previous conclusions — may steer regulators and their political masters to believing a policy has been a triumph when it has not.

Indeed, even what constitutes success or failure in the public sector is debatable.  Few policies have defined criteria whereby we can determine if they have succeeded or not.

In the Centre for Policy Development's 2008 paper, You Can See a Lot by Just Looking:  Understanding human judgement in financial decision-making, Ian McAuley rightly points out that humans are susceptible to the fallacy of sunk costs.

''We find it very difficult,'' McAuley writes, ''to make decisions solely on the basis of future costs and benefits, particularly if it means implicitly admitting that we have made poor decisions in the past.''

This is true for private actors, but is especially true for governments.  Old bureaucracies never die — they just get renamed.  Subsidies survive long past their use-by date.  And taxes are stubborn things.

So far, the policy debate around behavioural economics has led with ideological conclusions — apparently offering those who believe governments should tax and regulate more a cutting-edge reason for doing so.

But if we want to fully understand the implications of behavioural economics, we'll have to recognise that the field offers an even harsher critique of government than it does of markets.  And the safe money says policy makers and bureaucrats will not enjoy the spotlight on them.

ADVERTISEMENT

Internet laws a sledgehammer approach to privacy

Legislators with little knowledge of internet privacy will do more harm than good.

The protest against the American Stop Online Piracy Act recently, where Wikipedia and 7000 other websites went dark for 24 hours, made two things plain.

First, online activism can be effective.  Before the protest, 31 members of Congress opposed the act.  After the protest, that number swelled to 122.  The bill died overnight.

More importantly, the protest emphasised that the internet is not the Wild West.  Domestic laws and international treaties pervade everything we do online.  And bad laws can cause profound damage.

The Stop Online Piracy Act (SOPA) is an example of legislative over-reach.  SOPA would have given the US government broad powers to shut down access to foreign sites that were suspected of hosting material that breached copyright.  This would have given governments the power to interfere with the internal workings of the internet.  Such a power would have been an unconscionable threat to free speech.

Yet SOPA is not alone.  The internet is surprisingly vulnerable to laws that, with good intentions or bad, have the potential to stifle online liberties.  Take for instance, the European Union's proposed ''right to be forgotten''.  Changes to data protection laws now being considered by the European Parliament would give internet users the power to force websites to delete information about them.

There would be privacy benefits from this law.  No question it would be lovely if we could make websites remove embarrassing photos or uncomfortable facts years after we uploaded them.

And yes, we need to keep pressure on social networks to protect our privacy.  Too many companies are reckless with user data.  Yet the EU's plan goes way too far.  A legislated ''right to be forgotten'' would be, like SOPA, a threat to freedom of speech.  These new rules would, according to the American legal scholar Jane Yakowitz, ''give EU residents an unprecedented inalienable right to control and delete facts that were once voluntarily communicated''.

In the age of social media we all happily put information about ourselves in the public domain.  A right to be forgotten is actually an obligation for others to forget things they've been told.

Apart from being unworkable (erasing stuff from the internet is a lot more complicated than politicians seem to believe), this new obligation would envelop the internet in a legal quagmire.

The law would turn every internet user into a potential censor, with a veto over everything they've ever revealed about themselves.  Every time media organisations referred to freely obtained information, they would have to be sure they could prove they did so for a ''legitimate'' news purpose.  This would create enormous difficulties for journalism.  Censorship to protect privacy is just as dangerous as censorship to prevent piracy.

But unlike SOPA, there has been no outcry about these new rules.  No blackout of popular websites, no mass petitions.

SOPA was driven by American politicians in the thrall of an unpopular copyright lobby.  The European data protection rules are being driven by social democrats claiming to protect people's privacy.  And, in 2012, privacy is a value that many people claim to rate above all others.

By contrast, free speech seems daggy and unpopular.  Even our self-styled civil liberties groups have downgraded their support for freedom of speech.  Now other rights — privacy is one, the right not to be offended is another — are seen as more important.  So these new laws could slip through with disastrous consequences.

Should Australians care what the European Parliament does?  Absolutely.  The big internet firms are global.  If a legislature in one country or continent changes the rules of the game, those firms have to comply.  The easiest way to comply is by making global policy changes, not regional ones.

And regulations introduced overseas have a habit of eventually being introduced in Australia.  Already our privacy activists are talking up the EU scheme.

Whatever the EU decides about a right to be forgotten, it will have significant effects on the online services we use in Victoria.

Free speech isn't the only problem with the EU's proposed privacy laws.  As Jane Yakowitz points out, people trade information with corporations all the time — for discounts or access to free services.  No one compels us to share stuff on the internet.  We share because we think we'll get something out of it.  The new right to be forgotten would make such trades virtually impossible.  It could cripple the information economy overnight.

Governments have always struggled to legislate for the online world.  Not only do politicians have little understanding of the technological issues, but the internet doesn't take very well to regulation:  according to one old tech saying, ''the net interprets censorship as damage, and routes around it''.  So legislators over-compensate.

The internet is complex, borderless and dynamic.  Laws are inflexible and heavy-handed.  Too many attempts to protect privacy or combat copyright infringement take a brickbat to freedom of expression and internet liberties.

Let European dogs lie

Australians will be surprised to learn that, apparently, the federal government now has responsibility to help the city of Athens pay for the feeding of stray dogs in the Greek capital.

Athens has a policy that ''in no case supports the sheltering or euthanisation of animals''.  Stray dogs are instead sterilised, tagged, let loose again and fed by the council.  During the anti-austerity riots in Athens last year one ginger mongrel, Sausage, became an international celebrity as he stood side by side with the balaclava-wearing protesters.

How countries deal with stray dogs is up to them.  But if a country wants to provide stray dogs that are sick with an individual dog house and constant veterinary care, other countries shouldn't be forced to foot the bill.  If the Greek government wants to set the retirement age at 50 it can, but it has to wear the consequences.

That's the issue at the heart of whether Australian taxpayers should contribute to an International Monetary Fund bailout of Europe.

Shadow treasurer Joe Hockey said a few weeks ago:  ''The government must explain to taxpayers whether it would be in Australia's national interest ... to fund any such contribution.''

A spokesperson for Treasurer Wayne Swan then accused Hockey of undermining ''half a century of Australian governments meeting their responsibilities''.

Last year, when the Coalition first started to question why Australia should contribute additional funds to the IMF, Labor claimed the Coalition was being ''xenophobic''.  Opposition Leader Tony Abbott subsequently retreated, claiming:  ''I never said that Australia should fail in its duties of international citizenship.''

Abbott and the Coalition shouldn't back down.  They should refuse point blank to support Australian taxpayers paying money to the IMF to help pay the debts of Greece, Italy, Portugal, or any other European country for that matter.  The Gillard government should be forced to explain exactly what is Australia's ''responsibility'' to Europe.

There are times when Australian taxpayers should financially support the governments and citizens of other countries.  But Europe in 2012 is not one of those times.

Europe's debt crisis is not an act of God.  It is not like the 1997 Asian financial crisis, which was caused by a series of external shocks and which was stabilised relatively quickly.  In 1997 it was entirely appropriate for Australia to take a leading role managing a crisis in our own region.

Europe is different.  Its problems are the result of deliberate decisions taken over decades.  The economics of Europe and the euro are broken and the continent's political system is fatally flawed.  Bailout money, whether from Germany, Australia, or China, can't give Europe what it really needs.  Europe needs something more than other people's money.  It needs a governing class focused on economic growth, not rule-making.  And it needs democracy.

Daniel Hannan, the British member of the European Parliament who will be in Australia in the next fortnight, has described it well.  ''The EU, run by its 27-member politburo, is barely more democratic that the German Democratic Republic.''

Hannan makes the point that the EU's so-called ''democratic deficit'' and the lack of accountability was essential to the design of postwar Europe.

''Having lived through the 1920s and 1930s, the [EU's] founders had little faith in democracy — especially the plebiscitary democracy, which they saw as a prelude to demagoguery and fascism.  They were therefore unapologetic about vesting supreme power in the hands of appointed commissioners ... the euro was the culmination of their scheme.''

There's not much Australia can do about Europe.  It's probably a waste of time to even try.  Only the Europeans can fix Europe's problems.

There is a place, though, where Australia can make a difference.  It's in Papua New Guinea, a poverty-stricken country of 6 million people 150 kilometres to our north.  On any measure Australia's economic and security interests in PNG are vital.

Unfortunately, Port Moresby is not as glamorous and just a bit more dangerous than the capitals of Europe.

We know where the priorities of Australia's Foreign Minister are.  Last week, as PNG lurched from constitutional crisis to attempted military coup, Kevin Rudd was at a conference in Munich discussing cyber security with Henry Kissinger.

ADVERTISEMENT

It's time to bring back the thrift

Ted Baillieu plans to shave 3600 jobs from Victoria's bloated public service.

The state of Wisconsin in the US, with a population similar to Victoria, is the battleground for rolling back excessive public service spending.

Recently elected Governor Scott Walker realised that the state was going broke.  Eight years of a union-friendly Democratic Government had seen a massive expansion of the public sector and public-sector wages.  Earnings were independently estimated to be 30 per cent above those in like-for-like private-sector jobs.  And that excludes the value of very high level of job security public servants enjoy.

In the face of vicious opposition, Governor Walker reduced remuneration levels by requiring public servants to pay a portion of their superannuation.

Victoria has also seen a surge in public-servant wages and numbers.

Since June 2008, average earnings per public-sector employee have risen by 18 per cent, easily outstripping the average private sector increase of 13 per cent.

During the same period, private-sector employment could manage only a 4 per cent increase but state public servant numbers increased by over 12 per cent.  Moreover, undoing all the economies of the Jeff Kennett era, local governments have seen a 27 per cent growth.

EVERYONE welcomes new job creation and higher wages but these have to be accompanied by productive output.

This happens automatically in the private sector where businesses need to persuade customers that they are providing services competitively.

Only then can they earn the revenue to service a higher wages bill.

In the public sector this test is absent.  Employment levels and wages are set arbitrarily.

Recently, Fair Work Australia awarded wage increases of 23-45 per cent to low-paid service-sector people largely funded by state governments.

This is typical of benefits granted by expert bodies who do not pay the costs themselves.

Though these workers perform valuable services, such increases without matching productivity improvements would send commercial businesses broke.

Senior public servants are especially adept at winning high levels of remuneration.  The head of the Premier's Department in Victoria gets $600,000 a year.  That's twice the level the Premier himself receives, (and actually four times that of Wisconsin's Governor).

Top public servants win such awards from arbitration bodies by pointing to supposedly equivalent high-paying private-sector jobs.

But private-sector executives, unlike public servants, quickly find themselves unemployed if performance is not maintained.

Moreover, remarkably few top public servants offer their services to the private sector.

UNIVERSALLY, the creation of sustainable and productive jobs in the private sector opens the door to maintaining and improving levels of prosperity.

An important key to this process is lower government cost burdens on businesses and consumers.

Victoria needs to be especially frugal in its public spending since we have fewer of other states' advantages in minerals and other natural assets.  But frugality was absent in the decades to 1992 and, following cost-cutting under the Kennett government, after 1999.

Since its December 2010 election, the Baillieu Government has done little to reduce the deadweight burden of government costs accumulated by the previous Bracks/Brumby administration.  Hopefully, a start is finally being made.

ADVERTISEMENT

We'll huff, we'll puff, we'll blow the budget into surplus

Bill Clinton famously said, ''It's the economy, stupid''.  So it is.  Unsuccessful politicians might be inclined to argue, ''It's the stupid economy''.  Either way the economy is important.

Both political parties want to argue about the economy this year.  The Government believe they have a good story to tell;  to which Tony Abbott said ''Make my day''.  Policy wonks will be in heaven — the general public not so much.

The fact is, with politicians arguing at each other over the economy, both parties have good stories to tell.  Australia has enjoyed a long period of good economic performance with either party in government.  That is unsurprising — despite what they say, the prime minister does not run the country or the economy.

So while we can expect to see a blizzard of facts and figures it remains that it is the future and not the past that voters most want to hear about.  End goal rhetoric is remarkably similar.  Both parties want to balance the budget and run modest surpluses.  Good.  Both parties want to boost productivity — whatever that means.  The difficulty is in how that rhetoric will be realised.

The problem facing government — any government — is debt and deficit.  Sure we can argue that government debt is small compared to other OECD economies and short periods of deficit were necessary during the global financial crisis.  But that argument isn't as comforting as we'd like.

In an intriguing analysis of Australian exceptionalism Possum found that some countries, like Ireland, had done well over long periods of time.  They also quickly became economic basket cases.  When things go wrong, they have a habit of going wrong quickly.

The first priority of government is to get the budget into surplus, then to start paying down debt, and cutting taxes.  The challenge here is that both parties like to spend.  As much as politicians would like economic growth to drive budget surpluses, they will have to cut spending.  Tinkering at the margins won't be enough.

That brings us to debt.  Here we're seeing all sorts of argument over net debt, gross debt, public debt, private debt ... the jargon never ends.  First thing to note is that private debt doesn't matter for public policy purposes.  As long as politicians resist the temptation to nationalise private debt during a crisis and let troubled firms fail, we should never worry about private debt.

We shouldn't confuse public debt and private debt either.  A corporation with little debt can be characterised as having a lazy balance sheet.  That is not a criticism of government.  At the same time, however, government should have some debt.

People tend to think about debt only as a form of finance.  But it also has other characteristics.  Trade in government debt creates what is known as the risk-free rate in financial markets.  This price is very important in asset pricing and capital budgeting and is widely used in practice.

In the early noughties the Howard government had a team of Treasury officials canvas the notion of entirely shutting down the Australian government bond market.  At that time Treasury was forecasting strong budget surpluses and net debt was expected to be negative.  If the government didn't need to borrow money then Australia didn't need a government bond market.

Many academics, and even some market practitioners, agreed with the logic.  A common argument was that private instruments could be used to ''back-out'' a risk-free rate equivalent to that generated by government bond markets.  I argued then, and still believe now, that market prices can't be faked.  Further, the empirical financial economics literature points to the importance of deep and liquid bond markets in promoting efficiency in the real economy.

So zero gross debt isn't good economic policy.  That isn't to say, however, that our current position is any good.  Right now government is borrowing because it needs the money;  because spending is too high.  Ironically the best time to issue public debt is when government does not need the money.

In the area of taxation we do see some substantial differences between the Government and Opposition.  The Government has introduced (or plans to introduce) new taxes or increase existing taxes.  Mind you the carbon tax will cost more in the initial years than it raises in revenue and I doubt the mining tax will raise much revenue at all.  The Opposition proposes abolishing those taxes and cutting existing taxes when the budget is in surplus.

Of course, all that presupposes the budget will return to surplus sooner rather than later.  Here the pressure is on Treasurer Wayne Swan.  He promised, come hell or high water, that the 2012/13 budget would be in surplus.  In May he will have to deliver a credible projected surplus and by December we'll have a good idea as to whether he has actually delivered.

Julia Gillard and Wayne Swan can huff and puff as much as they like about the Coalition's economic plans being vague, they, however, are in government and actually have to perform.  The pressure in 2012 is on them.

ADVERTISEMENT

Farmers feeling the squeeze of marketplace realities

We are a pessimistic bunch.  Apparently no-one will win out of the supermarket price wars.

The farmers will lose:  Nick Xenophon claimed that ''short-term gain will be followed by long-term pain for farmers — and, ultimately, consumers''.  Bob Katter said the price of cheap food will be ''the broken backs of our farmers.''

Consumers will lose:  Supermarkets are ''businesses, not benevolent institutions,'' warned the self-styled consumer group Choice last week, ''we may see longer-term impacts that work against consumers' interests''.  A writer in the Courier Mail claimed that ''we should not be delighting in the promise of lower prices'', in a column titled ''We'll pay for this price war''.

Even the supermarkets will lose:  market analysts were sternly telling the business pages that '''persistent acute food deflation posed a risk to this financial year's margins.''

One news story even initially reported ''supermarket giants have been given the green light to continue with aggressive discounting, with worse to come''.  Yes, that's right:  ''worse to come''.

If you ever needed a demonstration that producers have a lock on the public debate, look no further.

Declining prices and aggressive competition is an absolute, unbridled, unvarnished good for consumers, yet we only seem to hear how much discounting could hurt.

Sure, supermarkets should be able to defend themselves.

But our apparent sympathy for producer interests over consumer interests has — and has had — some terribly unfortunate consequences.

One analyst described to RN's PM program what he imagined was the consequences of price competition:

The very consumers that they're selling their products at lower prices to are employees of the companies that are going broke because they're not making enough money selling to Coles and Woolies.

In other words, a vicious cycle of cheap goods where we all end in poverty.

That is a complete fantasy.  If buying more for less led to economic collapse, we'd have no economy to speak of anymore.

An alternative theory is that consumers are bringing enormous competitive pressure on supermarkets to reduce the price of grocery staples, which the supermarkets respond to by trimming administrative fat, reducing margins, and getting better deals out of suppliers.

You know, a competitive market working in exactly the way a competitive market should.

It's exactly the sort of aggressive pricing dynamism that we want from the marketplace.

But producers don't like that sort of dynamism and competition.  Satisfying consumers is stressful — it's a never-ending process of innovation, refinement and creative destruction.  Markets are uncomfortable and uncertain.  And competition is destabilising for established firms.

No wonder farmers don't like the pressure being applied from the retail end.

But why should we give their complaints such credence?

Adam Smith wrote in his Wealth of Nations,

Consumption is the sole end and purpose of all production;  and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

We work so we can eat.  We labour so we can relax.  We don't consume in order to produce, we produce in order to consume.

Smith continued to say that this ''maxim is so perfectly self-evident, that it would be absurd to attempt to prove it''.  Apparently it is not.

Protectionism is based on the belief that producer interests are more important than consumer interests.  Australia was the richest country in the world at Federation.  Ninety years of protectionism later, we had dropped to 15th.

When Australia embarked on economic liberalisation, it was a reorientation of the economy towards consumption.

But we did not similarly reorientate our political culture.  The howling of rent-seekers after such an unambiguously pro-consumer price cut has been deafening, and reported uncritically.

There's an important reason why producer interests dominate the public and legislative debate.  Only producers have enough incentive to lobby in their interests.

The benefits of producer-favouring regulations are concentrated.  Producers who believe they can get a commercial advantage out of regulatory protection have an enormous incentive to lobby for new laws.  Farmers feeling squeezed by the demands of the supermarkets email their local MP and call sympathetic journalists.

There is no equivalent dynamic on the consumer end.  Who would spend days, or weeks, or months, of their life defending ever-so-slightly lower prices?  The benefits of cheap goods are dispersed across all consumers.

When Adam Smith was writing in the 1770s, his targets were the mercantilist states of his day.  In the 18th century, governments had created cartels and monopolies in order to dampen ''troublesome competition'' and deliver political favours.

But troublesome competition is what has made us in the 21st century wealthier than at any other time in history.

Yes, consumers always demand that producers make things better and cheaper.  And not all firms can meet those demands.  This is exactly how the system should work.

ADVERTISEMENT

It's not sexist to be critical of Julia Gillard's performance

Political commentary has some fairly regular and predictable trends.  In an average electoral cycle the consumer of political news is almost guaranteed to hear that political parties rely far too much on opinion polls, that media outlets are biased, that politicians either aren't paid enough or are paid far too much, and that journalists are either the solution to or cause of all political problems.

Julia Gillard's period as prime minister has introduced a new trope:  that Australians are a bunch of terrible sexists for evaluating her leadership harshly.  This week Bob Brown is leading the charge, somewhat unsurprisingly pointing the finger at the media, specifically its ''male commentators''.

Brown's characterisation of Gillard's critics is somewhat disheartening, not least because we heard this same tired argument a few months ago.  By suggesting that a subconscious sexism pervades all criticism of Julia Gillard's leadership, Brown has effectively denied that there is any legitimacy to claims that Gillard has been a less-than-effective prime minister.

It is important to recognise that as a woman, and especially as a childless, unmarried woman, the prime minister is subjected to more scrutiny than her male predecessors.  Part of this is because her position is new.  Australia hasn't seen a female prime minister before, and unfortunately, there are sections of society for whom Gillard's femaleness is her defining characteristic.

There's a sort of women's magazine mentality to much of the commentary about Julia Gillard;  almost as if an invisible editor somewhere has decided that news consumers — and particularly female news consumers — aren't interested in reading about the prime minister unless her femaleness is touted as unique and reinforced by constant references to the clothes, shoes and make up she wears.  This is not confined to the prime minister;  other women in politics, like Julie Bishop, Sarah Hansen-Young and Kate Ellis, are still subjected to disappointingly inevitable ''oh look, a woman in politics'' stories, as if femaleness and political activity were still largely incompatible.

That is a legitimate example of subconscious sexism in political commentary.  Until we are able to refer to women in politics as ''politicians'' instead of ''female politicians'', women will remain a strange and slightly suspect quality in the eyes of some political consumers.

But when Bob Brown states that Julia Gillard comes in for unfairly harsh criticism because she's a woman, he is reinforcing her femaleness in the most unhelpful way.  It is not an invalid or gender-based criticism to claim that the Gillard government has not performed to the standard that many would've hoped.  Suggesting that criticisms of the Gillard government are inherently sexist reinforces the idea that we can't talk about women in politics outside the context of their gender.

There are very valid criticisms to be made concerning Julia Gillard's performance as prime minister.  Her government has allowed itself to be defined by leadership tensions;  Gillard has not proved effective at banishing the spectre of Kevin Rudd — his potential ambitions and intentions seem to have paralysed effective government communication to the electorate.

In addition to having a communication problem, the Gillard government has a policy problem.  The prime minister has retreated from policy positions that previously took on the importance of an essential, unshakeable pillar of government reform, such as mandatory pre-commitment for poker machines.  Political commentators and consumers sense that this is a government without a clear, planned policy vision for the future.

Criticising the Gillard government's disappointingly narrow policy ambitions has nothing to do with sexism or gender.  It is a continuation of the same observations made about the Rudd government:  all spin and no substance.  However, the Gillard government also falls short on the spin.  If the criticisms of Julia Gillard surpass those levelled at Kevin Rudd during his term as prime minister, it is because Gillard is operating the same policy-free government, with the added burden of an inability to communicate.

There is enough sexism in politics without having to invent it.  The real problems with the Gillard government are a lack of vision and policy commitment, and a breakdown in communication to voters.  These are problems that need to be addressed if the Gillard government wishes to be even vaguely competitive at the next election, but these issues are being obscured by yet another predictable and depressing focus on the prime minister's gender.

ADVERTISEMENT

Scientific research drowning in a sea of alarmism

Last week, almost 400 people attended a public meeting in Newcastle to learn about the scientific evidence that underpins sea-level change.

The meeting was prompted by strong public discontent with Lake Macquarie City Council's new coastal planning regulations designed to accommodate a science-fiction prediction of a 91cm rise in sea level in the district by 2100.  This prediction comes from the NSW government, which in turn sourced it from a UN political body, the Intergovernmental Panel on Climate Change.  As with its unnecessarily alarmist projections of global warming, the IPCC's estimate of future sea-level rise derives from speculative computer models.

Where, then, should the government get its advice about sea-level change instead?

Prior to the advent of global warming alarmism in the late 20th century, governments and councils drew their advice from statutory authorities involved with harbour and tidal management, and from scientific research groups such as the CSIRO.

With the IPCC's formation in 1988, which was tasked to ponder on global warming, the focus of governments shifted from sea-level change as a ports, harbours and beaches issue to it being seen as a more general environmental issue related to hypothetical, human-caused global warming.

At about the same time, attention shifted from basing public policy on the use of measured tide gauge records to basing it on the theoretical projections of computer models.  By the end of the 1990s, Australian governments and councils were basing their sea-level planning almost entirely on IPCC advice, that is, on unvalidated computer predictions that are in no way tied to accurate local sea-level measurement.

The CSIRO and the Bureau of Meteorology, at official level, have consistently supported the IPCC sea-level projections as valid and accurate, as indeed has the government-appointed Coasts and Climate Change Council.  To make matters worse, the IPCC sea-level predictions are for an entirely notional statistic, global average sea-level.

Astonishingly, the predictions have been adopted uncritically as the basis for local planning.  This is equivalent to introducing new housing regulations for the heating and cooling of Australian dwellings based upon global average temperature.  Well, now that we have learned about the unsuitable nature of its sea-level speculations, what else do we know about the IPCC?  Does it have form?

My word it does.  As long ago as 1996 a former president of the US National Academy of Sciences, Frederick Seitz, commented on its second assessment report on global warming that "I have never witnessed a more disturbing corruption of the peer-review process than the events that led to this IPCC report".

Subsequently, successive scandals have engulfed the IPCC, and destroyed the credibility of its claimed "gold standard" of science summary and peer-review.

These scandals are well described in several easily accessible publications, and include such things as statistical chicanery related to the global temperature "hockey stick" (a faulty analysis of ancient tree ring measurements used to reconstruct global temperatures), a biased and dysfunctional peer-review process, the Climategate affair (leaked emails from Britain's Climatic Research Unit that contained abundant evidence of scientific malfeasance by leading IPCC scientists), the Glaciergate affair (inaccurate anecdotal evidence about Himalayan glacier melt in an IPCC report) and the infiltration of IPCC advisory panels and authors by environmental activists and partisan researchers.

Public reaction to these scandals has included calls for the IPCC be disbanded or that its chairman, Rajendra Pachauri resign, with former German chancellor Helmut Schmidt even recommending an IPCC audit be undertaken because "some of their researchers have shown themselves to be fraudsters (betrueger)".  In such circumstances, that Australian governments still use IPCC advice about sea-level change as their guide for coastal planning is hard to understand, when site-specific measurements of actual Australian change are readily available.

Well-qualified independent scientists have repeatedly drawn public attention to the existence of a body of official agency sea-level measurements (now maintained by the BOM), and peer-reviewed research papers based on these and other empirical data, which demonstrates conclusively the four following facts.

First, that rates of sea-level change vary around the Australian coast.  This means any new coastal planning regulations (if and where they are needed) should be based on the appropriate local sea-level measurements rather than a hypothetical global average.

Second, the longest east coast tide-gauge record, from Fort Denison (Sydney), records an average rate of rise over the past 100 years of about 1mm a year (10cm a century).

Third, that other tide gauges, scattered around Australia as part of the national tidal network, mostly record rates of long-term rise between about 0.5mm and 2.5mm a year with no change in behaviour in the late 20th century that might reflect a human (global warming) influence.

And, fourth, that the Sydney tide gauge, as well as other long tidal records from nearby (Fremantle, Auckland) and overseas, exhibits a slowing rate of sea-level rise over the past 40 years.

All of which leads directly to the three following money questions.  Why do Australian governments still draw their advice about sea-level change from the IPCC, a discredited international political agency that is now known to flout conventional scientific and peer-review procedures in favour of promulgating environmental activism?

Why have governments adopted the irrational policy of basing Australian sea-level planning on theoretical computer-generated projections of global sea-level change?

Last, why do Australian authorities ignore the solid base of empirical measurements, and the more than 100 years of peer-reviewed local and international research, that contradicts completely the alarmist views of the IPCC;  and that also provides the accurate, site-specific records of local sea-level change that are the necessary basis for achieving sensible coastal policies in Australia?

The good folk who live around Lake Macquarie, and doubtless tens of thousands of other coastal residents upon whom new planning regulations are now impinging, deserve an explanation;  and it needs to be a good one.

Who'll drag us free of our heavy debt burden?

While most Australians were tanning themselves at the beach during their summer breaks, the federal opposition and the Gillard government traded blows over what will be a key political issue this year:  financial management.

Opposition finance spokesman Andrew Robb depicted Australia's gross public debt growth as ''Icelandic'' in scale, consigning taxpayers to significant fiscal risks in the event our terms of trade moderate as a result of a global economic slowdown.

Pointing to recent economic growth and low unemployment, assistant treasurer Bill Shorten dismissed the claim of profligacy in government borrowing, stating our only connection with highly indebted Iceland is that ''we are both an island''.

At home, government ministers have made a political virtue of pointing to Australia's relatively low levels of public sector debt compared with Europe and the US, whose debts in some cases exceed the size of national economies and which have experienced recent credit rating downgrades for their sovereign bonds.

International Monetary Fund financial statistics confirm the low proportion of debt as a percentage of GDP for Australia compared with other advanced economies.  However, the data also shows Australia has engaged in an activist approach towards accumulating public sector debt.

From 2007, one year prior to the global financial crisis, to 2010, the inflation-adjusted gross public debt of Australian federal, state and local general government sectors increased by 131 per cent to $253 billion, or 21 per cent of GDP.

This figure places us in the top four of the international debt splurge during the last quarter of the past decade, following Ireland (gross debt growth of 213 per cent), Luxembourg (189 per cent) and Iceland (181 per cent).

Governments have been able to significantly increase their borrowings, partly through their efforts in relaxing legislative constraints.

Since late 2007, the commonwealth has raised its legislated gross debt ceiling from $75bn to $250bn, with the prospect of more increases in the near future as the dollar amount of commonwealth securities on issue approaches the upper limit.

When relatively liquid financial assets of Australian governments, including cash and their holdings of bonds of other governments, are taken into account, our net debt position at first glance looks eminently more appealing with the net debt-to-GDP ratio standing at about 4 per cent in 2010.

That said, the argument that governments across all levels in Australia during recent years have engaged in a debt spree is sustained when it is recognised we had an overall negative net debt-to-GDP ratio prior to the GFC.

These figures are also generous to present governments in that they understate the level of sovereign debt, as they do not include the borrowings of semi-autonomous government trading enterprises and other off-budget public sector entities.

The debate over the actual magnitude of debt is situated within a broader discussion concerning how and to what extent public debt — and its size — matters for a country's overall economic performance.

Proponents of a greater role for government in economic activity, including Keynesian economists concerned with stabilising macroeconomic aggregates, have recently made two key arguments to delegitimise concerns about the use of debt to finance government expenditures.

The first is that the economic effects of government borrowings are benign for as long as economic activity remains subdued, implying crowding out of private investments through higher interest rates is unlikely to materialise as a major concern.

However, there are numerous ways in which governments crowd out private economic activity, such as in instances where debt is being used to finance public consumption where the economy-wide benefits, if any, are exhausted within a short period of time, rather than financing long-lived productive assets such as economic infrastructure.

It is worth noting that during the GFC, Australian governments conceded debts were being raised to cover shortfalls in taxation revenues and hence maintain consumption, and in recent years the quantum and rate of growth of borrowings by the general public sectors of all governments has exceeded their capital investments.

While it is conceivable that governments have dedicated borrowed funds to their growing array of special economic and social infrastructure funds, the ability of governments to raid these funds for recurrent spending purposes poses an ever-present threat to the efficient use of funds, and also to political accountability more generally.

Governments, just like households and businesses, need to meet their gross debt obligations, but unlike households and businesses, who repay principal and interest on loans through incomes acquired through mutually consenting market transactions, governments will compulsorily impose taxes that impose efficiency and other burdens upon households and businesses.

Even in cases where governments use borrowed funds to invest in activities yielding future streams of benefits, the growth in the size of government that public debt facilitates implies the displacement of private sector decision-making by less-efficient political decisions over resource allocations.

Second, arguments are made that the incidence of public debt should not be a matter for policy concern since we owe the debt to ourselves in our capacities as members of the community.

However, the domestic or foreign bondholder who voluntarily purchased the government security is not necessarily the same individual as the domestic taxpayer who bears the burden of the debt.

This point is particularly pertinent in the cases of existing minors yet to enter the workforce and pay taxes, and indeed unborn future generations, who have not politically consented to the additional tax burdens resulting from governments' debt-financed public expenditures.

Since 2007, Australia has joined with other advanced economies in a co-ordinated splurge in government borrowing, increasing public sector size while enervating the productive private sector and risking the living standards of future generations.

To argue that we are better off because others are sinking in a fiscal sea of red ink faster diverts our focus away from the common underlying cause of government overspending that requires remedial attention, rather than empty promises and intergenerational buck-passing.

With Opposition Leader Tony Abbott differentiating himself from the Rudd-Gillard deficit-and-debt record by signalling an intention to reduce the size of government, securing a reputation as to who will be the best financial manager is now well and truly up for grabs.

ADVERTISEMENT

Renewable energy rules lose traction

Energy policy in Organisation for Economic Co-operation and Development countries is spurred by concerns that gas and oil are becoming scarcer and that fossil fuel emissions must be curtailed.

This view is being punctured by technology allowing massive new resources to be developed from shale and coal seam gas.  Waiting in the wings for a technology breakthrough is methane hydrate, natural gas that is locked in ice, which is the world's largest source of hydrocarbons.

These developments have not prevented energy policies being dominated by carbon taxes and their uglier sibling, renewable energy requirements.  The former put a price on carbon either through direct taxes such as those introduced by the Gillard government or indirectly, as with the European Union's cap-and-trade approach.

Renewable energy requirements mandate a share of renewables such as wind and solar within total electricity supply and sometimes also stipulate generous feed-in tariffs for solar.  Governments also subsidise low carbon emissions through their budgets.

But the legislative steamroller of carbon taxes and regulations preventing low-cost energy is crumbling.  Spain was among the first to fall.  The former socialist government had already started dismantling the web of renewable energy subsidies, and the new conservative government has accelerated this.

In an ominous portent for local superannuation funds that have invested heavily in supposedly assured returns offered by wind farms, Spanish subsidies have been cut on new and existing facilities.

Now Germany is waking up.  A recent survey shows one-fifth of its companies considered shifting to other countries because of high power costs arising from renewable energy obligations.  Subsidies to solar power were more than $10 billion last year.  The Finance Minister is calling for subsidies to be phased out, and the Environment Minister has agreed to a scaling back.

Removing the renewable energy subsidies should be straightforward for the Australian government.  Now that the carbon tax is in place, the subsidies are superfluous imposts on the consumer, costing $3 billion a year by conservative estimates.

The opposition's $3.2 billion "direct action" scheme is its greenhouse policy centrepiece.  Aimed at getting the best emission reductions per dollar of spending, it also makes high-cost renewable energy schemes redundant.

Savings are available by cutting superfluous policy and relying on the carbon tax or its Coalition counterpart.  But this assumes the political parties' plans are based on achieving the goals set rather than being simply political exercises.

ADVERTISEMENT