William Pesek Jr: Australia needs more tax cuts to stem brain drain

Australia's abundance of raw materials means it can do a roaring trade with China and India. Picture / Reuters

Australia, it's often said, rode to prosperity on the sheep's back. Wool and other farm exports paved the way for it to become the Asia-Pacific region's No. 5 economy.

These days, it's not sheep on which Australia is riding, but a dragon. The dragon, of course, is a Chinese economy that's pushing up mining company profits and tax revenue. It shows why Australia is uniquely positioned to benefit from Asia's rise.

Geography is part of it, though the real boon for Australia is its abundance of raw materials, which China - and increasingly India - needs to thrive.

They include iron ore, copper, coal and other commodities, not to mention agriculture.

Australia's 14-year expansion is more than a China story. It has much to do with sound monetary and fiscal policies from which the world could learn.

While many of the richest economies are drowning in Budget deficits, Australia has enjoyed a surplus in eight of the past 10 fiscal years.

Not surprisingly, Prime Minister John Howard was under pressure to return more of a projected A$10.8 billion surplus in the form of tax cuts. And cut taxes he did - for the third year in a row.

Income taxes were trimmed by A$36.7 billion, and the top income tax rate will be lowered to 45 per cent from 47 per cent, starting on July 1.

Yet the cuts, announced last week when Treasurer Peter Costello unveiled the latest Budget, are falling a bit flat. Many observers are asking for more, and it's a valid gripe.

Travelling around Asia and beyond, it's hard not to bump into loads of smart, ambitious and entrepreneurial Australians working overseas.

When you chat, many will routinely say that high taxes drove them overseas. It risks creating a brain drain in an economy that needs its brainpower to thrive in the future.

"There's no bigger risk to Australia's prosperity than the skills shortages we're facing," said Heather Ridout, chief executive officer of the Australian Industry Group, which represents 10,000 companies, in Sydney last week.

"And it's not just about our group's current members; it's about new companies that could be created if more smart people stayed home."

Greg Paramor, managing director of real-estate investment trust Mirvac Group in Sydney, said: "We'd love to see more of our best and brightest come back home."

It's something Howard's Government is working on.

Lowering the top tax rate to 45 per cent brings Australia into line with the average for Organisation for Economic Co-operation and Development members.

Many argue that Australia is missing a rare chance to go further to boost its global competitiveness. Today's window of opportunity is something that shouldn't be squandered.

There may never be a better time to cut taxes, particularly while the Howard Government controls both Houses of Parliament.

The world could learn from how Australia has managed its economy in the past 15 years. One good example comes from central bank Governor Ian Macfarlane, who last August declared victory in deflating one of the world's more obvious housing bubbles.

While some worry that property prices are still too high, others think his handiwork offered insights to central bankers in London and Washington on how to fix asset imbalances.

Costello's tax policies are another example. Australia needs to cut its top tax rate to 30 per cent, bringing it into line with company-tax levels.

Although it would have been nice to see the Government be more aggressive, few doubt taxes will head lower.

More important, though, Australia isn't mortgaging its future in exchange for tax breaks for the wealthiest people.

Here, the US provided a graphic example of what not to do.

It's hard not to look back nostalgically at Washington's fleeting experience with Budget surpluses under President Bill Clinton.

Last year the US had a fiscal shortfall of US$318.6 billion, a figure that offers Australians a cautionary tale. Budget surpluses don't last forever and neither will Australia's. Its demographics - low birthrate, ageing population - virtually ensure it. And what if China has problems amid efforts in Beijing to slow growth? In a fast-changing global economy, it's hard to blame politicians for treading with care.

Balance also is important. On the one hand, it's best to lower top tax rates without fleecing the middle class. On the other, tax policies need to reach into the future, especially when you consider the part of the world in which Australia sits.

This challenge is proving to be complex. Where opportunities exist in Asia, so do disincentives for those thinking of leaving Australia. One is the country's high standard of living relative to the region it competes in.

For Australia's 20 million people, one solution is to innovate their way to continued prosperity - coming up with new ideas, technologies and products to compete with Asia.

The other is to keep the Chinese dragon moving so it continues to feed off Australia's raw materials.

It's comforting to see Australia taking another step in the right direction by spending its surplus wisely. The rest of the world could learn from the folks Downunder.

- BLOOMBERG