Key Challenges

Major strategic
challenges ahead
Australia faces a number of major strategic challenges over the coming years. The most pressing are the lack of investment in physical infrastructure, and the continued dependence of the economy on primary product exports and an inflated real estate sector. In addition, the tax system requires reform. While it is unclear how Australia could reduce its dependence on primary product exports and unwind the bubble in real estate prices without a crash, the tax system could be fixed more easily. The OECD has suggested raising the tax on goods and services tax, and introducing a land tax. The land tax would distribute the benefits from substantial foreign investment in real estate more evenly. Fiscal policy is heavily exposed to external risk and, in the medium term, Australia should establish a stabilization fund, as other resource-rich economies like Norway, have done.
Infrastructure falling behind
Meanwhile, significant public investment is required to bring Australia’s physical infrastructure to a level comparable to other advanced economies. The price for Australia’s low level of public debt has been underinvestment in roads, ports and railroads. Yet, the “structural fiscal deficit” impedes large spending programs on infrastructure. The coalition government has attempted to address some of the shortfalls in infrastructure investment, but has primarily focused on roads. It is unclear to what extent real increases in investment will materialize. Furthermore, the government has scaled back Labor’s National Broadband Network infrastructure project, essentially replacing the “fiber to the home” model with an inferior, cheaper hybrid fiber-copper network model.
Challenging global environment
In international relations, Australia is facing a rapidly deteriorating situation. Its biggest customer, China, is intervening in Australia’s domestic policymaking and becoming a much more aggressive player the Indo-Pacific region. The Australian government is aware of the challenges, but may have to choose between political preferences and commercial interests. The choice will not be simple given the vulnerabilities of the Australian economy.
Federal-system flaws
need attention
Other strategic challenges are more perennial. Closely related to the structural deficit has been managing the implications of an aging population. Existing policies have better prepared Australia for this demographic shift compared to most other developed countries. However, the inefficiencies inherent in the federal system of government have proven more problematic. Notable problems include the division between federal and state responsibilities, and a vertical fiscal imbalance. The need to secure agreement with the states on most major issues of shared concern has proven difficult for recent federal governments, particularly in the policy areas of water, health, education and transport infrastructure. The autonomy of states and their accountability should be strengthened, while the conditionality of grants from the federal budget should be reduced.
The federal Labor government was at least as proactive in addressing this issue as any past government but found progress difficult. “Cooperative federalism” was supposed to overcome entrenched, parochial interests, but has proven inadequate in facilitating reform on contentious issues. Policies designed, for example, to increase the efficiency of water use or ensure a fairer allocation of water rights have eluded successive governments, and the issue of water security remains a prominent and immediate issue. Australia’s failure to address the water issue reflects structural problems in the federal system.
Tax system too
The tax system also remains complex and inefficient. The 2010 Henry Tax Review produced 138 recommendations for improvements. However, the previous Labor government only adopted a few recommendations. Similarly, the Liberal-National coalition government has shown little inclination to radically reform the system. Other long-standing deficiencies that should be priorities for reform include diversification of media ownership; improving regulatory impact assessments by expanding their scope and application; increasing public consultation and transparency, and conducting consultation prior to policy decisions; and introducing a bill of human rights.
In the past, Australia has addressed environmental challenges haphazardly. Considering Australia’s climate, there is much room for the development of sustainable policies on energy and the environment. Transport could be made greener, for instance, by financing improvements to inadequate public transport systems through an increase in excise duties on fuel.
Indigenous policies
have failed
Finally, the situation of indigenous Australians continues to be the most serious social failure of the Australian political system. Over recent decades, numerous policy initiatives have attempted to address the appalling outcomes experienced by indigenous people, but there is little evidence that substantive progress has been made. Remedying this must remain a priority over the coming years.
OECD, Economic Survey Australia, December 2014, p. 11.

Kate Darian-Smith: Indigenes Australien - von der britischen Besiedlung bis zur Gegenwart, in: Bettina Biedermann, Heribert Dieter (eds.): Länderbericht Australien. Bonn: Bundeszentrale für politische Bildung 2012, S. 93-125.
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