As Tony Abbott’s top business adviser Maurice Newman sees it, there’s a pressing need for a sensible conversation in Australia about the country’s economic future. Some difficult decisions need to follow. If the country can’t do it, the rest of the world will make the decisions for Australia.

For some time there has been a gap between how the government has talked about Australia’s economic future and the public’s experience of it. In the 24 years since Paul Keating’s “recession we had to have”, Australians grew used to uninterrupted growth, accompanied by ever-growing wages and asset prices.

Perhaps this fed into the lack of broad-based political momentum behind the need for deep savings in the federal budget. House prices continued to rise as the Coalition cried about a budget “emergency” and “crisis” ahead of the 2013 election. The budget’s problems were portrayed as a political question that could be fixed by a change of government.

It’s now agreed, even among the Coalition, that the government failed to make a case for its budget savings measures. But the problems facing the budget have been looming for years, and in just the last couple of weeks there has been a shift in mood, with economists suddenly talking about the need for further interest rate cuts. Global forces – especially the falls in commodity prices – are increasingly dragging on economic growth. There’s a renewed focus on structural challenges for the economy, and a growing realisation that action is required on the budgetary and policy fronts.

Wherever you look across the Australian economy you can see in the actions of consumers – their spending patterns, confidence, savings rates and associated level of mortgage pre-payments – that households know things are not as rosy as they were. Even Sydney house prices look to be softening.

So when the Treasurer says that “without economic reform, the economy will drift, without economic reform, the economy will be more exposed to global volatility, without economic reform, our future prosperity is not assured”, he is now in a better position to get his message across.

But there’s much more work to do to build momentum behind specific policy reforms. This was the catalyst for Business Insider to sit down with Maurice Newman, head of the Prime Minister’s Business Advisory Council, to talk about how he sees the road ahead.

Newman is one of Australia’s senior businessmen and is known for speaking his mind – often controversially saying what many think, but fear to say.

This often draws the ire of the left, but watching Newman speak at a panel discussion in Sydney recently, I was struck by how he’s not the caricature many seek to draw. He’s an Australian businessman of vast local and international experience who wants a better future for the generations that follow. Certainly, his views on climate change may appear out of step with the majority, but Newman has dedicated his life to the nation’s prosperity and been extremely effective at delivering on it.

Sitting down with Newman for a long discussion about Australia’s economic future, it became clear that this is a man who wants to help catalyse Australia’s next round of reforms. Sure, he talks from a business standpoint. He’s a businessman after all.

In the flesh, what’s clear – and often lacking in media reports – is that when Newman talks about “the market”, he is not referring to a gates open, no-holds-barred approach to economic management in favour of the market and business.

Rather, he recognises that everything in this global economy is connected and if hard choices are not made actively by Australia, then the market – the action of others who want to build their own businesses and economies efficiently – will force the decisions we are unwilling to make.

Hockey’s statement on reform and Australia’s economic future was a succinct echo of our conversation.

Newman thinks Australia is at risk of slipping irretrievably behind the rest of the world, despite two decades of uninterrupted growth built on 30-year-old reforms, a lot of luck, disinflation globally, and a mining boom.

The victory of Hawke and Keating

“People don’t appreciate the economic impact of what Hawke and Keating did in the 1980s,” he said, referring to the float of the dollar, financial markets reform and deregulation in the Hawke-Keating era.

“These are benefits which we still enjoy today. There is no question about that,” he said. “It was three decades ago, so we are still benefiting from the commonsense and vision, if you like, of Hawke and Keating. They set in train the capacity for Australia to be more competitive.”

Newman cites the contribution to economic flexibility that the floating exchange rate has given Australia since 1983 as one of the key economic stabilisers and contributors to the long run of uninterrupted growth.

He compared the situation in Britain – which also has its own floating currency – with that in Spain which, because it uses the Euro, lacks the stabilising force of a floating exchange rate.

“The UK’s rebound since the global financial crisis has been stronger than Spain, for example, not least because it is not a part of the EMU… the Pound has sunk not much lower than where it was pre-GFC. Spain and the other members of the EMU have been stuck with the Euro, and to their great concern, because flexibility is all-important,” he said.

The changing labour market

The term flexibility is a nice segue into the labour market and the challenges it faces. Here’s Newman’s summary.

The unemployment level is 6.1% and productivity is declining with an aging population. 200,000 people have withdrawn from the workforce since 2010 which brings us back to an unemployment rate with a 7 in front of it if we use the same participation rate. We are facing another 250,000 leaving the workforce between now and 2025.

So these are real challenges.

In economic circles this was well understood, but perhaps not so much in the wider economy, Newman said.

The critical problem now, he said, is now how Australia faces its challenges and have a discussion about reform of the employment market, productivity and competitiveness, without raising the spectre of WorkChoices.

Whenever we talk about employment, industrial relations or workplace flexibility “we get into an emotional discussion”, in which the hated former policy of the Coalition is trotted out as the logical end-point.

“The discussion will have to be had otherwise the market will have it for us because the unemployment rate will be at such a high level,” he says.

What Newman means by this reference to the market is a truism in any walk of life. By not making an active decision – or at least having the conversation between the political class and the Australian people – Australians are letting others decide our fate as we drift as a nation. Global competition is part of that market and that means it’s possible job losses will follow, real wages will fall and the unemployment rate will spike.

Already we’re seeing hints of what’s to come. The need to talk about our employment and wages future is something Business Insider has canvassed regularly of late as the economic writing becomes clearer of the wall.

RBA deputy governor Phil Lowe said in a recent speech that:

Over the decade or so to the late 2000s we had got used to consumption growing more quickly than income. We had also got used to asset prices, credit and fiscal revenues growing more quickly than income. We had got used to employment increasing more rapidly than the working-age population. And we had got used to growth in our real incomes outpacing the rate at which we were improving our productivity.

We started to think that this was normal. Retailers thought it natural that their sales grew more quickly than people’s incomes. Many investors thought that earning capital gains on their existing assets was the key to wealth creation. Banks got used to very fast growth in their balance sheets. And we all got used to the annual tax cuts that came from strong revenue growth.

But these trends were not normal.

It wasn’t normal and the future looks very different.

Newman highlights a convergence of forces hitting employment and competitiveness internationally, which would feed back into the local employment market. He cites the relatively high cost of Australia’s average wage, but in the context of the point made by outgoing Treasury Secretary Martin Parkinson, who said:

Fiscal drag, which helps improve fiscal outcomes in the pre-Budget line of this chart, is regressive yet gets little attention. As I have noted elsewhere, allowing fiscal drag to continue will result in someone on average full-time earnings moving into the second-highest tax bracket from 2015-16 and, over the decade ahead, experiencing a rise in their average tax rate of over 20 per cent.

Newman’s point is that high wages and taxes to pay for a generous social net in Australia go hand-in-hand. It’s part of who we are as a nation. But we need to have a conversation about what entitlements we want from government. It could help address a large part of the competitiveness problem.

He said that the the type of economic future we experience “depends on what you want.”

Newman argues employment on-costs are also hurting the economy, noting that an hourly rate can be inflated by as much as an 30% in super, workers comp, long service leave and holiday loading.

“This impacts employment and competitiveness. At the end of the day somebody has to pay for it, somewhere in the economy. There are no free lunches.”

The causes of job losses

Because, as has been illustrated in wage freezes at Coca-Cola Amatil and for Qantas engineers, alongside the exit of car manufacturing and businesses outsourcing to other countries, including New Zealand, Australian workers are losing ground – and also in many cases their jobs. They face a very different future.

Leaving aside the currency impact, Australian wages will remain high by global standards regardless of how the industrial relations system is changed. So how do we adjust?

Newman says it’s already starting to happen.

“What I could never understand, if I was a union leader in the auto industry, is that I’ve just lost all my members. I mean it’s all very well to fight for your members, but at the end of the day it doesn’t seem a very good business strategy. Qantas recently signed a 4-year standstill agreement with its engineering union. So, yes what they have essentially created is called wage drift. And what happens is that the engineers at Qantas have said that over a period of time they will receive lower compensation,” he said.

Will that drift spread economy-wide?

“It’s impractical for that to be achieved in any short-time reference. But over time, unless we’re able to significantly improve productivity, with more job substituting capital investments, through wage standstills, through further reductions in the exchange rate, or some combination … if we are to become competitive, these things have to happen.

“It’s not just a question of what Maurice Newman says, its a question of what the market will ultimately sustain.”

Australia is part of a global market, with 23 million well-educated industrious people competing against 7.3 billion others.

The way forward

If Australians don’t confront the future by addressing the present settings in the local and global economies, the future we hand our children could be of a lower standard of living than that which we enjoy today.

Joe Hockey, Tony Abbott and the government need to have a reasonable, well-articulated conversation with the Australian public. It has to be about more than slogans. And the Opposition has to contribute rather than being politically opportunistic.

Newman’s message is that unless we have that discussion, and prefer to be caught in a raw political discourse that paralyses debate and action, Australia will end up passively drifting toward the future – one determined by outside forces.

Just ask Greeks how that feels.

Whatever side of the political divide you sit on, the reality is that the last 24 golden years of Australia’s economic future are starting to fade.

We need to make some serious decisions about what happens next.

As Maurice Newman repeatedly points out, we can choose, or the rest of the world will. The question is who we want deciding the country’s future.

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