Australia is finally talking seriously about productivity – the quiet engine that drives higher wages, stronger living standards and sustainable profits – without stoking inflation, AMP’s Shane Oliver said in a recent insights report.
With the government’s economic reform roundtable looming, he hopes it will spark a wave of policy changes to help the economy produce more with less. While not very hopeful, Oliver says there are good prospects for a serious focus on deregulation, as well as on better incentives to invest and competition reforms.
We bring you Oliver’s wish list in its entirety.
It’s a very good thing that we are at last starting to have a national debate about the importance of productivity, why weak growth in it is a problem and what can be done about it.
Productivity growth is basically the secret sauce that enables strong growth in real wages, living standards and profits while at the same time keeping inflation low and its absence in recent years has made this kind of difficult. So hopefully, the roundtable will kick-off a process of economic reform that will boost the ability of the economy to produce goods and services with the aim of boosting long-term living standards. Key reforms on this front should include the following:
1. Tax reform to rebalance from income tax to a higher and/or broader GST, compensate those adversely affected, index the income tax thresholds and remove nuisance taxes like stamp duty to incentivise work effort and investment, better allocate resources and reduce the burden on younger generations as the population ages. This sounds politically difficult but if combined with an adjustment to income tax scales to offset the regressive nature of the GST, some measures to cap property tax concessions (like cutting the overly generous capital gains tax discount) and better tax gas exports, a broad consensus could be reached. While some advocate a wealth tax to deal with rising wealth inequality, a better option may be inheritance tax as it’s a less distortionary tax.
2. Limit government spending to below 25 per cent of GDP. If we want more government services, we need to find others to cut. This is the best way if we want to ensure budget sustainability and boost productivity (as higher taxes and government spending crowd out more productive private sector activity).
3. Deregulate product and labour markets to remove red tape, boost flexibility and make it easier to get things done. There is much that can be done here, e.g. to speed up home building.
4. Provide more incentives, e.g. by tax deductions, for companies to invest and adopt new technology including AI. At the same, we must avoid encumbering companies with AI dos and don’ts.
5. Boost workforce capability by improving education and training outcomes.
6. Competition reform to reduce market concentration.
7. Match population growth to the ability to supply new homes.
8. Boost service delivery productivity in the care economy, including by focusing more on prevention in healthcare and the faster adoption of automation/robotics.
9. Maintain high levels of infrastructure spending to reduce congestion, lower transport costs and allow more to live away from expensive cities.
10. Rely more on market signals as to how best to get to net zero.
The reality of course is that everyone has their wish list and expectations running into the roundtable appear to be running too high.
It’s likely just the start of long process through which (hopefully) the government will pick the best options and make some compromises. However, in the absence of a serious economic crisis, like when Keating was talking about a “banana republic”, radical economic reform is unlikely.
And in any case, serious tax reform involving the GST looks off the table as does labour market deregulation and the inclusion of budget sustainability risks any tax outcomes being dominated by measures to simply raise more taxation revenue. However, there are good prospects for a serious focus on deregulation, with housing at the pointy end of this but other sectors of the economy likely to benefit too, better incentives to invest and competition reforms.
