Productivity push paramount
Productivity reform is vital for returning our country to prosperity. By Tim James.
Amidst the pandemic response, Australia risks losing sight of its biggest enabler of economic growth – productivity. Recent intergenerational reports remind us that productivity is paramount to return us to prosperity.
The MRC has often prioritised the case for productivity reform, a need now more acute as we climb out of COVID. In September 2019, which seems a lifetime ago now, we posed this question and answered it unequivocally in Watercooler:
“What will underpin our prosperity going forward?
“Productivity.
“More than any other force or factor, productivity is the key to growth.”
Today, even more so.
Intergenerational reports since the first in 2002 have focused on our national population, participation and productivity. Now we have a fourth “p” that has changed our future - pandemic. The COVID pandemic and policy responses to it, more than ever, demand that we deliver productivity gains through policy reform.
And big, national reform is required to put us on the path to prosperity.
The three key insights from this year’s IGR delivered this week each give cause for greater courage, depth and urgency in public policy reform towards productivity:
Our population is growing slower and ageing faster than expected;
Our economy will continue to grow, but slower than previously thought; and
The ageing of our population will put significant pressures on an already challenged budget position.
The latter is best demonstrated by the following chart which the Treasurer pointed to in his IGR speech.
The effects of COVID have overwhelmingly driven the long-term direction to one of deficit and the next decade requires immense heavy lifting. So much of that heavy-lifting relies on productivity growth.
The Treasurer was right to quote Nobel prize winning economist Paul Krugman in his IGR speech when he said productivity ‘isn’t everything, but in the long run it’s almost everything’.
Presently, and similar to many other developed nations, we’re not as a nation doing enough to lift productivity.
The IGR’s forecasts rely on productivity growth of 1.5% whereas it is currently 1.2%.
Australia now ranks 22nd out of 64 nations in the IMD World Competitiveness Index. Released a fortnight ago, this is Australia’s worst ranking in 25 years.
The Productivity Commission’s own productivity performance dashboard shows material lags in our productivity compared to the five-year average.
It’s not exactly a compelling current picture of confidence for the productivity priority.
Similar to the Commonwealth’s IGR, the recent NSW Intergenerational Report made it clear that productivity will be the biggest driver of economic growth in NSW in the next 40 years. Yet it revised down forecast productivity growth since the 2016 IGR to 1.2% per year over the next 40 years and notes even that rate would be an improvement compared with the 20-year average.
The essential message therefore is this - now is the time for policy makers to make productivity a real priority.
The Morrison Government has a sound record of reform, even amidst COVID, to deliver productivity gains including in taxation, superannuation, licensing, insolvency laws and more.
However, there’s a lot more to do and we can leave no stone unturned in the reform arena to meet the challenges ahead. Some will take immense political courage and capability, for instance to tackle labour market reform, improve our federation and governance, and deliver tough but vital tax system reform.
Big, bold, politically challenging policy prescriptions such as JobKeeper were required to get the economy through the worst of the pandemic, and did so successfully. At the same time COVID and policy-makers’ responses have imposed substantial and generational costs to the budget and economy. Taxpayers, both individuals and businesses, today, tomorrow and through time for decades will be burdened by this.
The notion therefore that small, incremental policy reform will get us out of this and that we can pass up bigger, tougher reforms is flawed. We must tackle the tough stuff in the reform agenda to get through the toughest shock to our economy since the Depression and contain its consequences.
The Treasurer is right to point out that some reforms of the past, so-called big bang reforms, such as floating the dollar and lowering tariffs, cannot be repeated.
Others such as competition policy and taxation policy can and should be continued.
There’s a case now to push for a third tranche of competition policy reforms. The Harper Review is six years old and the world has changed markedly. The earlier Hilmer Review of the 1990s delivered considerable reform, competition and uplift. It’s time to do so again.
Likewise, reforms to taxation policy, in spite of some positive recent steps, still haven’t met many of the original objectives of the Howard Government tax reform package that commenced 21 years ago this week. There is fundamental unfinished business in tax reform for Australia as multiple subsequent reviews have recognised.
Credit to the Business Council of Australia for its discussion paper this week, Living on Borrowed Time, which calls for a more diversified industrial base for Australia and a more skilled workforce. Both would build growth as well as resilience – a key national priority in the COVID recovery.
There’s also a case, as the MRC will soon report, for government service delivery to be more contestable, transparent and efficient.
It’s time to bring back microeconomic reform. It seems to barely rate a mention these days. But it is needed more than ever as we come out of COVID and confront the competitive dynamics of the modern global economy. Making productivity a priority is key to advancing our economy, employment and way of life. It may not ostensibly be a vote winner, but it matters immensely and will shape our destiny for decades to come.
As so often, the words of Sir Robert Menzies ring true today and continue to guide the path forward for our country:
The greatest function of a democratic government is to create a climate in which enterprise will flourish and productivity will increase, in which not only will human physical progress develop, but the human mind expand and the human spirit constantly revive.[i]
Let us hope and demand that all governments across Australia rally, resolve and reform with renewed spirit to see productivity increase. It’s the most important economic step we can and must take.
[i] Robert Menzies, ‘The Science and Art of Politics’, University of Texas Lectures (No 1), 20 November 1969