Risky business

Why is the government rushing industrial relations changes that will be a drag on productivity and make the fiscal hill set out in the Intergenerational Report even steeper? By stephen walters.

First published in The Australian Financial Review

Last week’s Intergenerational Report set out in eye-watering detail the huge fiscal challenges Australia will confront over coming decades. The IGR predicted slower economic growth weighed down by sluggish productivity. Without remedial action, this means diminished prosperity for all Australians.

A key challenge will be turning around our dismal productivity performance. Productivity is driven by investment and innovation and using the skills of workforces more effectively. The gains usually come at the workplace level and are about working smarter, not harder.

In this context, why is the government rushing workplace changes that will be a drag on productivity and make the fiscal hill even steeper?

First, the IGR predicted that Australia’s population will grow to 40 million people by 2063. Our population will also age despite substantial migration. There will be fewer working Australians for every older person (hopefully) in comfortable retirement. Moreover, there will be spiralling costs of government services that Australians demand and deserve, particularly in the care sector.

There is an unhelpful implication in the current debate over our future that taxes should be allowed to grow over time to fund these services. Even if we accept this premise, our creaking tax system is filled with rigidities, distortions, leaks and discouragements of effort. It won’t be up to the task of squaring our fiscal circle.

The reality is that a yawning funding gap will open and become wider over time. The easy solution would be to allow the tax burden on future generations and businesses to become heavier, but this would further diminish incentives to work, invest, innovate and hire.

Simply raising taxes is not the answer. Getting the tax system to work more effectively is the answer, alongside reforming our economy and governance structures to lift productivity.

On this, also last week, the Business Council released Seize the Moment, a comprehensive reform document. It recommends ideas across 10 policy levers, including industry policy, energy, tax, microeconomic reform, social inclusion and our international engagement. Driving for the frontier of global best practice in everything we do and lifting GDP growth to the long-run average would mean that, within a decade, the economy would be $200 billion larger and every Australian $7000 better off – every year.

How do the recent and planned workplace changes help smooth our journey to fiscal sustainability and sustained prosperity? The bottom line is they won’t. They will give disproportionate power to union delegates and make it more complex, costly and difficult to employ Australians. This at a time when other countries are making it easier.

Seize the Moment advocates a workplace system that encourages agility and flexibility and helps drive wages growth linked to productivity gains. The proposed IR changes will do the opposite. In a nutshell, they will add complexity, red tape and cost, all disincentives to hiring and investing. These are sweeping changes that cover every area, including who gets hired and in what types of jobs.

The workplace proposals will centralise negotiations over wages and conditions into an antagonistic framework echoing the industrial era of the 1970s. The Fair Work Commission will have a broad role in determining how a business operates because the expected changes will be so complex that the only way to get certainty is to have the FWC intervene. That’s costly and time-consuming and risks businesses deciding it’s too hard to employ people.

Many people get their first job as a casual worker. For students, it’s a valuable first step and for people returning to the workforce, it provides the flexibility they need. However, those jobs will be at risk because there will be a new definition for casuals. That changes the type of jobs on offer and the weekend shifts will become permanent, with a pay cut of 25 per cent as workers lose casual loadings. They will lose the flexibility they cherish.

On Same Job Same Pay, the government says it’s closing loopholes, but we don’t know what they are. Instead, we will have more red tape, making it difficult for businesses to scale up with additional staff and expertise when they need it most.

The gig economy is an important way of working for many people, driven by consumer demand. Treating it like traditional work arrangements is not what these workers want. Nor do their customers. Higher business costs inevitably will be passed on to consumers. They also may trigger higher unemployment as growth in the economy slows.

We are only now seeing early impacts of the IR changes passed last year. We should wait to see how these changes work before adding more layers of complexity. Moreover, any proposal of this magnitude needs to be put through a comprehensive assessment process that adheres to world’s best practice. This should include a clear identification of the problems being “solved”.

It’s instructive there were three recessions here in the 1970s, two in the ’80s, just one in the ’90s, and none over the subsequent two decades, when inflation was low and stable. It’s no coincidence the outdated workplace negotiation in the ’70s triggered outsized wage gains untethered from productivity. This heralded rampant inflation and the subsequent recessions.

In the midst of a cost-of-living crisis, shifting global tectonics and mounting domestic challenges, as the IGR and Seize the Moment lay bare, why return to those bad old workplace ways? There could not be a more risky time and a more risky set of proposals than what’s on the table. Let’s stop and really think about what the journey we are embarking on.

Let’s remember that productivity failure hurts everyday workers via slower wages growth and fewer jobs.

Stephen Walters is chief economist of the Business Council of Australia.