Unless productivity rises, a re-elected Morrison government will have to break its spending promises. Neither party can shirk micro reform any longer.
By the end of this month the Treasurer will have released Australia’s fifth intergenerational report. Since productivity growth has contributed 95 per cent of the improvement in Australians’ material living standards since 1901 https://www.pc.gov.au/research/ongoing/productivity-insights/long-term/productivity-insights-2020-long-term.pdf the report’s productivity projections will reveal the level of concern within the government and Treasury about Australia’s long-term economic prospects. The stress-o-meter should be flashing red.
Australia’s previous intergenerational reports, dating back to 2002, seek to look four decades ahead. They simply assume Australia’s productivity growth in the coming 40 years will repeat our performance over the preceding 30 years. That averages 1.5 per cent per annum. But it includes the productivity boom years of the 1990s created largely by the Hawke-Keating program of microeconomic reforms.
From the turn of the century, Australia’s productivity performance began to slide and the longer it has gone on the worse it has gotten.
Over the period from 2015 until the COVID-19 pandemic struck, actual productivity growth was worse than the low-productivity scenario included in the 2015 intergenerational report. That is, we performed worse than the worst-case scenario, including some periods during which productivity didn’t grow at all – it actually went backwards.
The sharp slide in Australia’s productivity growth has been replicated in most developed countries. Lots of explanations have been proffered but the trend is undeniable and shows no sign of abating.
Productivity Commission chairman, Michael Brennan, pointed out just last week https://www.pc.gov.au/news-media/speeches/post-pandemic-priorities that in the decade since 2010 – even excluding last year – Australia recorded its slowest growth in GDP per capita of any decade in at least 60 years.
Concerns about the May budget’s productivity growth assumptions were expressed during last week’s Melbourne Economic Forum (supported by the Financial Review) by Associate Professor Janine Dixon https://www.afr.com/politics/federal/budget-overshoots-with-optimistic-productivity-gains-20210608-p57z78 while Economic Society President Danielle Wood suggested Australia might be returning to a period of secular stagnation.
Worryingly, the prime minister has described economic reform proposals as vanities https://www.afr.com/politics/federal/morrison-rules-out-big-reforms-20210201-p56ybd. Hopefully that was a temporary lapse.
Certainly, assistant minister to the prime minister, Ben Morton, has been pursuing a productivity-raising agenda of bringing government regulation into the digital age and enabling automatic mutual recognition of occupational licenses to allow skilled workers to have their qualifications readily recognised by all states and territories.
Last Friday, the federal government and all states and territories agreed to modernise the execution of statutory declarations and deeds, replacing visits to Justices of the Peace and personal appearances at government offices with secure, verifiable digital signatures.
These are valuable reforms, but they are not yet of the breadth needed to lift national productivity growth rates back to where they were in the 1990s.
Danielle Wood’s analysis for the Melbourne Economic Forum confirms that increased spending announced in the budget and the legislated tax cuts to commence in 2024 are projected to deliver a decade of deficits. And that’s assuming productivity growth of 1.5 per cent per annum.
Based on the average productivity growth rate of the last two decades, the Treasury should be using no more than 1 per cent per annum in the budget and the intergenerational report. Relegating a 1 per cent productivity growth assumption to the worst-case scenario while maintaining an unachieved 1.5 per cent assumption in the base case would be recklessly misleading.
Without a comprehensive economic reform program, Australia will inevitably experience weak growth in living standards during the remainder of the 2020s and into the 2030s. And without economic reform, the current budget settings will prove unsustainable.
If the Morrison government is re-elected and shirks reform, it will have to announce large spending cuts to shrink the budget deficit, breaking pre-election promises.
For its part, Labor will need to embrace economic reform if it wins government.
A smart move would be to signal ahead of the election that a Labor government would convene a national reform summit to work on ways to lift productivity growth and ensure that a fair share of the benefits go to workers and the underprivileged.
There’s no shortage of reform proposals. In an excellent recent report https://www.productivity.nsw.gov.au/sites/default/files/2020-11/Productivity%20Green%20Paper_Consolidated.pdf the NSW Productivity Commission has proposed a coherent reform program that includes improving schools’ performance, investing in the skills of the future, support for innovation and competition, energy and water reform and modernising the tax system.
The Australian Productivity Commission, too, had earlier published a large selection of reform options https://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review.pdf.
Clearly there is potential for cooperative reform of the workplace relations system, as evidenced by the agreement reached by the Business Council of Australia, the union movement and the Council of Small Business Organisations of Australia that was ultimately scuppered by several other business groups.
Without a frank pre-election conversation about the need for a new wave of economic reform, the post-election field will be littered with broken promises. A shocked nation will demand to know why it wasn’t told the truth about Australia’s grim economic outlook before they voted.
Craig Emerson is managing director of Emerson Economics. He is a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT and adjunct professor at Victoria University’s College of Business.