The true picture is worse than the Intergenerational Report has revealed. That’s why the Treasurer is wrong to rule out ambitious attempts to change course now.
Now that the intergenerational report is out, painting a landscape of Australia’s economic future for the next four decades featuring a sea of red ink, we are entitled to ask of the major political parties: “What’s the plan?”
Using optimistic assumptions about productivity growth, the intergenerational report envisages persistent government deficits over the coming four decades.
But the true story is even worse.
The intergenerational report assumes labour productivity will converge to its 30-year average of 1.5 per cent per annum. That 30-year period includes the productivity boom years of the 1990s, built on the Hawke-Keating economic reform program and the dawning of the digital age.
After hitting a strapping 2 per cent per annum during the 1990s, productivity growth has been ebbing away ever since. In the last five years, it averaged just 0.5 per cent per annum and in the year before the pandemic struck it was a big fat zero.
This productivity growth slowdown is crucially important. As the Productivity Commission reported less than a fortnight ago https://www.pc.gov.au/research/ongoing/productivity-insights/recent-developments-2021/productivity-insights-2021-recent-developments.pdf productivity growth has contributed 95 per cent of the improvement in Australia’s material living standards since Federation.
For their economic projections, the US, Canada and New Zealand have revised down their long-term productivity growth assumptions to 1.2-1.3 per cent per annum.
The intergenerational report shows that if Australia did the same, instead of optimistically sticking with 1.5 per cent, the sea of red ink would be twice as deep by the end of the period and wages would be 9 per cent lower than they otherwise would have been.
Of course, the COVID-19 recession necessitated sharply increasing government debt. But the intergenerational report confirms the nation has little to show for it in the long term.
If there had been any plan to build back stronger, this might have been manageable, as productivity growth again weaved its magic at it had done during the 1990s.
Yet, in releasing the intergenerational report, Treasurer Frydenberg dismissed a bold reform agenda to drive productivity growth: “I understand there will always be calls for big-bang economic reforms and grand bargains, but we should never let that blind us to other important reform opportunities.”
By effectively backing in Prime Minister Morrison’s February 2021 position that he will not pursue reform “for the sake of vanity” https://www.afr.com/politics/federal/morrison-rules-out-big-reforms-20210201-p56ybd Treasurer Frydenberg has hoisted the white flag on major economic reform.
Instead of going for home-grown growth, the government’s intergenerational report plans to take the easy way out and bring in more migrants educated by other countries.
Skilled migration adds to national prosperity and should be supported. But to guarantee a low-wage economy, the government is planning to increase the unskilled temporary migration program by issuing visas to workers from the 10 ASEAN countries https://www.afr.com/politics/federal/asean-visa-scheme-to-tackle-farm-labour-crisis-20210615-p5812p
This low-skill, low-wage economic model is designed to suppress the wages of Australian workers, as demonstrated by a recent report of the McKell Institute https://mckellinstitute.org.au/wp-content/uploads/McKell-Institute-Stuck-in-Neutral-June-21.pdf
Australia desperately needs a new, comprehensive economic reform program to reboot productivity growth. The list of reform possibilities is long – if anything, too long.
The seminal 2017 Productivity Commission report on reform possibilities, Shifting the Dial https://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review.pdf makes 28 recommendations.
A 2012 “to do” list compiled by then-chair of the Productivity Commission, Gary Banks https://www.pc.gov.au/news-media/speeches/productivity-policies/productivity-policies.pdf runs to more than 40 items, though he does identify priorities.
An ambitious but manageable reform program is essential, comprising:
· human capital development through reform of Australia’s schooling system;
· research and development of renewable energy to enable Australia to take its place as a renewable energy superpower and benefit from trade in carbon storage;
· digitisation of the economy to reduce transactions costs through the sorts of initiatives being pursued by the deregulation taskforce driven by assistant minister to the prime minister, Ben Morton;
· a universal childcare subsidy to sharply reduce work disincentives for talented young women;
· tax reform involving the replacement of inefficient stamp duties with land taxes and a move to some form of a cash flow tax; and
· industrial relations reform along the lines proposed by the Business Council of Australia, the Council of Small Business Organisations of Australia and the ACTU.
The Hawke-Keating reforms were driven by their ambition for Australia. Its rewards for business, workers and the disadvantaged were bountiful.
Shirking economic reform is the easy way out politically but it will threaten Australians’ living standards.
Whoever wins the coming election should call an economic summit, just as Bob Hawke did, and develop a new economic reform program based on a level of consensus achieved at that summit. Participants would be informed by a report of the Productivity Commission identifying a limited number of major reform possibilities.
The summit should be based on a shared understanding that the benefits of economic reform are to be shared fairly among business owners, workers and the disadvantaged.
We’ve done big-bang economic reform before. We can do it again. If only the government of the day had the necessary ambition.
Craig Emerson 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. He was an economic adviser to Prime Minister Bob Hawke.