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What would a real economic reform budget look like?

What would a real budget, targeted at Australia’s most pressing economic problems and free of politics, have looked like last week?

That naturally depends on what you think are the nation’s most pressing problems. If you’re the Business Council of Australia, you might think the level of corporate tax, Australia’s restrictive IR laws and the lack of infrastructure investment are the big problems. Trade unions might think the lack of support for manufacturing and other sectors harmed by a high dollar and the resources boom is the problem. Social services groups might complain about the low level of Newstart, the need for more help for the long-term unemployed and better support for people on low incomes.

Let’s start from the beginning in identifying what the most significant economic challenges are for Australia, bearing in mind we’re the envy of the developed world. Our economic issues are … well, I’d use #firstworldproblems but even that wouldn’t be accurate, as they’re problems the First World would be happy to have.

1. Productivity: is this a problem? The consensus until recently was yes, but now there’s dispute about whether our recent bout of productivity panic has been justified. A recent paper for (though not endorsed by) the Productivity Commission by Dean Parham, while not purporting to comprehensively explain what’s happened to productivity over the past decade, has a decided sense of “don’t panic” — Parham suggests the productivity slump can be mostly explained by factors such as the mining boom and its massive increase in investment in pursuit of more expensive-to-mine minerals, and the long-running drought of the past decade. Productivity growth may well return to higher levels soon, the paper concludes.

There’s also the problem that, when it comes to labour productivity, we might not be doing ourselves any favours. Both sides of politics are committed to lifting our (currently slightly declining) participation rate, which is likely to mean that employees with lower skills and less marketable skills will re-enter the workforce. This was one of the reasons Treasury accurately predicted that WorkChoices would cut labour productivity, by making lowest-paid workers more attractive through wage cuts and making them easier to sack.

More positive measures, such as reducing EMTRs to encourage people back into the workforce and giving incentives to employers to hire older workers (who are more experienced but who may have been out of the workforce for a time), may well have the same effect on productivity.

2. Decarbonisation: Australia has the most carbon-addicted economy in the developed world, which is why the criticism that we shouldn’t take unilateral action on climate, or “lead the world”, apart from being wrong about the lack of international action, misses the point that Australia has a considerable way to go before it achieves only the same level of carbon dependence as other developed countries.

The carbon pricing package — a half-baked pricing scheme supplemented by a significant direct action renewables investment plan — will provide some momentum, but that is significantly offset by an extraordinary range of tax concessions that currently encourage carbon consumption. That is, we have a “carbon policy” that deters and encourages carbon use.

3. Housing: Australia has a housing shortage and it’s getting worse, despite what you may read about the housing market. Since the political heat went out of the issue (which climaxed with xenophobic claims about foreign investors buying Australian property), it has disappeared from politicians’ radars, and slipped off the COAG agenda even as the gap between supply and demand has grown. Only Joe Hockey, occasionally, raises the issue and appears to be interested in policy options to address it.

The problem is particularly acute in NSW, where years of problems around the development approval process have meant Australia’s biggest state has been the worst performer in building new housing stock, although building has begun recovering again under the O’Farrell government.

4. Fiscal stability. Despite a forecast return to surplus, Australia faces a long-term fiscal challenge from an ageing population, a remorselessly growing health and caring sector that is primarily public funded, and tax revenues likely to prove sluggish for several years to come. Moreover, state governments face a similar but worse version of the same dilemma. Any significant new spending initiative — the National Disability Insurance Scheme — therefore needs either dramatic offsetting savings elsewhere in the budget, or its own funding mechanism from new sources of taxation.

5. Infrastructure. Labor has at least moved the infrastructure debate into the 21st century by establishing a national, though insufficiently transparent, infrastructure assessment process and abandoning the historic unwillingness of the federal government to fund urban infrastructure. But despite numerous attempts at the state and federal level, no Australian government has yet solved the basic problem of public-private partnerships — leveraging taxpayer funding into privately built infrastructure in a way that delivers projects to users, revenue to owners and minimal risk to taxpayers.

With governments unwilling to borrow to fund much-needed infrastructure, resolving this is one of the more obscure but important public policy challenges.

*Tomorrow: Keane’s budget to match the priorities. What do you think? We want budding economists everywhere framing their own budget — leave your feedback as a comment or email boss@crikey.com.au.

25
  • 1
    Richard Wylie
    Posted Thursday, 17 May 2012 at 1:27 pm | Permalink

    Bernard for PM… or at least Treasurer!!

  • 2
    Dajopa
    Posted Thursday, 17 May 2012 at 1:41 pm | Permalink

    There is no housing shortage. Not in Australia and not in NSW. The report Bernard linked to is wrong and has been debunked by independent unaffiliated analysts.

  • 3
    Jimmy
    Posted Thursday, 17 May 2012 at 1:42 pm | Permalink

    Interesting article BK and tomorrows should be more intersting as identifying problems is always easier than solutions.

    That said if we look at the problems and see which party has the better pol icies to solve them then we see;

    1) Productivity - The coal ition says the workchoices is dead but constantl y make s comments that they will restore at least parts of it which indicates they only view productivity through the slash wages lense. The ALP wins this one.

    2) Decarbonisation - Well Bernard may not like the govt’s approach and it may have some flaws but when compared with the Libs “direct action” nonsense it is a rolls royce. An easy win to the ALP here.

    3) Housing - Not sure either party have much of a policy in this area so won’t make much comment.

    4) Fiscal Stability - Before you even discuss the govt’s record the mere fact that the Libs seem to have found a magic pudding where they can cancel the carbon tax & MRRT, keep the tax cuts and pension increases, spend billions on their direct action policy, nanny subsidies and ridiculous paid parental leave scheme, wind back means testing of everything and still deliver a bigger surplus and possibly support the NDIS (who knows after what Joe had to say yesterday) would indicate to anyone that the ALP win this one. But for the record the govt has steered us through the GFC, is returning us to a neutral fiscal policy at the right time and has taken measures to wind back middle class welfare and find new revenue streams.

    5) Infrastructure - Does the coalition have a policy on this, they didn’t seem to last time they were in govt. And along with the points made by BK the govtt has set aside MRRT money to invest in infrastructure needs. So a win for the govt there.

    After reviewing the big issues we confront you have to ask why is the govt looking at defeat and what sort of disaster will Abbott deliver?

  • 4
    Modus Ponens
    Posted Thursday, 17 May 2012 at 1:55 pm | Permalink

    Reducing effective marginal tax rates would increase workforce participation but it doesn’t automatically mean those new workers would increase productivity. If those workers needed training or were simply crap workers, then productivity would actually decline.

    Sorry to be a pedant, but I figure thats what you have a comments thread for….

  • 5
    Bloody OiCrikey
    Posted Thursday, 17 May 2012 at 1:58 pm | Permalink

    On productivity I think most Australians in the private sector are very productive, improvement will depend more on better management and streamlining of production and work activity, better technology and skills. The public sector is not very productive, a couple of years ago I heard the Australian defense department has 7,000 staff compared to the British which has 4,000, and now we have Fair Work Australia taking three years to complete investigation into the HSU. I suspect many public servants didn’t like Kevin Rudd because may be he did trim the sector down or expected them to work hard.

    One key point Bernard didn’t mention is the Gonski report, how education is failing to lift children from poor background out of the cycle of poverty. These kids also often end up in the criminal justice system with beak future. With limited budget the government should at least have human development program in the first couple of years of education and the last three years with proper identification of kids who are disillusioned or going astray. Assisting kids with social, community support, re-engage them with society and learn discipline have focus and goal for their jobs or career paths. It will be cost effective if local schools work together to develop such programs, and there will also be some bright kids willing to give a hand to the disadvantaged. My niece and nephew in high school have been volunteering in the last couple of year in free tutoring programs.

    The more ignorant and value free society we create the more they would likely vote for the current crop of Liberal politicians.

  • 6
    Bloody OiCrikey
    Posted Thursday, 17 May 2012 at 2:10 pm | Permalink

    mistype-bleak future.

    Welfare needs revamp. Some just enroll on this course and that course to get extra money without ever completing them and get employment.

    There are certain long term welfare recipients who just abuse the system, what’s bad is the cycle will continue with their children ending up in alcohol abuse, drugs and crimes. Long term welfare recipients will need more attention, training, work placement, compulsory community work, in worse scenario drug test them and provide them rent and vouchers instead. This should apply to people of all ethnic backgrounds.

  • 7
    Andos
    Posted Thursday, 17 May 2012 at 2:58 pm | Permalink

    Implement a Job Guarantee for full employment and price stability. Everything else is second-tier, at best (except decarbonisation).
    http://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee.cfm

  • 8
    Paul Byard
    Posted Thursday, 17 May 2012 at 3:06 pm | Permalink

    I would add one other fundamental reform and two long-term goals: the enforced reintroduction of competition across the vast swathe of Australian business sectors currently run as rather cosy clubs for the benefit of a small number of privileged operators: the newspaper business, of course, supermarkets, banking, merchant banking, drinks production & retailing, gambling/pokies, packaging, resources to name just a few. Capitalism needs free and fair competition to work properly and we have lost sight of that. How you divide up those companies which have been allowed to become too large and powerful would require considerable skill and great courage. But at least the process could be said to be carried out in the spirit of the late, great Mr. Adam Smith, though any Government with the balls shouldn’t count on too much support from his alleged disciples at the Oz.

    Long-term goal #1: to give an incentive (perhaps, but not necessarily, financial) to business owners & managers to encourage their employees to participate in community affairs through volunteering. A few enlightened companies already do this, including Alcoa (http://www.alcoa.com/australia/en/info_page/week_of_service.asp )

    Long-term goal #2: to give better structure and support to the concept of lifetime learning so that any individual can continue to learn if they wish to do so irrespective of age or resources. Let’s aim to have our schools, TAFEs and universities sitting at the very heart of our communities.

  • 9
    Damien
    Posted Thursday, 17 May 2012 at 3:33 pm | Permalink

    Re the statement on infrastructure - I don’t think PPPs are the way to go. they’re inequitable. Why should it cost some Sydney residents (with no public transport links) $10 each way in tolls and others nothing? Also, the costs of building and maintaining country roads are funded across the community, why should some metropolitan projects be the responsibility of those in the areas they connect?

    When the NSW Government built the Sydney rail system, the price was five times the annual state budget - and this was when the states still had taxation powers. Thank god they did.

    Bloody OICrikey - your judgements about people on welfare and those from low socio-economic communities are a big part of the problem. You obiviously have no idea what one has to currently do to get Newstart or parenting allowances. Also the notion that kids from “poor background” are destined to a life of crime is just wrong. You can train and discipline and re-engage people all you want but if all you can offer is minimum wage casual work for a few hours a week (because you demand labour market flexibility) nothing will change - you’ll just make people angrier.

  • 10
    Bloody OiCrikey
    Posted Thursday, 17 May 2012 at 4:10 pm | Permalink

    Damien

    My comment on productivity did not mention labour market flexibility. One has to wonder why after Labor has introduced Industrial Law reverting many aspects of Workchoices back in favour of the workers as well as now that low income workers have been enjoying real income growths since Labor got in office yet there are so much anger towards them and the poll is dismal? That to me is the result of an ignorant and lacking value society.

    I did not say all of those from poor background will end up in crimes. But many in bad environment will likely, you should read the article on the Drum about how our justice system is failing our youths it also mentioned the Gonski report on need to help children from poor background, it was a week or so ago I hope it is still in their archive.

    Japan has less crime per capita than Australia and their welfare system is very strict, it depends on family value looking after each other, pride and personal responsibility. Australians are spoilt yet still have more crimes and disaffected youths. Many years ago when I could not focus on Uni and took a break and could not get work for a period of time, I was able to survive easily while on unemployment benefit.

  • 11
    Bloody OiCrikey
    Posted Thursday, 17 May 2012 at 4:14 pm | Permalink

    People should wake up and see the welfare system have destroyed our indigenous communities. Some used to have self reliant productive industries now they become alcoholic town. Instead of having proper policy for all people, Labor and the Liberal engage in racist policy.

  • 12
    Bloody OiCrikey
    Posted Thursday, 17 May 2012 at 4:16 pm | Permalink

    People should wake up and see the welfare system have destroyed our indigenous communities. Some used to have self reliant productive industries now they become alcoholic town. Instead of having proper policy for all people, Labor and the Liberal engage in racially discriminating policy.

  • 13
    GocomSys
    Posted Thursday, 17 May 2012 at 4:50 pm | Permalink

    The message I am getting so far is that the government is doing an admirable job under the circumstances. See what BK comes up with tomorrow!

    Regarding phoney Tony and his minions. I just wonder how long he is allowed to stay before Limited News and the Poll Pushers turn on him in order to re-install “Mal” as opposition leader, ready for the next election. Phony Tony will get a pat on the back for a “demolition job” well done and will then recede into the background where he belongs. Why however would Turnbull drink from this poison chalice I ask myself when having to content again with the likes of Barnaby and the Bishop sisters, just to name a few?
    Policy wise there isn’t much to be expected from the conservative lot, whoever is in charge.

  • 14
    Modus Ponens
    Posted Thursday, 17 May 2012 at 4:55 pm | Permalink

    Dajopa - if there is no housing shortage, why are house prices so ridiculously inflated and far higher than in comprable countries?

    Bloody OICrikey - they are not ‘our’ indigenous communities - they are indigenous communities. Do you call them ‘our italian communities’? Freudean dispossession…

  • 15
    Jimmy
    Posted Thursday, 17 May 2012 at 5:00 pm | Permalink

    Gocomsys - The libs have a real problem if they want to reinstall Turnbull, he won’t accept their rubbish direct action plan and will wnat to back an ETS which will probably result in keeping the current policy.

    I also think he will ditch the paid parental leave scheme, the nannies rebate, back a lot of the means testing and in general want to get their economic policies into some sort of order.

    How that is achieved without demonstrating how ridiculous they have been for the past few years I don’t know.

  • 16
    AR
    Posted Thursday, 17 May 2012 at 6:55 pm | Permalink

    I would like to see the abolition of industrial welfare such as tax write offs for advertising, diesel fuel rebate for miners and accelerated depreciation of capital structures.
    And the abolition of negative gearing for investment properties.

  • 17
    taylormade
    Posted Thursday, 17 May 2012 at 7:38 pm | Permalink

    Jimmy,

    After reviewing the big issues we confront you have to ask why is the govt looking at defeat and what sort of disaster will Abbott deliver?”

    1st point - People have stopped listening.

    2nd point - People rated Gillard prior and she has turned out to be a disaster so you just never know. Has proved a pretty effective opposition leader so may translate to a good PM. Whether good or bad, no one will know until he is PM to see what he delivers.

  • 18
    Jimmy
    Posted Friday, 18 May 2012 at 8:56 am | Permalink

    Taylormade - “she turned out to be a disaster” on what basis, she has passed a lot of controversial but necessary reforms that will be reviewed favourably by historians.

    As for Abbott being an effective oppostion leader and may make a good PM. His success as opposition leader has been on the back of opposing everything even if his stances aren’t coherent. The few policies he has make no sense at all and will probably drive this country into recession.

    As for people havinf stopped listening, that is my point despite the achievements of this govt and ridiculous policy settings of the opposition people have stopped listening why maybe this exchange from lateling last night might explain it;

    GREG COMBET: Well none of what I just put is spin; they are facts. They are things that we are doing for the community.

    TONY JONES: Well, I know that’s clearly the case and I don’t really think we need to go through a list of other facts in favour of the Government, but there’ve been plenty of examples …

    GREG COMBET: Well actually they’re pretty important.

    TONY JONES: Yes, they are, but that’s not what my question was related to. Because the question is why people have stopped listening, have they stopped listening? And there are many examples of actual spin.

    When the media are more interested in discussing spin than facts what hope do we have.

  • 19
    GocomSys
    Posted Friday, 18 May 2012 at 10:25 am | Permalink

    The largely “insular” OZ electorate has been very successfully conditioned during the previous conservative reign in becoming fundamentally apathetic, largely self-centred and self-absorbed! I guess in an adversarial environment driven by vested interests pursuit of short-term power and profit, it is to some extent understandable that a state of self-preservation comes into effect. Individuals intuitively appear to regard it as tantamount to survival, staying sane as well as retaining some piece of mind!
    There are simply too many “mushrooms” in the community. Kept in the dark and fed bullsh^t!
    As JIMMY rightly said: “When the media is more interested in discussing spin than facts what hope is there”.

  • 20
    Jimmy
    Posted Friday, 18 May 2012 at 10:36 am | Permalink

    Gocomsys - It is the exact points you raise about the state of the electorate that could in fact end up saving the ALP at the next election. At the moment they believe tha Carbon tax is going to destroy them and everytihgn they hold dear, once it actually comes in and they realise that in fact things aren’t that bad and a great number of them are actually better off then the “self preservation” factor will start working against Abbott.

  • 21
    mike flowers
    Posted Friday, 18 May 2012 at 12:50 pm | Permalink

    you know what i’m looking forward to?

    tony abbott being elected, and removing a large portion of the revenue streams, including repealing said taxes as well as lowering both income and company tax (even though we all know only company tax will be lowered, because “wealth creators”). Right at the time the eurozone crumbles, starting gfc mkII proper, causing the coalition to stop spending altogether, firing the other half of the public service they didn’t the first time around, watching business go up the wall because bailouts are not “in their dna”, and because a budget surplus is more important than people being in work, all the while hearing the coalition (through their media mouthpieces) blame the previous labor government.

    at least thats what i hope will happen….

  • 22
    Steve777
    Posted Friday, 18 May 2012 at 1:03 pm | Permalink

    Jimmy, I agree that in due course carbon pricing (and the MRRT) will become business as usual, should it be allowed to remain. But rolling out such a major reformis a hugely complex undertaking and there are bound to be glitches. Remember the GST? John Howard looked gone in early 2001 in a far less hostile environment. The issues took a year or so to iron out, after which Tampa and 9/11 drew much attention elsewhere. This time around carbon pricing and the MRRT will meet a very hostile reception, with the resistance, minimum cooperation and monumental whinging from those directly affected. And a hostile media will have a field day with it. Every glitch will be blown up into the greatest stuff-up in the history of the known universe, with dire consequences for ‘ordinary Australians’. For an indication of the headlines in the Murdoch press and the rantings of shock jocks between July 1 and the election, think Pink Batts or BER times 10. Unless the government can bed these reforms down and iron out any glitches very quickly, I think the Opposition, polluters and the Murdochracy will be able to keep the issue on the boil beyond July 1, right up to the election.

  • 23
    Jimmy
    Posted Friday, 18 May 2012 at 1:18 pm | Permalink

    Steve777 - Do agree that there will be the usual “john’s fish & chip shop closed today due to increased electricity prices” type reporting but the big difference in the GST and MRRT and Carbon tax is who is paying. With the later 2 it is just big businesses who have to pay it and these businesses have departments dedicated to ensuring there are no glitches. With the GST small businesses have to do a lot of the donkey work and learn how to account and administer the tax which lead ot the glitches.

    The other issue is the sheer level of the scare campaign run by Abbott and New Ltd, I am starting to think that anything short of complete decimation of society is going to be better than expected. Also remember Howard lost the popular votee on the GST election so it was hardly a “friendly” environment.

    In the Herald Sun today I saw a report which stated this is the first govt in history to have inflation, unemployment and interest rates below 5%, surely once the “fear” dies down even slightly the reality will shine through.

    Mike Flowers - I have no doubt Abbott’s economic policies will lead to disaster but I would never look forward to it.

  • 24
    Dogs breakfast
    Posted Friday, 18 May 2012 at 1:25 pm | Permalink

    The public sector is not very productive,”

    Sorry bloodyoicrikey, but that is just unthinking private sector balderdash.

    Defence, and the DMO particularly have been world class leaders in expensive muck-ups, while recognising that many of the worst areas were actually political decisions outside their department, i.e. Collins Class submarines and the lamentable Joint Strike Fighter.

    But outside of Defence we have Treasury and the Reserve Bank, almost certainly the leader in economic management, and very few would argue from outside Australia on that call. Better still, that record goes back to Bernie Fraser days. They have been outstanding.

    Foreign Affairs almost certainly the same, but harder to measure. So let’s forget the anecdotes for now.

    On topic, Paul Byard has hit the nail on the head. There are too many areas of non-competition in the private sector. Banks, supermarkets at the head of the queue, with newsagents and many others. Get some competition into these closed shops.

    On the budget, I have argued elsewhere that the budget doesn’t directly affect much of the issue of productivity, and if business is looking to government to improve their productivity, and they think that a 1% reduction in company tax rates is in any way related to productivity, then it is clear that business (the private sector) is the great stumbling block on productivity.

    In any case, it is highly doubtful that productivity is the problem that has been made out.

    Other budget issues, sure the effective marginal tax rates are a problem particularly for working families. Most of the terribly highly taxed high earners pay much less marginal rates than the average working family with kids. Tough probelm to solve though.

    Housing shortages, as mentioned elsewhere, is just bunkum. There are so many different points of view on this I can’t believe any of it, and the real estate industry is the least reliable part of the economy in terms of getting hard data from. Remember also that Ireland and USA are still working through a disastrous period of economic collapse brought on by over-investment in housing.

    Negative gearing, almost certainly the stand out problem. Why an investment should gain tax benefits from intended losses is beyond me, and pretty much any economist.

    Halving the capital gains tax, it’s just an economic distortion and encourages tax ‘minimisation’.

    Tax concessions on superannuation brought in by Peter Costello were rightly anointed the prize by one very senior private sector economist as the worst budget decision in the last 25 years. Why someone should be allowed to earn $60k or more before paying tax from their superannuation, while often continuing to work and salary sacrificing to their super and gaining tax benefits there as well, is beyond anyone. The fact that Costello brought that in a few years before the baby boomers started to retire just makes it worse policy. Unravelling that will take huge political courage. Good luck.

    Infrastructure - yes, it would have been just the right time to set up an infrastructure fund while Costello was raking in billions of dollars from the mining boom, but mostly that was spent on middle class welfare and tax cuts to the wealthy. Great work Costello. We should have been saving to an infrastructure fund then, and state govts should have had a list of ‘ready to go’ infrastructure as soon as the GFC hit. Appalling policy at Fed and State levels.

    Decarbonisation - Bernard is right. Get rid of the incentives to use carbon emitting fuels. Rebates and related tax write offs work directly against stated policy. Clean it up.

    The final real reform - simplify the outrageously complex tax system. If you are an average PAYE wage slave you shouldn’t need a degree in tax law to fill out your tax return. All those accountants doing tax returns are doing work that is futile and worthless. If your tax act rund to thousands of pages with thousands more in regulations, it’s a pretty clear sign that you need to start again.

  • 25
    Posted Sunday, 20 May 2012 at 6:51 pm | Permalink

    DOG’S BREAKFAST: Defense spending could be reduced, sharply, if all our Federal governments stopped bowing to America. Then America would be panicked about our vulnerability and give us all those lovely toys, non-Collins Class submarines et al, pie-in-the-sky fighter jets-converted to bio fuels-of course, and all those useless tanks they’ve ordered. This gives our defense dept-or whatever they call themselves the time to go through all the glossy catalogues with the expensive war machine artwork in them.

    All this would leave Australian governments with the balls, if not the courage, to say to America- the next time they want our help to fight in some squalid little, oil soaked desert, all to impress the locals. “OK, but you have to provide us with war materiel. F.O.B. of course.”

    Just thought I’d inject a bit of levity here.

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