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May 17, 2012

What would a real economic reform budget look like?

What would a hardcore economic reform budget look like, stripped of political self-interest? It depends on what your economic priorities are.

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.

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25 comments

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25 thoughts on “What would a real economic reform budget look like?

  1. Richard Wylie

    Bernard for PM… or at least Treasurer!!

  2. Dajopa

    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

    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

    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

    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

    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

    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

    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

    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

    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.