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 [email protected].