MICHAEL KEATING. The Future Agenda for Economic Reform

Given the lack of agreement about what are our key problems we shouldn’t be surprised that ‘economic reform’ is presently in the doldrums. But progress would be easier if the business community recognised that the old agenda to improve the flexibility and competitiveness of markets is now largely complete. Instead I argue that the new agenda should focus on reducing inequality by increasing education and skills. Furthermore, this will also help foster innovation by increasing the ability of the workforce to adopt and adapt to technological change. 

We hear constant complaints about the lack of an economic reform agenda in this country at present. This is often attributed to a lack of leadership, but I suspect the real problem is our inability to agree on what reforms are needed. By contrast, the economic reforms of the 1980s and 1990s had very long lead times when a lot of work was done in preparing the analytic case for those reforms well before they were taken up by politicians. Consequently, there was considerable support for many of those reforms, prior to their adoption by governments.

Today there is not the same unity of purpose when it comes to economic reform. Many of the interest groups have only limited proposals that largely reflect their self-interest. For example, one of the most powerful and articulate of these groups is the Business Council (BCA), but its reform agenda is largely stuck in the past with its demands for lower taxes and lower wages. The BCA states that its aim is to increase productivity, but there is no obvious link between its reform proposals and the rate of growth of productivity.

What is perhaps most interesting is that the recent 2017 report by the Productivity Commission about how to improve productivity in the future largely ignores the old (so-called neoliberal) agenda based upon improving market flexibility and competition. Instead the Productivity Commission acknowledges that its recommendations focus on “areas that many would not traditionally associate with productivity: health, education, cities and confidence in institutions”. The aim of the Productivity Commission’s reform agenda might be broadly described as improving the quality and cost-effectiveness of government and the services that it is responsible for. The focus of this reform agenda is on achieving better outcomes, and much of the improvement is expected to come from improved decision-making processes, including proper evaluation both before and after money is spent.

While I personally would support the Productivity Commission’s reform agenda, I am not surprised that it hasn’t set the world on fire. Rather I think the best this sort of agenda can hope for is a slow burn over time. Furthermore, while these reforms are valuable, they do not address what the community considers to be major pressing problems. Consequently there is no great groundswell for their support.

Instead, as I argued in my previous article posted yesterday (Economic Strategy for the 21st Century), after a decade of economic stagnation the best way to improve Australia’s economic performance is to ensure an adequate rate of increase in aggregate demand. This in turn means that the priority for reform must be to focus on the causes of inadequate demand: namely the reasons for low wage growth and increasing inequality, which as I have shown elsewhere (This is what policymakers can and can’t do about low wage growth,), are mainly due to how technological change is impacting on the labour market. This in turn means that the most important feature of any reform agenda should be improving education and training systems. This improvement in education and training is essential if we are to improve the ability of the workforce to adapt to technological change, with priority areas being early childhood learning and life-long learning through vocational education and training. As Piketty put it in his monumental work on inequality,

“Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries”…. “To sum up: the best way to increase wages and reduce inequalities in the long run is to invest in education and skills.”

Beyond the critical focus on education and training, Stephen Bell and I argued in our recent book, Fair Share, that the other important elements of a comprehensive reform agenda are:

  1. A preparedness to make greater use of fiscal policy to support demand when necessary
  2. The active facilitation of technological progress and innovation, including funding and forging better links between researchers, business and governments to ensure quicker adoption of new technologies on which increased productivity most depends
  3. A deliberate attempt to tackle spatial inequality, which has grown a lot in Australia in recent decades and is now seriously impacting on equality of opportunity. A reduction in spatial inequality will require changes to housing policies, the provision of infrastructure, and funding arrangements, especially the provision of needs-based funding for schools.

In addition, it must be recognised that no reform agenda will be completely successful. At present too little effort is being made to assist those who have been left behind – typically through no fault of their own. The incomes of these people should be increased, with priorities being increased rent assistance for those who don’t own their homes and closing the gap between those on benefits and those on various forms of pensions – in the past there was no such gap, and it is hard to see why there should be a gap now.

Finally, it needs to be recognised that this agenda for economic reform will require more government intervention, not less. Furthermore, this emphasis on maintaining adequate demand growth by reducing inequality will almost certainly also require an increase in taxation relative to GDP. Thus, the future debate around taxation reform should start from what sort of society we want and the role of government in achieving that society and its links to economic growth through income distribution; and only after that should the debate turn to how best to raise that taxation revenue.

Overall this reform agenda should lead to improvements in both the demand and supply sides of the economy. Furthermore, recent experience suggests that without a reasonable and fair distribution of income, economic growth and employment are likely to stagnate, bringing the future of capitalism itself into question.

References:

Bell. S. & Keating, M., 2018, Fair Share: Competing Claims and Australia’s Economic Future, MUP.
Piketty, T., 2014, Capital in the Twenty-First Century, Harvard University Press, Cambridge, MA.
Productivity Commission, 2017, Shifting the Dial: Five Year Productivity Review.

 Michael Keating is a Visiting Fellow at the ANU. Previously he was the Head of the Departments of Employment & Industrial Relations, Finance, and Prime Minister & Cabinet. 

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