Do We Need Reaganomics Now?

The Treasurer has suggested that we should look to the supply side of the economy as we climb out of the COVID recession. He has raised increasing workplace flexibility, reducing green tape and bringing forward tax cuts as fruitful strategies. He has suggested we look back to the Reagan and Thatcher legacies for inspiration.

Forty years ago my generation – politicians of both parties, Commonwealth and State, senior public servants, of whom I was one, academics, business people and key union leaders – understood that we needed urgently to reform the supply side of the Australian economy. Josh Frydenberg was in primary school.

We did look at what had happened in the UK and US and what was unfolding as NZ moved from being the Albania of the South Pacific to one of the most brutally competitive economies in the world.

But we crafted our own way forward that steered well clear of the nonsense of the Laffer Curve and the huge transfers of income and wealth that characterised both Thatcherism and Reaganomics.

As we cleaned out the Augean stables of the raft of tariffs, quotas, subsidies, and self-regulating monopolies that had accumulated in the post-war period, opened the economy internationally with a floating exchange rate, embraced national competition policy and created more workforce flexibility in the 80s and 90s there were large gains in allocative and dynamic efficiency.

But that has been done – there is little evidence from recent Productivity Commission reports that there are massive payoffs to be garnered on the supply side of the economy except through hard patient work to lift productive efficiency. That means speeding and broadening the development and implementation of new technologies and deepening and extending the skills of our labour force. More workplace flexibility, environmental deregulation and personal income tax cuts for the top half of the income distribution will do none of those things.

We entered the COVID19 lockdown in a relatively poor position. Growth had been low for years, real wages were rising very slowly, inflation was almost non-existent and productivity growth was poor. Such GDP growth as we had had since the GFC, had been underpinned by high immigration and strong minerals export prices. 2020 started in drought and unprecedented bushfires. The one bright spot was that our fiscal position was relatively strong compared with almost all other OECD nations. This meant we had, and have, room to borrow at historically extraordinarily low rates.

Much of the debate before COVID19 struck was about whether our poor growth was due to supply-side problems – labour inflexibility, tax disincentives for investment, green tape, our inability to devise and maintain a sustainable climate policy – or to inadequate demand flowing from depressed real earnings growth except for the top quartile of workers.

Like many other Australian economists, I think that a lot has to do with low-income growth for most people. This depresses demand. Relatively high effective tax rates (ie including the relatively sharp tapering of welfare benefits) for low-income earners and women with children in particular, once childcare costs are included, deter workforce participation or inhibit hours worked.

The COVID crisis has underlined our vulnerability to those areas of the workforce with the lowest incomes, highest levels of workplace flexibility and lowest level of job security. It is no coincidence that the resurgence of COVID infections in Victoria has been linked with security staff, abattoir workers, aged care workers and the hospitality sector. Job insecurity and the absence of sick leave have been suggested to be key factors in the failure of workers who are unwell, to self-isolate.

The last thing we need to do is to extend the uncertainties of the gig economy and these low-income sectors more broadly in the economy. COVID has proved we need a cohesive society to be resilient and you do not build that by creating more uncertainty.

There is little evidence that a vigorous pursuit of workplace reform will yield large productivity gains. In the last comprehensive review of workplace relations, the Productivity Commission (2015) concluded: “Contrary to perceptions, Australia’s labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervaded historical arrangements have now abated. Strike activity is low, wages are responsive to the economic cycle and there are multiple forms of employment arrangements that offer employees and employers flexible options for working”.

While improvements can always be sought and delivered this suggests that there is no low hanging fruit to be easily plucked to deliver a stepwise productivity jump.

The government is proposing tax relief for the top half of the Australian taxpaying community, but little change for those whose taxable income is below $45,000. The government’s proposal to lift the top tax rate threshold to $200,000 and for those between $45,000 and $200,000 to pay a flat 30% for this portion of their income will principally help those in full-time employment – it will be a major windfall for middle to third quartile earners, and considerably more so for two middle-income households.

While I can understand the government’s political reasoning, particularly when you bear in mind the proposed lift in the superannuation guarantee charge, I question whether we should be giving away a large slab of our revenue base when we are very uncertain about the rebound from COVID as well as the implications of a reduction of the dependence of our resource, agricultural, education and tourism markets on China.

Revenue might be under considerable pressure at a time when I think we need to be slightly increasing the overall tax take to build a more independent and resilient capacity to deal with regional security and cyber challenges.

Then there is the question of equity and social cohesion. Incomes and wealth in the top decile of earners, and particularly the top percentile in Australia have increased more rapidly than across the rest of the income spectrum. This is even though post-tax and transfer income inequality more broadly has not increased, and indeed somewhat reduced since 2007. There is a very strong argument that at salaries over $500,000, $1 million and higher there is a strong element of rent.

That is people are being paid more than is necessary to attract their labour and more than can be explained by competitive markets for talent.  This suggests that there is little productivity improvement to be gained from further benefiting these income groups’ disposable income through bringing forward the Stage 2 and Stage 3 income tax cuts.

Conversely increasing marginal tax rates for the highest income earners should not result in major withdrawals of labour and loss of performance. But it would send a useful message that we are all contributing to the recovery and help us maintain social cohesion – avoiding the appalling divisions that are now so evident in the US and across Europe. It might encourage boards and CEOs to think about executive pay a little more critically.

Finally, there is the issue of the macroeconomic effect of tax cuts for the better off – well the answer there is well known, given their lower marginal propensity to consume you get less stimulus bang for each dollar of government revenue foregone than you would if you focused on increasing the disposable incomes of those in the lower-income quartiles.

A sustained increase in the JobSeeker/NewStart benefit levels and increased rental assistance for pensioners and benefit recipients as well as a close look at the effective marginal tax rates including government benefits for the lower-income groups, is important both on equity grounds and to maintain demand.


Roger was the longest-serving disabled Departmental Secretary (of Environment and Heritage) in the history of the APS – there have only been two since 1901. He contracted polio in 1948 and uses a wheelchair, leg braces and crutches.

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