Last week the Commonwealth released a major report on productivity challenges facing Australia over the next five years. Although it was commissioned by Treasurer Scott Morrison, it is unlikely that the government, which shows no appetite for meaningful economic reform, will act on its recommendations. But the report may form a useful guide for whichever government takes the reins following the next federal election.
Last Tuesday, while media attention was directed to energy policy, same-sex marriage and the impending High Court case on citizenship, the Productivity Commission released its Productivity Review Inquiry – “a look out across the landscape of factors and influences that may affect Australia’s economic performance over the medium term, in order to offer advice on where our priorities should lie if we are to enhance national welfare”.
The Commission’s report was in response to a reference sent by Treasurer Morrison in September last year. He asked the Commission to report within a year on Australia’s productivity performance, and to “provide recommendations on productivity reform”.
Perhaps Morrison was hoping for an endorsement of the Government’s economic policies: cut company taxes; de-regulate the labour market; crack down on social security.
The Commission’s report is nothing of the sort, however.
While it argues for tax reform, it says nothing about corporate tax rates. Instead it re-presents many of the shelved recommendations of the Rudd Government’s taxation review (the Henry Review). It says “Australia’s national tax system, regarded as one of the most complex in the world, is costing the community more and raising relatively less.” Rather than pressing a “small government” agenda (it’s agnostic on the “size” of government), it emphasises ways to improve the technical and allocative efficiency of government services, particularly health and education. These sectors have been subject to many partial reviews but not to any comprehensive review.
The Commission has a great deal to say on regulation, mainly in the context of regulations that protect rent-seekers, such as retail pharmacists, but on the labour market its consistent message is about the need to make better use of the nation’s human capital, with practical recommendations on issues such as technical education. It stresses that “productivity is not, as some would have it, about extracting more sweat from the brow of an already hard-working Australian.”
And on social security it avoids any suggestion of a conflict or tradeoff between social policy and economic policy. On inequality, it writes:
The motivation for limiting inequality extends beyond its intrinsic value to the desirability of avoiding too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth.
In a section titled “Fixing the energy mess” the Commission calls on government to “stop the piecemeal and stop-start approach to emission reduction, and adopt a proper vehicle for reducing carbon emissions that puts a single effective price on carbon.”
It must have been gruelling for Josh Frydenberg, less than a week after abandoning a clean energy target, to read in a government-commissioned review “In the case of Finkel, 49 out of 50 is not a pass mark.” And for the Coalition’s coal lobby and climate change denialists it would have hardly been comforting to read “Advocates of older generation technologies who oppose (regulated) prices that reflect emissions are actually doing themselves a major disservice.”
It’s reassuring to be reminded that in Canberra there is at least one Commonwealth agency giving non-partisan economic advice. (The other independent economic agency, the Reserve Bank, is in Sydney.)
This report carries much the same message as the Commission’s annual Trade and Assistance Reviews. That is, it points out how many areas of the economy are affected by some special regulation providing economic privilege for select groups – protection from competition, tax breaks that shield some from responsibility to fund public goods, and regulatory impediments to taking on new technologies or work methods which would disrupt present players.
As the Commission has consistently pointed out, when so many groups are enjoying some economic privilege, if all the costs and benefits are added up, no one really benefits. As an analogy, to quote from Gilbert and Sullivan, “When everyone is somebody, then no one’s anybody.” And worse, all those special privileges impede the economy’s progress to improved productivity.
As the political scientist Mancur Olson pointed out, in such a situation the only real beneficiaries are the lobbyists who make a living by helping others extract economic rent.
It’s almost impossible to imagine that this report will have any practical influence on the current government, a government that is so aware of its weak parliamentary situation and the fragility of its political support that it balks at any meaningful economic reform.
Cynics may say that such is the nature of Australian politics, but cynics have been proven wrong in the past, particularly in the 1983 to 1996 period when the Hawke-Keating Government took on a bold program of economic reform, or when the Howard Government introduced the GST.
Although the Commission does not explicitly say so, its implicit message is that reform is most effective when it takes on all vested interests, whether they are seen to be on the “left” or the “right” of the political spectrum. Economic reform must be fair and must be understood by the community to be fair. Hawke and Keating understood this, in a way that the Abbott didn’t and Turnbull doesn’t.
So for now the Commission’s report will probably lie undisturbed on politicians’, public servants’ and journalists’ hard drives. But for a party seeking an economic reform platform – a Labor Party taking over in 2018 or 2019, or a Liberal Party trying to reconstruct itself after defeat, the Commission’s Productivity Review could be a useful starting point.
Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development. In their work Governomics – can we afford small government? Miriam Lyons and Ian McAuley explain the economics of public services.