Michael Keating. The Government’s Plan for Jobs and Growth. Part 2 of 2.

May 5, 2016

On Tuesday night the Treasurer announced that this year’s Budget was like none other – this Budget represents the Government’s Plan for Jobs and Growth. Presumably the Government hopes that its Plan will represent such a compelling narrative that it can then sail to victory in the forthcoming election. Accordingly, in this article I propose to assess how the Government’s Plan measures up in terms of its probable impact on jobs and growth.

As stated in the Budget the Government’s Plan for jobs and growth is based on:

  1. A ten year enterprise tax plan
  2. Continued investment in the national innovation and science program
  3. Securing an advanced local defence industry
  4. Opening up more export opportunities through trade agreements
  5. Its plan to get more than 100,000 young people into jobs.

According to the Government’s own Budget forecasts, however, the growth in output over the next four years is expected to be relatively poor, and notwithstanding its Plan. In fact the forecast growth in GDP has been revised down yet again, and is now expected to continue growing by less than its potential in the next 2016-17 financial year. Indeed it is precisely because of this weak economic outlook, that the Reserve Bank took its decision on Budget Day to reduce interest rates to the lowest level ever for the cash rate of 1.75%. Of course, the Bank and the Government attributed the timing of this decision to the recent low inflation numbers, but those numbers only provided the opportunity to reduce interest rates. The need to reduce them was occasioned by the inadequate level of aggregate demand, and especially the poor rate of business investment in the economy.

The good news, as the Government keeps reminding us, is that around 300,000 jobs have been created in the last year or so. But these new jobs are predominantly due to the very low rates of wage increase that have pertained in the last few years. Furthermore, according to the Budget these low rates are expected to continue, with nominal wages forecast to increase by only 2½ per cent and 2¾ per cent in the next two financial years, representing a forecast real annual increase in wage rates of only ½ per cent each year.

No wonder employment is growing rapidly, but this has little to do with the Government’s strategy for growth and jobs. Rather what we are experiencing is how, following the reforms of the labour market by the Keating Government, the labour market is now much more flexible and how the price of labour is now much more responsive to economic conditions. But the counterpart of this success in creating jobs is that the rate of productivity increase has dropped to around only ½ per cent in each of the last two years, and is not expected to increase by much more in 2016-17.

In that context, what is surprising and disappointing about this year’s Budget Statement on the Economic Outlook is that there is no section dealing with productivity, and this despite productivity having been at the centre of all discussion about economic reform for the past couple of decades.

In addition to our poor productivity performance, what is also worrying about the economic outlook is that non-mining investment is projected in the Budget to continue to remain sluggish. To some extent both phenomena may be related. But this non-mining investment is precisely the area that one would expect the Government’s Plan and especially its innovation agenda to have an impact on if that Plan is to succeed.

So what is the problem with the Government’s Plan, that its own forecasts do not seem to provide much evidence that it will be successful?

First, one would have to be extremely sceptical about the claim that ‘the tax and superannuation plan can be expected to lift the level of GDP by just over one percent in the long term’. Frankly it is difficult to see how this claim could be modelled given the shortage of empirical evidence. Furthermore, it is most curious that this modelling was not done by the Treasury, but by private consultants, who too often assume what they have to prove. Perhaps it is therefore no accident that it is still not possible to find out how this modelling was done. But what we do know is that whenever the company tax rate has been changed, it has never made a perceptible difference to investment, either here in Australia, or anywhere else. And even if we were to accept this dubious self-described “modelling”, a one percent difference over twenty years is next to imperceptible, and Australia needs a much faster pick-up in non-mining investment than that.

Instead the required pickup in investment will mainly depend upon the demand for each firm’s products. The profit share and the rate of return on investment is high enough, but the lack of demand is why so many firms are engaging in share buy-backs and acquisitions of existing assets, rather than expanding through new investments to create new assets. In this regard a credible path to accelerate the restoration of a sustainable budget surplus would make more difference than these tax cuts. A Budget surplus would reduce the relatively high real interest rates in Australia and would probably also lead to some further reduction in the exchange rate over time. Therefore the ten-year funding for the tax plan should be progressively re-deployed to bring the Budget back into surplus quicker.

Second, there is the issue of what can realistically be expected from the innovation and science package. The most important elements of this package aim to improve:

  1. the collaboration between industry and researchers which according to an OECD study is worse in Australia than in any other advanced economy, and
  2. Australian business attitudes to risk and experimentation, and the incentives for early stage investment in start-ups.

These are worthy aims, but how much difference can government make, especially when the funding largely comes from a re-arrangement of existing programs, and overall the funding has been cut for business assistance, and cut significantly.

The third leg of the Plan is the support for an advanced local defence industry. Readers of this blog will have seen previous articles querying the suitability of the submarines to meet our defence needs and their cost. (The mistaken decision on submarines and A more efficient submarine solution.)  In brief, building the wrong boats at a cost at least a third higher than purchasing them off the shelf, is not the future for a competitive manufacturing industry. Australia does need to, and I believe can, have a future in advanced manufacturing which produces high value added products based on technological leadership. On the evidence, however, building these submarines in Australia does not meet these criteria and cannot be expected to ensure our industrial future.

The other legs of the Government’s Plan identified above – opening up exports through trade agreements and the plan to get 100,000 young people – are also worthy endeavours, but again cannot realistically be expected to have a large impact on the economy as a whole.

Instead having a comparative advantage in skills is the most critical element if Australia wants to pursue high value added industries based on technological leadership. The Prime Minister’s Innovation Statement did in fact recognise the importance of skills, but unfortunately his words haven’t been matched by action. Instead the funding for education and training, along with research, has been cut.

A second critical element in improving Australia’s comparative advantage in high value industries is to make better use of the skills that are available. This is also the key to enhancing future productivity growth. But unfortunately there is considerable evidence that most firms in Australia are not at the frontier of best practice when it comes to making the best use of the skills of their workforce. What is needed is a renewed management focus on achieving improvements in the organisation of work, a principle source of innovation, and less focus on cost cutting, which at worst can lead to lower productivity.

Closely related to this second element, and its focus on improving the organisation of work, is the scope to improve the effectiveness of education and health services, and consequently their productivity, by re-organising how they are delivered. This means breaking down some of the silos, developing teams, and particularly in the case of health it will require changes in the payments systems and consequent incentive structures.

Finally, a good plan for jobs and growth would require much more carefully targeted infrastructure investment, based on the introduction of proper pricing signals and proper evaluation. While the use of infrastructure continues for the most part to be free, we should not be surprised if there is over-demand. Instead in future infrastructure investment (which is a huge drain on the Budget) should be guided by what will deliver the greatest economic returns, having regard to the value that users are prepared to pay for, and not in response to political whims.

In sum, one can applaud the Prime Minister’s enthusiasm for innovation and his efforts to encourage the embrace of new technology. However, the agenda for jobs and growth needs to broadened as there is much more to do, and the funding is inadequate to support many of what the Prime Minister himself has identified as priorities.



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