In this second part of this article, discussing the possible policy agenda for a minority Labor Government, the focus is on taxation and how to improve productivity – issues that are most difficult to agree on.

Yesterday this article discussed how Labor should be able to reach agreement with enough members of the crossbench in the policy areas of:

• Integrity and good governance procedures;
• The environment and climate change; and
• Foreign policy and defence policy

However, the other two major areas where agreement will be necessary to form a minority government — the provision of government services and taxation and productivity improvement — may well prove more difficult.

The main difficulty is likely to be achieving agreement with enough of the Teals, if their support is required. This is because all the Teals represent conservative electorates, which Labor could never hope to win, and they tend to favour an economic strategy that minimises taxation and government regulation of business.

Taxation

While each of the Teals insists on their independence, it is likely their policy positions on taxation and productivity will be influenced by the tax reform agenda put forward by one – Allegra Spender.

She has issued a Green Paper which favours lower income taxes on working Australians, rebalancing tax settings in favour of home ownership rather than investing in existing dwellings, incentivising innovation and business investment, and adjusting tax settings to support our energy transition.

I consider that it should be possible for Labor and the crossbench to reach agreement on each of these “reforms”, with the possible exception of incentivising business investment. But where I doubt that agreement will or should be readily reached is with Spender’s contention that “holding the tax burden constant is a minimum aspiration".

Instead, I think that realistically there are a number of government services and demands for government support that cannot be accommodated without increasing the taxation burden by about 4% of GDP.

For example, the independent defence of Australia will require increasing defence expenditure by 1% of GDP to 3%, compared to the present 2%. Foreign aid will also have to increase if we want to ensure support from neighbours.

Domestically, it is widely agreed that health reforms to improve prevention and access to health services will require additional funding. Income support for unemployed people and rent assistance should also rise, while universities and research and development are under-funded. Finally, the crossbench should recognise that the energy transition they favour is likely to require additional government funding.

If additional proof is needed of how much our services are under-funded, it might be noted that every other developed country spends significantly more on government services and support than Australia relative to its GDP. For example, total government outlays across all levels of government in Australia represent only 38.9% of GDP, compared to 46.3% in the UK, 44.4% in Canada, 49.4% in the Euro area, and even 40.1% in the US, where no one thinks government service provision is adequate.

Further, there is no evidence that this higher level of taxation and spending is holding back economic growth in such developed economies.

In short, agreement to freeze tax revenue is unrealistic and/or could well damage our well-being.

In addition, while it is understandable that the Teals do not want the burden of income tax to rise, it will be difficult to stop. Apart from reducing some income-tax concessions, the only alternative is to tax spending more, which effectively means an increase in the coverage and/or the rate of the GST. As all the GST revenue is, however, transferred to the states and territories, increasing the GST will probably require a renegotiation of this distribution if the Australian Government is going to be able to meet is spending responsibilities, and that will not be easy.

Lifting productivity growth

Increasing living standards are almost entirely dependent on growth of productivity. We should all therefore want to sign on to policies that will lift such growth. But the problem is which policies?

Through history the rate of productivity growth in all countries has been almost entirely driven by the rate of technological change and innovation. If government policies could make much difference to the rate of technological change and its adoption, we would expect to see significant differences between the rate of productivity growth in different advanced economies.

However, as Table 1 shows, in almost all the advanced OECD economies the increase in productivity in the 2010s was much less than during the previous decade and even worse so far in this decade. The reality is that most developed economies quickly adopt the same technologies and the general slowdown in productivity is indicative of a slowdown in technological innovation that has affected all countries.

Thus, the policies favoured by Spender, and possibly her fellow Teals, to increase taxation incentives and reduce regulation are unlikely to make much difference to business investment and productivity. Instead, with the profit share of national income now higher than in the past, business investment is being held back by weak demand resulting in low rates of capacity utilisation.

Table 1 Productivity growth rates compared

Average annual growth rate %

Source: OECD Economic Outlook data base.

In sum, the evidence shows that government policies, such as Labor’s A Future Made in Australia, support for research and development, and skills training can be useful in assisting the adoption of new technologies. However, with less technological progress in recent years nothing that governments can do will substantially accelerate the rate of productivity growth.

Conclusion

For the most part, a minority Labor Government should be able to reach agreement with the Greens and sufficient Teals on a policy agenda that will improve on what we have seen from Labor so far.

However, the one big caveat is that Labor should not agree to freezing the tax burden as measured by the ratio of tax revenue to GDP. That would severely jeopardise the provision of services and income support that are essential to the well-being of most people in Australia.

Read Part 1 of this two part series:

https://publish.pearlsandirritations.com/a-minority-labor…cy-agenda-part-1/