Anthony Albanese has made it clear that we cannot expect a more ambitious government strategy in future, despite the size of his election win.

But the critical question is how well the present set of policies will work towards achieving the government’s aims.

In his first major speech following the election, at the National Press Club, Albanese outlined his vision for Australia’s future and his strategy for getting there.

I believe most of us would agree with Albanese’s values and aims. “Fairness, aspiration and opportunity for all. To face global challenges, shape economic change and engage with our region in the Australian way, and to build a future where no-one is held back.”

Albanese then ran through his government’s policies, inviting us to believe that they will be sufficient to realise the glowing future he promised.

Further, in response to those of us who were hoping that Labor’s huge majority would result in a more ambitious policy agenda in Labor’s second term, he had the following response.

“Our government is focused on delivery.” “Delivering [our] commitments matters for every Australian, regardless of who they voted for.” But “we are living in a time of significant global uncertainty”, and the even “more corrosive proposition [is] that politics and government and democratic institutions, including a free media, are incapable of meeting the demands of this moment.” “To counter this, we have to offer the practical and positive alternative.”

In other words, Albanese is trying to manage expectations by arguing that the most important thing is to deliver on his government’s specific commitments. He argues that it is the failure by governments to deliver on their promises that has led to the loss of trust in so many democratic institutions.

According to Albanese, the most critical thing is therefore to restore voters’ trust in government. Without that trust and the belief that the government is centred on the national interest, reform becomes much more difficult, and even impossible.

In short, don’t aim too high and risk failure, which would be counterproductive. Instead, the Albanese Government must be confident that it can deliver what it is promising, so don’t promise too much. To restore trust, the government must limit itself to what it is confident that it can deliver.

However, I am less sure whether voters are focused on delivery of the government’s specific commitments. I suspect that voters are not so concerned with the delivery of these specific commitments, but rather that they judge governments by the outcomes achieved and whether they feel that adequate progress is being made towards achieving those desired outcomes. After all, the specific commitments are no more than the means to achieve the desired outcomes, and if that is not happening then achievement of the specific commitments will count for little.

In that case, a policy agenda that is insufficiently ambitious to achieve the desired outcome may well result in future failure. For example, I question whether Albanese’s policy agenda will realise the agreed aims for living standards, opportunities and equality of opportunities, security and quality of life.

In what follows therefore, I discuss the strategy for raising productivity growth and the provision of government services, the foundations for future living standards.

Productivity growth

The government has asked the Productivity Commission to investigate five broad areas as offering the best prospects for productivity reform:

• Creating a more dynamic and resilient economy;
• Building a skilled and adaptable workforce;
• Harnessing data and digital technology;
• Delivering quality care more efficiently; and
• Investing in cheaper, cleaner energy and the net-zero transformation.

I expect that the Productivity Commission will propose a reform agenda that will deliver significant benefits.

The business community is very keen on regulatory reform and lower company taxes. Certainly, the new Productivity Minister, Andrew Leigh, has pointed to the inefficiencies in approval processes. Leigh notes that back in 1967, the development application to build a three-storey apartment building in Sydney was 12 pages, but he says that “Today, such an application would stretch to hundreds if not thousands of pages”. “Approvals drag on. Rules multiply. Outcomes are inconsistent. And the consequences are… rising rents and overcrowding.”

Leigh similarly sees a need to expedite the approval process for energy projects. There would also be gains if people with skills, including migrants and people moving interstate, could get their credentials recognised more readily. While I and others have shown that the reason why housing has become so unaffordable for young people is the way zoning regulations are preventing the expansion in the supply of dwellings where people want to live.

I have no doubt that there would be considerable benefits from regulatory reform, including simpler and quicker approval processes, but I am sceptical that these sorts of reforms will make much difference to national productivity.

Similarly, I doubt that a cut in company tax will make much difference to productivity growth. Increased investment in new capital equipment embracing the latest technologies would help, and business investment as a share of GDP is currently low.

However, it is doubtful that this low rate of investment is because of insufficient returns. Profitability is currently high as measured by the share of corporate profits to GDP, and there is little evidence either in Australia or elsewhere that company tax cuts have ever made much difference to business investment. Instead, given an adequate rate of return, business investment is mainly driven by the demand for the business’s products and its rate of capacity utilisation.

As shown in Table 1 below, the slowdown in productivity growth is not unique to Australia. In fact, all the advanced economies, with the partial recent exception of the US, have experienced a much slower rate of productivity growth following the Global Financial Crisis and especially in the last five years or so. The decline in Australian productivity growth is no different from other advanced economies.

Table 1 Productivity growth rates compared

Average annual growth rate %

Source: OECD Economic Outlook data base

The obvious reason why productivity growth has fallen almost everywhere is because the most important driver of productivity increases through history, by far, has been technological change. Further, all advanced economies tend to adopt much the same technologies quite quickly, and that is why they all have a similar productivity experience. So it would seem that despite AI, there has been a lull in technological progress, or at least a universal lull in the adoption of new technologies, and that is why productivity growth has fallen.

Building a more skilled and adaptable workforce, harnessing data and digital technology, and investing in cheaper, cleaner energy and the net-zero transformation could all help lift the adoption of new technologies and thus lift productivity. But that begs the question of whether there are new technologies waiting to be adopted that will significantly lift the rate of productivity growth, and at present the international evidence is that there are not.

In addition, it is questionable whether the Albanese Government is prepared to accelerate the progress and find the money needed to take advantage of Australia’s low-cost renewable energy sources. As the leading economist in this field, Ross Garnaut, recently said, the government has laid out the policy framework in its Future Made in Australia, but “to utilise fully our economic opportunity, we will need… to provide fiscal support for innovation at levels that support the external benefits from increased knowledge investment”.

Another more general problem is that if Australia is going to improve the rate of take-up of new technologies, we will need to invest more in research and development. But the latest data show that Commonwealth expenditure on R&D in real terms was only 4.9% higher in 2022-23 than it had been eight years earlier in 2014-15, and in every previous year real expenditure on R&D was lower than in 2014-15. And Australia’s total expenditure on R&D, both public and private, is only about 1.6% of GDP; way below the OECD average of 2.7%.

Equally important, Commonwealth funding of universities, where much original research is undertaken, fell slightly in real terms during the first six years of the Coalition Government and has fallen further since the Albanese Government was first elected. This is hardly the foundation for building a more skilled and adaptable workforce.

The provision of government services

A similar problem of insufficient finance is preventing the adequate provision of government services.

During the nine years of Coalition Government, from 2013 to 2022, many government services were deliberately under-funded in an attempt to get the budget “back in the black”. The alternative would have been to make some major policy changes to achieve expenditure savings, but this alternative was dropped after some such changes were rejected in the first Coalition budget in 2014.

In its first term, the first Albanese Government tried to increase the funding for some of the most damaged services. Health and aged care funding received particular attention, but what the government can do to improve essential services has been limited by the availability of revenue.

As already noted, universities and research and development remain seriously under-funded. In addition, while the government is congratulating itself on reaching funding agreements with the states regarding the future funding of public schools, the full funding of all public schools will not be achieved until 2034 – nearly 10 years away. In the meantime, the majority of the most disadvantaged school students will continue to miss out. This will certainly damage their life chances as well as holding back Australia’s economic development.

Foreign aid should also be increased, while the income support for unemployed people is generally agreed to be inadequate, and the funding for public housing needs to increase over time if homelessness is to be reduced; just to give some further examples of where additional government funding is needed.

Looking ahead, expenditure on the NDIS, defence, aged care and the investment to support the transmission and storage of renewable energy are all forecast to increase. Finally, Australia already has a structural budget deficit, that is projected to continue for at least the next decade. It would therefore be prudent to return the budget to surplus or at least balance, as soon as economically feasible.

My rough assessment is that if we want adequate provision of government services and a balanced budget, Australia will need to increase government revenue by around 4% of GDP. While that may sound like quite a lot, if we look at what other similar advanced democracies spend on government services, we find that Australia is way down near the bottom. Thus, the OECD reports that total government spending by all levels of government in Australia in 2024 was 39.1% of GDP, the highest it’s ever been, but still significantly lower than the OECD average of 42.7% of GDP and the Euro area average of 49.6% of GDP. The only countries lower than Australia were South Korea and Switzerland, with even the US spending more at 39.3% of GDP.

Conclusion

The evidence strongly suggests the Albanese Government’s present strategy will not realise its goals for security, living standards and equality. More money will be needed to achieve those goals, and this will require an ambitious agenda of tax reform.

It would seem that the Albanese Government has set its sights against tax reform, but can he really achieve his stated objectives without more revenue? Instead, if people remain disappointed with the outcomes achieved, it is doubtful that Albanese will succeed in restoring trust in government and democracy more generally by limiting his policy agenda to only what he thinks he can confidently deliver.

The views expressed in this article may or may not reflect those of Pearls and Irritations.