Bad policy risks living standards

Hard on the heels of the Business Council of Australia’s prescient warning that living standards will plummet unless Labor addresses the decade-long productivity slump, the Reserve Bank board has voiced related concerns. On Wednesday, Jim Chalmers will pat himself and the Albanese government on the back in parliament for “very substantial progress” in reducing inflation, jobs and wages growth, and delivering two budget surpluses. But Labor can no longer afford to ignore serious economic challenges threatening the nation’s quality of life.

Productivity growth, the BCA noted, is currently 0.5 per cent a year. And it would need to quadruple to around 2 per cent a year to 2030 just to match the economy’s productivity performance over the past decade, which is the weakest in 60 years.

One of the consequences of failing to lift productivity, the RBA minutes of its most recent meeting on November 4-5 show, would be a continuation of elevated interest rates. These are hurting many households and businesses struggling to stay afloat. The minutes note: “Wages growth would need to slow even further to enable a return to the inflation target if productivity growth does not increase as assumed.” That does not sit comfortably with the “get wages moving” mantra of the government and unions.

According to the BCA, the gap between the current productivity rate and the rate Australia needs to reach should alarm every government in the country. But the measures it advocates are not impossible to achieve. They would involve: cutting red tape to make it easier to do business; reversing workplace laws that are a handbrake on productivity growth; reliable and affordable energy; education reforms to improve workplace skills; tax reform to better support business investment; and supporting increased research and the uptake of new technologies. The tax system has not undergone major reform for 25 years, the BCA notes, becoming inefficient.

The Australian has long been concerned about over-reliance on income tax and a company tax rate that is no longer competitive. It will be even less so if, as expected, Donald Trump cuts company tax in the US to 15 per cent, half the rate paid by big business in Australia. The BCA is also correct in its assessment of the impact of Labor’s changes to workplace relations. These have undermined the ability of employers to realise productivity benefits from investments and innovations, the report argues, and share the dividends of better-performing workplaces with their workers through higher wages and better conditions. Productivity in the construction sector is in free fall, the report warns, due to restrictive work practices imposed by militant unions. In driving up the cost of construction, such restrictions have slowed down home building – exacerbating the housing crisis – and made otherwise beneficial large-scale projects uneconomic.

The danger is that if the economy is not competitive, approvals are too slow and taxation too onerous, investment and jobs will go elsewhere. This lost opportunity, the report argues, could degrade skills and “sovereign capabilities which are key to our future”, contributing to “an erosion of both Australian security and real wage growth, and therefore our quality of life”. It also notes the adverse impact of the growing government footprint through the so-called “care economy” in outstripping the growth of higher-productivity activity elsewhere in the economy. The complex analysis offers a wealth of policy considerations. And the issues are too important to be ignored by either side in the coming election. The unpalatable result of doing so would likely be greater poverty.