Budget strategy must be geared to lift productivity

While paying lip service to budget repair, the Albanese government has promised plenty of largesse next Tuesday for single parents, aged-care workers, JobSeeker recipients over 55, vulnerable households and the long-term unemployed. In an interview with The Weekend Australian, Jim Chalmers said the budget would include investment in “laying the foundations of growth, with a particular emphasis on the clean-energy transformation”. For the sake of future prosperity, the Treasurer and his cabinet colleagues must direct the budget towards a productivity strategy. The Reserve Bank of Australia’s quarterly statement on monetary policy, released on Friday, warned: “Inflation could turn out to be more persistent if productivity growth remains weak.” Wages growth, the bank said, remained “consistent with inflation returning to target (2 to 3 per cent), provided productivity growth recovers”. If this does not occur or higher prices and wages reinforce one another, domestic inflation would be more persistent than forecast, the RBA warned.

Pillars of productivity such as instant asset write-offs and more generous depreciation allowances – measures implemented to good effect by Josh Frydenberg during the pandemic to encourage investment in more efficient plant and equipment and increase business activity – would be useful productivity boosters across the medium to longer term. Education and better skills are vital, too. Beyond Treasury, the Fair Work Commission and industrial relations policy also have important roles in driving productivity.

As reported on Saturday, the restaurant and catering sector is pushing to limit this year’s minimum wage increase to 3 per cent, claiming a pay rise in line with inflation (which is falling) would result in businesses cutting their operating hours and job losses, especially for casual workers. That is not the kind of contraction the economy needs. The proposed 3 per cent increase, less than half the rate of inflation, is below what most other employer groups, the government and the union movement have advocated. The ACTU is seeking an inflation-linked $57-a-week increase for 2.6 million minimum-wage and award-reliant workers from July 1. Wage rises need to be linked to productivity improvements. This is harder in a multi-employer bargaining system than in individual workplace negotiations, where local factors are better addressed.

In its monetary policy statement, the RBA put paid to a myth, frequently pushed by ACTU secretary Sally McManus and other union leaders, that “the main driver for inflation in Australia is excess corporate profits”. This debate was resonating, the bank acknowledged, as household budgets were being stretched by rising prices and interest rates. Excluding the mining industry, however, the bank concluded after crunching the numbers that the profit aggregate had changed little across most of the past decade.

Economists are predicting a small deficit next Tuesday, assisted by a strong fiscal dividend from 50-year record employment and booming commodity prices far exceeding what the Coalition budgeted for. A small deficit would pave the way for the government to claim a surplus later in the year. If debt is to be reduced substantially, however, positioning the economy to absorb future shocks such as another pandemic or global financial crisis, recurrent spending on programs such as the National Disability Insurance Scheme needs to be rationalised. The cost of programs such as improving defence firepower also needs to be factored in beyond the forward estimates. Against this background, the budget is being delivered at a time of challenge but with reasons for optimism and confidence, which are always important factors in the economic outlook.