Cut back big government to tackle productivity

The Productivity Commission has delivered a message to government the latter does not want to hear but must heed. The message is that big government is the enemy of productivity and reform is needed most in the areas that the Albanese government has sought to favour. These include the care economy, where government has made a virtue of lifting wages and growing demand without much thought to getting more out of the money that is spent. Changing definitions to account for community wellness or other metrics will not hide the fact a lack of productivity improvement in a growing services sector will make the job harder for the rest of the economy and result in a lower standard of living for all Australians.

Other unwelcome news for the government includes the recommendation it reconsider changes made to industrial relations laws and focus instead on boosting enterprise agreements and removing inflexible industry-wide bargaining, the opposite of what has occurred. The commission defends the gig economy and says simply imposing employee status in all cases would effectively erode many of the productivity benefits and flexibility for workers that arise from platform work as currently arranged. Employment and Workplace Relations Minister Tony Burke has made it clear the gig economy is the next government target for workplace reform, in the opposite direction to what the commission has recommended.

On climate, the Productivity Commission recommends further strengthening the safeguard mechanism but says all other subsidies should be scrapped, including to renewable energy and particularly tax concessions for electric vehicles, which it says have a high cost per tonne of abatement. In all, the commission’s policy agenda includes 71 recommendations spanning education, immigration, foreign investment, preserving the gig economy, qualification portability and federal-state relations. The reform agenda centres on five key themes: building an adaptable workforce to supply the skilled workers for Australia’s future economy; harnessing data and digital technology to capture the dividend of new ideas; fostering competition, efficiency and contestability in markets; lifting productivity in the non-market sector, and; securing net zero at least cost to limit the productivity impact caused by climate change.

Jim Chalmers has said the government will not accept all of the Productivity Commission’s recommendations. Particularly it will not accept its advice on the changes the commission says will make the biggest difference. “We don’t believe productivity gains come from scorched-earth industrial relations, for example, or from abolishing clean-energy programs,” the Treasurer said.

The Business Council of Australia welcomed the Productivity Commission’s report, which it said was a critical blueprint for a more dynamic and productive economy that could deliver the living standards and opportunities Australians expected. BCA chief executive Jennifer Westacott said boosting productivity was about avoiding own goals such as workplace relations changes that “leave our feet stuck in the cement of complexity and disruption”.

The report, commissioned by Morrison government treasurer Josh Frydenberg, is a call for the government to put its own house in order. The Productivity Commission identified reform in the non-market service sector as critical. This is an area where services typically are provided free of charge, or at prices that are well below cost. The government is usually the key funder, provider and regulator of these services, which include schools, hospitals, childcare and defence.

As social affairs editor Stephen Lunn reports on Saturday, the Productivity Commission says governments have created barriers to productivity across the care economy by legislating innovation-stifling staff-to-client ratios and inefficient activity-based funding models in healthcare. One reform option is to allow a special permanent visa subclass for workers in areas such as aged and disability care with a lower wage threshold on the condition that workers remain employed in the relevant sector for four years. Without such innovations, the warning from the commission is that if productivity growth in the non-market sector continues at its historic low level, in 40 years it will account for more than 40 per cent of employment. This would represent an increasingly large drag on overall economy-wide productivity growth and place an increasing burden on the economy because non-market services require additional tax revenue to fund their expansion.

Making the challenge more difficult is the race to decarbonise the economy as part of a global effort to tackle climate change. The Productivity Commission says the difference between doing this efficiently and doing it poorly will be a major determinant of future living standards. It says the technologies required are not yet fully developed and the relative costs of different abatement options are constantly evolving. The challenge for policymakers is to create broadbased incentives to identify and implement the lowest-cost abatement options, with flexibility to adapt to changing technological circumstances. The experience of Britain and Europe, where gas and nuclear have been declared green fuels to encourage investment, reinforces this message. Warnings issued by the Australian Energy Market Operator about likely shortages of electricity and gas supplies in coming years suggest a day of reckoning over the rush to retire coal-fired capacity without adequate replacement supplies is fast approaching. Energy rationing is fundamentally bad for productivity.

The Productivity Commission supports the government’s use of a strengthened safeguard mechanism to drive climate policy but says it should be strengthened further and cover more industries. With this as an anchor, the ongoing need for additional policy support for renewable energy generation is likely not required. “The already questionable policy case for commonwealth tax concessions for electric vehicles – which have a high cost per tonne of abatement – would become even more so,” the commission says.

It is of little surprise that industrial relations and climate are the two areas where Dr Chalmers says the government is reluctant to take advice from the Productivity Commission. But it must. Together with lifting the tax burden, promoting efficiencies, cutting waste and thinking harder about how to train workers and choose those we take from overseas, these are areas that must be core business for a reforming government.