Raise taxes and wages, Ross Garnaut demands

Australians must ‘stop kidding ourselves’ about the budget and the economy, economist Ross Garnaut says.

Ross Garnaut at the Jobs and Skills Summit at Parliament House in Canberra on Thursday. Picture: AAP

Veteran economist Ross Garnaut has called on Australians to “stop kidding ourselves” about the state of the budget and the economy, saying increasing the national tax take is critical to putting the country’s ­finances back on an even keel.

Professor Garnaut, a former adviser to Bob Hawke and the ­author of a major climate change review under Kevin Rudd, also said there was “no conundrum” around why real wages were not rising despite a near-50-year-low jobless rate of 3.4 per cent.

“We do not yet have full employment,” he said. “The Reserve Bank abandoned its pursuit of full employment before we knew how low the rate of unemployment could go without becoming the source of accelerating inflation.”

In a dinner speech at the jobs and skills summit in Parliament House on Thursday, Professor Garnaut invoked an underlying theme of this week’s summit: that returning to the economic status quo in the wake of the health crisis was not good enough.

“We can’t turn the economy back to before the pandemic. Even if we could, pre-pandemic conditions are not good enough. That’s high unemployment and underemployment and stagnant living standards.”

He said a better future required hard thinking about the need for “unquestionably strong public finances” to make sure the country could access the cheap money necessary to drive major transformations in the economy, not least to fund the massive energy transition task.

“We have emerged from the pandemic with historically large budget deficits in the commonwealth and most states and peacetime record highs of public debt,” Professor Garnaut said.

“We have large deficits when our high terms of trade should be driving surpluses. Interest rates are rising on the eye-watering commonwealth debt. We talk about the most difficult geo-­strategic environment since the 1940s requiring much higher defence expenditure, but not about higher taxes to pay for it.

“In the face of these immense budget challenges, federal and state taxation revenue as a share of GDP is 5.7 percentage points lower than the developed country average. Let’s stop kidding ourselves.”

Professor Garnaut criticised the central bank for its breakneck pace of rate rises towards a “neutral” level that was consistent with full employment and stable and moderate inflation

“What might that (neutral rate) be? Maybe higher and maybe lower than the cash rate now,” he said, dismissing the threat of a wage-price spiral as a “spectre” of times past.

With real wages falling at their fastest pace in decades, Professor Garnaut said “if nominal wages rise more rapidly, but more slowly than average prices, they aren’t the source of accelerating inflation”.

Professor Garnaut also said immigration was “much more likely to raise rather than lower average real wages the more … it is focused on permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable production and cannot be provided by training Australians”.

He said a simple market test could be applied by letting skilled migrants in only when they earned wages higher than the average.

Professor Garnaut echoed Grattan Institute chief Danielle Wood, who in the summit’s opening address said “the economy, like all of us, looks increasingly older, fatter, and slower”.

He said the dominance of a few huge companies in a number of key industries was reducing productivity and shrinking the share of profits going to workers.

He targeted the resources sector as one where a special windfall tax was appropriate.

“A significant part of the increase in the profit share in recent years is in mining, where wages are high relative to other sectors. We are kidding ourselves if we think no deep wounds will be left in our polity from high coal and gas and therefore electricity prices bringing record profits for companies, and substantially lower living standards to most Australians.”