Deluded nation failing on productivity front

DESPITE the resources boom and China's ongoing role as a growth locomotive, Australia faces a new era of economic and social strain with a political system that is failing to respond to the challenge.

At week's end, after the Gillard government unveiled the Asian Century white paper that Ross Garnaut calls "the most challenging goals that an Australian government has ever set", the retiring head of the Productivity Commission, Gary Banks, has documented the extent of the nation's failure on the productivity front.

The Great Australian Delusion remains alive: that living standards can be boosted without a new series of tough policies that defy poll-driven politics.

This week the nation's untenable budget dilemma was repeatedly emphasised. Acting head of the federal Treasury, Nigel Ray, highlighted the "emerging gap between the demands placed on all levels of government and the resources available to them". It is a polite way of saying that the public has expectations that taxation revenue just cannot meet. Something must break in the coming collision between revenue limits and false dreams.

Finance Minister Penny Wong said "each generation" expected more but Australia, with an ageing population, was contemplating "a reducing tax base" that threatened "a sustained period of fiscal imbalance". Deloitte Access Economics director Chris Richardson called the federal budget a social contract and warned that "our national social compact is under pressure" with the economy generating less tax because of structural changes.

Treasurer Wayne Swan said more budget "room" had to be found to fund Labor's ambitious agenda - Gonski school programs and the National Disability Insurance Scheme but pledged this would not involve an assault on middle-class welfare, a label he rejected.

Yet a former politician and retired NSW Liberal premier, Nick Greiner, put the ugly but essential tax issue on the table: he warned that government must address "the size and stability" of GST revenue. In short, Greiner wants the GST to carry a bigger load. The same call was made by head of the Grattan Institute think tank, John Daly as well as Banks.

Each of the above contributions came from this week's Economic and Social Outlook Conference in Melbourne, which was dominated by debate over the risks Australia now runs on two critical fronts - fiscal viability and productivity.

The messages are that Australia needs to get greater intellectual honesty into its public debate: it needs more public sector savings, genuine tax reform, retention of a disciplined budget in the teeth of huge new spending pledges and a revised approach to productivity if living standards are to be enhanced.

Two days of debate exposed the poverty of politics and most media coverage of policy, outside The Australian and the Australian Financial Review, where reluctance to address the main issues facing the country seems entrenched.

Melbourne Institute director Deborah Cobb-Clark said the youth unemployment rate was stuck at 12 per cent, long-term unemployment was a growing problem and more people had legitimate claims on the social safety net. Yet the era of large surpluses seemed over. A debate about spending priorities was now essential.

"Whoever is in government will spend the rest of the decade paying off Labor's structural deficit," said shadow finance minister, Andrew Robb, offering a gloomy view.

The message from Richardson was that the tax base had not recovered from the global financial crisis. He said commodity prices were a risk; people were saving more, which meant the GST had lost traction; and the glory days of the capital gains tax were over.

Wong said post-GFC receipts had been written down by $160 billion and this dynamic was reinforcing fiscal pressures arising from an ageing population. Yet despite the dual problem of revenue base vulnerability and ferocious demands for more spending, Labor shuns serious tax reform talk.

Garnaut warned Labor against surrendering the 2012-13 budget surplus goal. Short of another global shock, Labor should "stick by" the surplus. Those who said "another few billion on the deficit won't hurt are right on the economics" but "they're not right on the political economy" because "once you breach the barrier there's no easy limit on expansion of the deficit".

But the standout speech to this eighth conference jointly sponsored by The Australian and the Melbourne Institute of Applied Economic and Social Research came from Banks in his swansong after 15 years as chairman of the Productivity Commission. He has produced a benchmark document against which to measure the current age.

Taking as his text the comment of Reserve Bank governor Glenn Stevens last June that "the Productivity Commission has a long list of things to do" to salvage living standards and productivity, Banks now produced the list. He makes all the qualifications about productivity measurement, says the outlook is improving but warns there are grounds for "caution or even concern" and that "the jury is out" on Australia's productivity future.

"There have been important omissions and 'blind spots'," Banks said of our productivity efforts.

He produces a long list of failures that reflect badly on Labor but also the Howard government. He attacks remaining tariffs and huge industry subsidies "that cannot deliver demonstrable net social benefits" but cost taxpayers $9bn annually. He targets "green technology" scams worth more than $3bn, government procurement preferences to favour local suppliers, pharmacy ownership restrictions, taxi licence quotas, Labor's shipping protectionist policies, its ban on parallel book imports and calls for another round of competition reforms.

Banks advocates reform and privatisation of public utilities. He wants transparent cost-benefit analysis before major infrastructure projects (think NBN among others) and proper pricing policy in water and electricity utilities.

His most lethal critique, unsurprisingly, comes on industrial relations. This is the great ALP denial. Banks now sees the labour market reforms of the 1980s and 90s as "no brainers" addressing "obvious anti-productivity" aspects of a centralised, adversarial system (yet he overlooks the intensity of these reform battles).

He said the commission's recent work on education, retail and electricity industries highlighted the need for reform. Addressing ALP and trade support for re-regulation of the IR system, Banks said: "Recently I found myself being condemned by union leaders for suggesting that such regulations should be treated no differently to other areas of social regulation that have potentially adverse economic impact." This is the entire point.

For Banks, proponents of such policies "should be required to demonstrate that there are public interest benefits that exceed the economic costs." Indeed, Banks says the hostility provoked by his "unexceptional proposal" in the public interest merely reveals the need to have IR reform on the list.

He warns of areas where regulation may inhibit productivity: native vegetation, heritage regulations, renewable energy targets, stamp duties, planning and zoning controls, rural water and waste management.

Taking Labor's favoured arena of productivity enhancement, education and human capital, Banks says early education should be re-focused on the disadvantaged, salary differentials must play a greater role in getting the best teachers, school principals need more genuine authority, and the industrial system in schools and colleges must be more flexible.

Why has Australia not done more on productivity? For Banks, the answer is many proposals are unpopular and strike vested interests. Take tax reform: fewer taxes with broader bases and lower rates. This would assist productivity but the outstanding items are "the hardest political nuts to crack".

Addressing the conference dinner, Swan said it would be "catastrophic" if the US Congress, after the presidential election, did not act to avert the "fiscal cliff" which could see the US economy contract 2.9 per cent in the first half of next year.

Contrary to much analysis at conference, Swan said the "structural saves" Labor has made in the mid-year review meant net debt could return to zero in 2020-21. This is a remarkable claim. Indeed, it was the trigger for questioning of the Treasurer because it seems to conflict with Treasury analysis. In order to eliminate debt by 2020 the budget must run large surpluses when the current outlook is for long-run thin surpluses.

Addressing the conference lunch yesterday, Opposition Leader Tony Abbott affirmed his growing commitment to economic reform by outlining three initiatives to outflank Labor on economic policy.

First, to end the "bad blood" between government and business, Abbott promised to establish a PM's business advisory council to meet three times a year under the chairmanship of former head of the Australian Stock Exchange, Maurice Newman. The point is obvious: Abbott's message is that he will listen to business.

Second, he announced a Productivity Priorities working group to be chaired by Steve Ciobo, with Josh Frydenberg and Dan Tehan to work on implementation of the Coalition's productivity agenda. In addition to spreading responsibility across his party, Abbott wants to best Labor on the productivity front.

Third, he announced further action on the deregulation front following the report of the review headed by Senator Arthur Sinodinos. As PM, Abbott would take responsibility for de-regulation into the Prime Minister's Department. Every cabinet submission would require a de-regulatory impact assessment. Abbott has read the mood of the policy community: he is pitching as an agent of deregulation, productivity and fiscal restraint.