The nation has lost its horsepower. Why? Because our leaders are too scared to act

Australia heads into the summer lull with enormous pressures bearing down on households and no substantial answers on how the country will jump out of its drift to a harder world. If there is a bold vision for a brighter future, it was certainly not in this week’s budget update. And that is a worrying sign for the election campaign ahead.

Politics can often be obsessed about the small things politicians do – the gaffes, the stumbles, the edgy opinions – but this is a column about what they do not do. In a political culture that punishes boldness, Prime Minister Anthony Albanese and Opposition Leader Peter Dutton are treading warily on economic reform. Australians will be the poorer for it.

Illustration: Simon Letch

Everyone can see that this week was no time for big announcements. The budget update was a do-nothing document because Albanese will keep any big decisions for next year, closer to the election. The mid-year economic and fiscal outlook, or MYEFO, was an accounting exercise to set the foundation for the campaign.

Dutton, meanwhile, has taken the risk of proposing nuclear energy without a compelling plan to make it happen, neatly assuming his proposal will cost 44 per cent less than the government policy because it will produce 40 per cent less electricity. Bold? Yes. Convincing? No.

The economic argument waits for next year. Dutton looks scared of scrutiny by keeping his plans under wraps for so long. Albanese, in turn, will start revealing more in January. The key point is that both sides must do more on the economy to give Australians a reason to sit up and take notice.

That is because the mid-year update is such a dismal picture of Australia – certainly not a vision worth voting for. It is a portrait of a mediocre nation with low growth, higher prices, heavy spending, a decade of deficits and a debt bomb for the next generation. And it is the legacy of policies under both major parties – nine years of the Coalition and almost three years of Labor.

The fact is that Australia is doomed to lower living standards on the current outlook than it would achieve under a more ambitious program. Economist Saul Eslake calls the country’s productivity performance “appalling” and fellow economist Chris Richardson says lifting that performance is vital.

Productivity is almost everything, as Nobel laureate Paul Krugman wrote. His next sentence said why: “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” Australia’s key metric is grim: labour productivity, or economic output per hour worked, grew by 0.9 per cent each year on average over two decades to June 2023. That was half the rate seen over the two decades to 2004.

If this does not change, we will build lower living standards into the structure of the economy while other countries pass us by. And there is only a muted debate about this (likely) outcome. While there is a willing argument about climate and energy policy, many commentators have given up on serious debate about the tax system or microeconomic reform. Who can blame them? Why should they come up with ideas when political leaders will never act on them?

There is a case to consider tax reform to encourage work, federation reform to curb the waste of federal and state duplication, housing reform so people can afford to live, and competition reform to make sure the economy works for consumers rather than the duopolies that dominate most markets. But the political risks are formidable on every front. To its credit, the government has asked the Productivity Commission to report next year on options for change. This might produce an ambitious agenda for a second Labor term.

The last big debate on economic reform was probably the “tax mix switch” considered by the Coalition in early 2016, or the tax white paper the previous year, or the federation white paper around the same time. While the Coalition budget of May 2014 is hated to this day by Labor and the Greens, it was a radical attempt at conservative change. Labor had the damp squib of its response to Ken Henry’s tax review in 2010.

So when did Australia last achieve a genuinely big and bold reform? A quarter of a century ago. “We’ve seen very little since the GST,” says Richardson, referring to the tax package that went through parliament in 1999. “We’ve poisoned the well around a bunch of things that could be done – there are reforms in tax and elsewhere that I would say are sensible, but they are just not going to happen.”

Eslake says nothing in recent times can compare to the dismantling of Australia’s tariff regime, the floating of the dollar, deregulation of interest rates, tax reforms under prime minister Paul Keating, the workplace reforms under Keating or the microeconomic reforms that began under Keating and continued under his successor, John Howard.

John Howard and Paul Keating, pictured together in 2012, knew how to make the case for reform.Credit: Jacky Ghossein

Richardson and Eslake are right. Australia is running out of economic horsepower because its politicians are too scared to make big fixes to the engine. There is a direct line of cause and effect from the partisan paralysis in Canberra to the lower living standards in the suburbs.

The shadow treasurer, Angus Taylor, does not venture any hard ideas that would reform the economy. Dutton is yet to reveal any economic platform. If the Coalition leaders are so timid in opposition, what chance is there of an ambitious agenda if they win office?

Chalmers, meanwhile, points to spending on things that help the workforce (education, skills) and investments in infrastructure. He admits the country’s productivity is not good enough but makes the valid point that this has been the case for decades. “So you can’t just flick a switch and turn it around,” he says in an interview with this masthead. “If you could, somebody would have done that by now. Productivity for Australia won’t come from making people work longer for less.” He says it will come from investing in energy, technology, the care economy, human capital and competition.

So what should be on the agenda? Eslake says Australia needs budget reform (even tax increases) to pay for the things it wants, such as the National Disability Insurance Scheme. He also wants to see housing reform to help younger Australians who cannot find affordable homes. He names federation reform, improvements to labour productivity, the high cost of construction and competition policy as other targets.

Richardson praises the government for cracking down on non-compete clauses for employees – an unfair restriction on labour – and names competition and federal-state reform as worthy targets. “I would name housing reform ahead of tax,” he says. That means taking on the not-in-my-backyard (NIMBY) view of housing. He agrees that stamp duty is a worthy target for reform, even if he knows the political barrier to change is formidable.

Expectations are low for good reason when the last big reform was so long ago. But history shows that reform pays off. And it shows that inaction has a cost.

David Crowe is chief political correspondent.

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