Reform summit must focus on productivity growth

Participants in the National Reform Summit will disagree on many things, but they might agree with Paul Krugman that “productivity isn’t everything, but in the long run it’s almost everything”. To be a success, the summit needs to focus on a few key things; and productivity growth, while hardly novel, should be at the top of the list.

Australia’s poor productivity growth performance in recent years has been well documented. Although there are some transitory reasons for it, they do not provide a full explanation. The need to lift productivity growth to drive living standards higher is more pressing now that the terms of trade boom — one of the key drivers of higher living standards in the first decade of the 2000s — has gone into reverse.

On all of this, participants may agree. When they turn to policies for stronger productivity growth, the conversation becomes more difficult. There is a risk of productivity being seen as another government project, requiring intervention, industry policy and picking winners. The reality is that productivity growth in the market sector is the outcome of myriad decisions by private individuals and businesses; it does not come from government.

The non-market sector is another matter. Australian governments collectively spend more than $400 billion a year (25% of GDP) on procuring or subsidising goods and services, including their own employees. Round after round of broad-brush ‘efficiency dividends’ have failed to get to the heart of efficiency in areas of spending such as the health system.

Our governments can learn from the Key government in New Zealand, which has pursued efficiency not as a cost-cutting exercise but as a matter of delivering better results — oh, and by the way, they’ve also made cost savings. Higher productivity of this kind in the non-market sector won’t show up in the productivity statistics, but it will deliver better public services and contain the growth of government outlays.

For the market sector the best ‘policy’ for productivity growth may be as simple as the government getting out of the way of the private sector. We should have the confidence that individuals and businesses pursuing their own private interests will generate the productivity growth needed to drive living standards higher provided they are not unduly hindered by regulation and taxation. But there is still a role for public policy.

Professor Fred Hilmer has given us a useful framework for thinking about policies for productivity growth by putting the policy drivers into two categories — enablers and incentives. Enablers include infrastructure, education and training, and I would add a productivity-friendly system of workplace relations. Incentives include the tax system and competition policy.

Hilmer argues that policymakers have paid too much attention to enablers and not enough to incentives. Even with the best of enablers, productivity growth won’t happen if the incentives are lacking.

The Abbott government lacks reformist zeal but has at least commissioned reviews of several of the enablers and incentives: workplace relations; taxation; and competition policy. There is also a review of the federation, which sits at the heart of several policy areas relevant to productivity. Reviews are one thing, but time for follow-up action is running out.

The tax system is sub-optimal for productivity growth and will remain so as long as the current fetish of viewing it primarily as an instrument of redistribution and ‘fairness’ continues. A discussion paper for the summit, to which the CIS contributed, dares to suggest that personal and company income tax rates — including the top personal rate — need to be slashed. Critics like to characterise such tax cuts as hand-outs to the rich and powerful while myopically failing to see the productivity connection via entrepreneurship and investment in physical and human capital.

Of course large tax cuts can’t be implemented responsibly without stronger and sustained spending discipline. The CIS’s vision for a lower tax Australia is part of its Target 30 objective of gradually reducing the relative size of government over ten years by lowering the growth rate of spending.

This should all be grist for the summit mill. The risk is that the summit, like the recent COAG retreat, turns into a hunt for tax increases to help balance budgets. Increasing the tax burden will hinder rather than help productivity growth. Balancing the budget is not ‘reform’ — it should be done out of habit.

To be a success, the National Reform Summit needs to raise its sights and demonstrate to our political class what it means to have long-term vision for the country based on stronger productivity growth.