This opinion article, by Jennifer Westacott, Chief Executive, Business Council of Australia, was published in The Australian Financial Review on 31 July 2013 under the title ‘Productivity Reforms Deserve Reward’.

To lock in the prosperity and living standards Australians aspire to for themselves and their children, this country needs a coherent plan.

The economic action plan released by the Business Council of Australia squares up to the reality we are at a crossroads.

We are a small economy in a fiercely competitive global environment that does many things well, but we have taken our eye off the ball when it comes to economic challenges. Complacency has crept in.

Our plan is designed to encourage discussion on what needs to be done in the next decade to achieve interconnected social and economic goals. It sets out the nine policy areas we need to tackle in a planned, coherent way, with some 93 actions to be taken over three phases.

The actions that should be taken in the first phase, over the next one to three years, would build trust and confidence, and enable subsequent reform.

One of these foundation actions goes to the operation of the federation.

We believe Australia needs a circuit-breaker to move beyond the constant conflict between levels of government and a lack of national cohesion on important policy matters. Along with clearer roles and responsibilities and more effective revenue sharing, our plan recommends introducing a new system of productivity payments to the states and territories to progress critical reforms across the federation.

With the Commonwealth collecting more than 80 per cent of taxes, the states should receive a greater share of the fiscal dividend than they now do for productivity-enhancing reforms that expand the national economy.

Almost 20 years ago, the Hilmer Report triggered national competition reforms that saw Australian governments identify some 1800 pieces of regulation to review and remove where they didn’t offer a clear benefit to the community.

The Productivity Commission says those efforts contributed to strong growth in household incomes and, at the same time, helped reduce the prices of everyday goods and services such as milk and electricity.

In establishing a new system of productivity payments, the Australian government would have to set aside its recent tendency of seeking to control and reward reform outputs by its state counterparts. It would need to reward the realisation of actual reform outcomes that deliver increased productivity and economic growth to the nation.

Signing up to a nationally uniform approach would not, necessarily, be the objective. Our proposal would see innovative state-based reforms rewarded if they complied with criteria set by the Productivity Commission to demonstrate a measurable impact on productivity.

For such a scheme to serve as a real incentive for action, payments would need to be partially or completely suspended if an outcome is not delivered, as occurred under National Competition Policy.

Given Australia’s weakened fiscal circumstances, payments under this new scheme could not flow immediately.

The design of the scheme would take time, as would the reform outcomes to be rewarded. When you consider the backlog of unfinished economic reform at the state level, in particular planning and zoning, environmental approvals and retail sector regulations, the costs of such a scheme would be strongly justified by the benefits.