This opinion article by Business Council chief economist Adam Boyton was published in the Financial Review on Monday 29 April 2019.
Our ability to ensure all can enjoy Australia’s promise will either be limited, or enhanced, by how rapidly we can grow the economy.
With the weakness in inflation lending support to the view that growth in Australia is too slow, an interest rate cut is now possible the next time the Reserve Bank board meets.
In the context of the election, an interest rate cut might – hopefully – see a shift in focus from policies that are about dividing the spoils of Australia’s wealth, to policies more focused on growing Australia’s wealth.
As I noted in these pages after the budget, a focus on dividing Australia’s wealth is in many ways not surprising given the importance of fairness in the Australia ethos.
But to divide the spoils of wealth you need to have some to divide in the first place. It’s worth remembering we can only fund the National Disability Insurance Scheme or a comprehensive social safety net because we can afford them in the first place.
Let’s therefore hope that some of the policy debate over the coming weeks focuses on supporting and adding to growth over the short, medium and long term.
With that hope in mind, what are the policies that deliver growth?
To answer that question, it’s worth taking a step back and recalling the building blocks of economic growth.
Population, participation and productivity.
That is, our ability to grow over the long term is ultimately a function of population growth, how many Australians are participating – and able to participate – in the labour market, and how efficiently we can produce both goods and services.
That last point isn’t about working harder for less. It’s actually about investment and innovation, the drivers of productivity over the long run. A productivity policy focus would see a genuine effort at making Australia a more attractive investment destination. Ultimately that will mean fixing Australia’s two-tier company tax system.
Outside of tax, it means a focus on ensuring that our regulatory settings are right, and that the benefits of regulation outweigh the costs. One new regulation might not seem like much, but the cumulative burden ends up being significant. In fact, the annual cost of federal regulation in Australia was estimated in 2014 to be $65 billion, or around 4 per cent of GDP. And that didn’t account for the patchwork of regulations imposed at the state, territory or local government level.
The cost of the cumulative burden of regulation is hardly likely to have fallen in recent years. Of course a productive economy also has a human dimension. We need a highly skilled workforce with the right skills. And given we are likely to be working for longer, we need to be able to update and change our skills as our working lives progress. A more flexible post-secondary education and skills system could lift both participation and productivity – two of the building blocks of growth. It’s fair to say that Australia is having a debate about population growth and our migrant intake. But we know that migration – notably skilled migration – doesn’t just add to GDP growth, it adds to GDP growth per person.
But to enjoy the benefits of population growth we also need to make sure our major cities keep up with the demand for infrastructure. One way to do that would be to have the planning of public infrastructure projects automatically triggered when populations look set to hit key milestones.
Another way we can enjoy the benefits of population growth is through a genuine and positive regional development strategy. That is, building economies of scale and scope in regional centres by, for example, prioritising government investment decisions towards existing strengths. A detailed analysis of regional strengths and unique attributes (their comparative advantages, in other words) would better inform both public and private investment decisions.
A set of pro-growth policies tend to build on each other. A positive and effective regional development strategy combined with better infrastructure planning can unlock the positive of population growth. A regional development strategy could also boost labour force participation in our regions. Getting our tax and regulatory structures right can lift investment and innovation. And investment and innovation drive productivity, which lifts real incomes.
Let’s hope the election campaign and the ongoing rollout of policies over coming weeks will feature ideas that will support and boost growth. Because, ultimately, our ability to ensure all Australians can enjoy Australia’s promise will either be limited, or enhanced, by how rapidly we can grow our economy over the longer term.