One thing on which almost all economists can unite is that Australia’s productivity performance for the past dozen years has been unsatisfactory.
Lifting productivity growth is therefore a top priority for the nation – since, in the long run, it is only productivity growth that can sustainably deliver increases in living standards, year after year.
So how can the federal government lift productivity growth, with all the flow-on benefits this would have for wages growth, business investment, the budget position, and so forth?
Several generic suggestions – “tax reform”, “welfare reform”, “improved skills training” – are often tossed about, when discussion turns to this issue. However, all the talk about these policy areas over the past 12 years, including major formal tax reviews initiated by both sides of politics, has yielded little by way of serious reform.
Accordingly, as I argue in a new book Restoring Hope – Practical Policies to Revitalise the Australian Economy, a broader focus on other levers available to the Commonwealth is now called for, paying close attention always to the practicality of achieving given reforms, not just their theoretical merits).
Doing so yields three key policy areas as strong candidates to supplement infrastructure investment and red-tape reduction as central planks of a compelling, three to five-year Commonwealth productivity agenda. These are: reforming higher education; reforming federal-state relations; and repairing Australia’s energy markets.
On higher education, the Coalition has already had two largely failed attempts at reform, the 2014 Pyne and 2017 Birmingham packages. Each had some strengths. However, each also had notable weaknesses, and both failed to address important root causes of the problems in the system.
The most fundamental of these root causes is the serious misalignment of financial incentives. These incentives encourage institutions to unscrupulously enrol students who shouldn’t be there and to water down their grading standards to retain them.
The steep costs of this unethical behaviour are then left to these marginal students and the taxpayer to bear – via the Commonwealth Grant Scheme and the Higher Education Loan Program (HELP) – with the institutions getting off scotfree.
Happily, a simple solution is available, which would force universities to have skin in the game regarding their educational standards. As I describe in my book, this is to require institutions to be cosignatories to their students’ HELP loans.
Students’ obligations under these joint loans would be completely unchanged, but universities would now have to start paying a significant interest cost to the Commonwealth on any such loans still outstanding after a suitable grace period.
This change would force institutions to care whether or not the education they are providing, at substantial cost to students and taxpayers, is actually imparting any worthwhile knowledge or skills.
It would also be vastly more politically feasible than, say, the Pyne proposal to reduce the funding burden on taxpayers by removing caps on university course fees.
That proposal, unsurprisingly, attracted broad support from vice-chancellors, but strong opposition from hundreds of thousands of students faced with having to pay more for the same courses.
This change, by contrast, would be likely to do the reverse – and hence be much more politically achievable – even while saving taxpayers money and better addressing the core problem of misaligned incentives in the system.
Likewise, on federal-state relations, there is a novel reform option available with the scope to deliver major productivity benefits – including through clarified governmental responsibilities and accountability, reduced bureaucracy and duplication, and reinvigorated competitive federalism.
Most importantly, this option – under which the Commonwealth would share with each state a specified portion of the income tax paid by workers in that State – would, on top of those benefits, dramatically strengthen the incentives for State governments themselves to be pro-growth and pro-jobs.
And this could be achieved without any visible change to the tax obligations facing taxpayers – thereby neutering the political obstacle, namely the risk of a “double taxation” scare campaign, that has stymied all previous proposals for income tax sharing.
Finally, on energy, there are also practical policy options – again set out in detail in my book, not as a vague “wish-list” – that, for both gas and electricity, would enable us to improve reliability of supply and restore the cheap power we used to enjoy as a nation (and which our gigantic endowment of energy sources makes possible).
And we know that this is possible because we managed to achieve it before – right up until governments started turning the nation’s energy markets into Byzantinely regulated monstrosities, since the turn of the century.
Combined with existing efforts on red tape and infrastructure, these politically achievable reforms would constitute a truly ambitious Commonwealth productivity agenda – and one likely to actually succeed in wrenching Australia out of the productivity doldrums, in both the short and long term.
All that is needed is a government with the will, and imagination, to take up these ideas and run with them.
Andrew Stone is a former Treasury and Reserve Bank official and Chief Economist. His book Restoring Hope: Practical Policies to Revitalise the Australian Economy will be launched this evening at the Centre for Independent Studies in Sydney.
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