While the Australian election result remains uncertain, the top priorities for the incoming government are crystal clear, writes Quentin Grafton.
The people have spoken and it seems that the Coalition will have the opportunity to form the next government. So what next? The prime minister must now get to work and move from the ‘stop and go’ and ‘on and off’ thought bubbles and policy pronouncements that we have endured since the toppling of Tony Abbott. Here’s my take of what needs to be on the ‘to do’ list for our newly-elected federal government.
First, and foremost, Australia needs a federal government to do the ‘hard yards’ to adequately manage the possible risks that generate big consequences, such as a major slow-down in the growth rate of China’s economy perhaps as a result of the large non-performing loans in its formal and shadow banking sector.
The ‘Chinagion’ or negative spillover effects to other countries, like Australia, could be significant. Such an event would adversely impact on our largest export market. Further, if the Chinese were to impose much stricter capital controls, which would be expected should they suffer a banking crisis or credit squeeze, this would have an adverse effect on Australia’s highly-leveraged banking sector and high priced property market.
While the likelihood of a China downturn and subsequent contagion may appear remote, so did the ‘yes’ vote on Brexit and the Global Financial Crisis (GFC) in 2008-09. The new Australian government must be fully prepared for high consequence events and take precautionary measures today to mitigate the risks that may become a reality tomorrow.
While there are many important social and environmental tasks ahead, I highlight three economic priorities. Number one is to effectively respond to the structural budget deficit of the Commonwealth government that was exacerbated by the GFC and aftermath. Whether Chinagion happens or not, an Australian recession will occur at some point, and probably sooner than many people think. We need to be sure that Australia’s public finances are in as good as shape as possible before the next recession. This would help us to maintain our AAA credit rating that enables us to pay the lowest interest rate possible on our debt and would also give us greater spending flexibility to help those most affected when a recession happens.
Despite the rhetoric of the election campaign there is no ‘magic pudding’ to structural budget deficit repair – it requires either lower increases in spending or higher taxes, or both so the debt-to-GDP ratio does not keep on rising. It demands tough decisions, meaningful discussion with the electorate about what needs to be done and why, a recognition that tax reform must be perceived to be fair, and must include a believable strategy based on realistic revenue growth projections. This must not be put off until the next election.
The second priority is tax reform. To be clear, I am not talking about the minimal tax changes that both the Coalition and Labor put forward during the election campaign, but rather a comprehensive package of reforms that supports rising living standards and a ‘fair go’.
The first place to look for what to do is the Henry Tax Review and the Re:think paper by the Treasury department, but it must also involve a serious debate with the Australian public, and not just special interests. No serious tax reform process can ‘take off the table’ key parts of the tax system, such as the goods and services tax (GST), or leave other taxes untouched simply because they favour the supporters of the party in government. Reform must also be coherent and comprehensive so that when changes are made to superannuation this connects to how capital gains are taxed and how benefits are paid.
Tax reform can no longer be put in the ‘too hard’ basket or delivered piecemeal. It requires our leaders to actually lead by explaining why it is needed and by making it clear that no particular group or sector, with the exception of the poor, can be spared the costs of change if Australia is to reap the long-term rewards of a fairer and more efficient tax system.
The third economic priority is to actually do something of substance about Australia’s falling real net national disposable income, rather than just talking about it. While the Australian economy is currently growing better than most other rich countries, it is a case of ‘growth without prosperity’ as, on average, our standard of living is stagnant.
Zero real wage growth is bad news, especially for low income Australians. Given that the price of our key export commodities will not rise to the levels we enjoyed in the mining boom and labour force participation rates are unlikely to grow substantially, we must rely on rising productivity growth – increasing how much is produced from using the same amount of inputs, such as labour hours or capital employed, to generate future income growth.
While Australia has had a ‘productivity agenda’ for years and we have also heard much about innovation over the past few months, our leaders need to change from ‘talk the talk’ to ‘walk the talk’. Long-term and sustainable productivity growth is linked to key factors under the influence of governments. These include educational performance that, relative to its peers, is declining in Australia, openness to trade as well as the domestic barriers to competition.
Useful places to ‘kick start’ the productivity agenda include the Gonski education reforms on public education and the recent Harper Review on competition reform, but much more is required. For instance, our federal and state governments need to carefully evaluate where and how to invest public funds so that every major capital spending decision, new or existing, is assessed through the lens of what it delivers for productivity growth. Simply put, we cannot afford expensive ‘nation-building projects’ that are really just public relations exercises that fail to deliver the productivity gains we critically need as a nation.
The new parliament, and especially the likely composition of the senate, will make serious economic reform difficult, but not impossible. What Australia needs is a government that mitigates the ‘big consequences’ risks, works to overcome a structural budget deficit, begins meaningful and comprehensive tax reform, and gets serious about encouraging long-term productivity growth.
This can only happen if the prime minister and key cabinet ministers explain in a straightforward way why reform is needed and with an approach, sadly lacking to date, that prioritises the long-term national interest over narrow, short term and political interests. Such an approach would, I believe, be politically successful and, more importantly, good for the country.