If Australian governments are serious about raising rates of economic growth, they must reform the tax mix and increase the workforce participation rates of women and older people. Each of these reforms has the capacity to increase GDP by around $25 billion by 2022. Together, they could grow the economy by more than $70 billion. Nothing else can change the economic game over the next decade.
The Grattan Institute report, Game-changers: Economic reform priorities for Australia, examines a wide range of economic reform opportunities. It assesses various economic drivers according to both the size of the growth opportunity over the next decade, and the confidence in specific policy solutions. That confidence matters: Australian governments have achieved their most lasting reforms when policy specialists have broadly agreed on a problem and on an evidence-based rationale for change.
The three game-changers, unlike any other proposals we could identify, enjoy broad policy support and promise very large economic benefits within a practical time frame.
If Australian governments collected more revenue from efficient taxes that encourage economic activity, and less from inefficient, distortionary ones, GDP could increase by $25 billion per year. In particular, we need to broaden the GST to cover education, health and food, and use the revenue to reduce corporate and income taxes while compensating those on welfare.
Australian women would only have to participate in the workforce at Canadian rates to deliver a $25 billion boost to the economy. The big driver of female participation rates is how much extra income working women take home after paying tax, forgoing benefits and paying for child care. Many women in Australia only keep 10 to 20 cents of every dollar they earn if they work five days per week instead of three. Canada shows how changes to taxes, benefits, and means testing can substantially increase participation.
GDP would be $25 billion higher by 2022 if the workplace participation rate of older Australians were raised so that they were closer to levels in New Zealand. Most people retire in Australia because they “reach retirement age”. Discrimination and employer attitudes are not major problems for most workers. Therefore the biggest driver to increase older age workforce participation would be to lift the eligibility age for the aged pension and for superannuation.
What is striking about these findings is less the reforms themselves — each of which is familiar to policymakers — but how clearly a strictly economic analysis sets them apart. Of course, growing GDP is not the only goal of government. In the end, well-being and happiness matter most, and individuals and families make decisions on that basis.
But, as Mae West (reportedly) said, “I’ve been rich and I’ve been poor. Rich is better.” Our starting point is that economic growth is the great enabler of good policy across government. It provides the resources to improve the well-being of our citizens, to increase living standards and to enable communities to invest in the non-material factors that enrich people’s lives.
Our research identifies several other reform areas that inherently matter to economic growth, but where there is little consensus on which specific reforms might make a big difference. They include innovation policy, industry policy and competition policy. In industrial relations there is not yet good evidence on the size of the economic gains on offer. In school system performance there are very large gains, but only over the long term.
A number of issues regularly touted as major reform priorities don’t show up as big drivers of future growth. We know that transport infrastructure, for instance, can significantly increase growth, particularly when it increases trade. But recent analysis suggests that returns on infrastructure investment are lower than once thought. We don’t believe that further increasing investment in this area can produce substantial gains in the near term.
Major reforms are hard. They take time and resources to implement, and in government both are scarce. Political capital is finite, as is the senior leadership time required to see big reforms through. On past performance, one substantial reform every four years is better than average.
In the current political climate, with a 24-hour news cycle and little money to “buy off” perceived losers, major reform may seem a distant prospect. But it’s equally possible to see this moment as an opportunity. Australia faces great challenges in the next 20 years: the mining boom and its impacts on the wider economy, climate change, the rise of a billion-strong Asian middle class; an under-performing education system and an ageing population. Only bold, clear-eyed leadership can meet these challenges.
We hope that Game-changers might start a discussion about the small number of hard choices the nation needs to make to substantially improve its prosperity.
Chris O'Neill
Telecommunications Engineer
I haven't checked the latest statistics but I recall that the poorest age-group (income wise) was the pre-old age pension group , 60-65, (followed by the 55-60 age group). This group certainly didn't have the old age pension to influence their decision about working but in spite of this they had low employment rates and incomes. The vast majority of them also had very little superannuation, especially women.
You haven't said anything about how to increase the employment rate of this group.
Garry Egger
Professor of Health and Human Sciences at Southern Cross University
Can someone please invite the economists back into the room. Locking themselves in the out-house seems to have just convinced them that tinkering with the engines on the Titanic of growth (albeit beyond a point of diminishing returns) has no impact on a rapidly deteriorating world environment.
If ever a field of study was in need of that dreaded phrase, 'a paradigm shift', it surely is the 'dismal science'!
Tim Hawes
Mr.
Garry,
It might be relevant to remember that the term 'Dismal Science' is a quote from a gentleman who was in favour of reintroducing slavery. In case you weren't aware I've put a link below to where the term was coined, it makes for interesting context.
Thomas Carlyle, Occasional Discourse on the Negro Question: http://books.google.com.au/books?id=IF_PAAAAMAAJ&pg=PA670&redir_esc=y#v=onepage&q&f=false
Of course, John Stuart Mill wrote a reply, but he was just a dirty Economist. Let's remember that economics was not reactionary but revolutionary in its foundation. It is founded on principals like free exchange and has done far more for the world that any Malthusian theory.
Misha Ketchell
Managing Editor at The Conversation
Excellent report but I do sometime wonder if we're putting in the cart before the horse in allowing productivity goals to dictate our behaviour. Would everyone really be happier and richer if we all worked longer, more women worked full time rather than part time, etc etc? Or are we just becoming too obsessed by what is measurable to the detriment of other aspects of our lives? Producing and consuming isn't always good, as my son's room, which is littered with cheap plastic junk, will attest.
Karl Fitzgerald
Economist
The IPA & CIS will be applauding this report John, well done. In an age where bureaucrats are pleading for a move towards taxation on fixed assets like Land (see land grabbing this week and housing affordability continually) and off moveable assets, your approach to tax our food is bewildering.
With the report's focus on export competitiveness, a broader GST will push up our pricing system, not remove deadweight and COMPLIANCE costs. More paperwork anyone? Using the GST to cut company taxes is…
Read moreChris O'Neill
Telecommunications Engineer
"increasing GST will do nothing to reduce speculation in land"
Well it possibly could if the proceeds were used to remove the tax incentives that favor land speculation, i.e. negative gearing against other income. But I do recognize that the normal way of doing this, i.e. reducing marginal income tax rates, only has a weak effect on reducing the incentive.
Far better, of course, to only allow deduction of interest against present and future rental income. As those of us old enough to remember know, the Hawke government tried this in the 80s but was squashed by the "investor" lobby.
BTW, it'll be interesting to see how the property market plays out. Normally in the past, property bubbles were popped by a recession. But this time there was no recession so the bubble went for a long time and got really big before it started to deflate.
Tim Hawes
Mr.
If I can, does anyone have an opinion on stamp duty? One thing that seems to be coming up for debate is a perception of a lack of labour mobility in Australia.
I guess, a)Is there a lack of labour mobility?
and b)can we affect that by reducing or eliminating stamp duties?
Chris, while interest rates and on the way down, I wonder if reducing the tax incentives for negative gearing might also pop the bubble? I just think any government would need to be cautious about doing too much at once, if it ever thought it was going to target "land speculation".
Honestly though, I can only see Labor doing this, so it would be at least 5 years away.
Chris O'Neill
Telecommunications Engineer
"a)Is there a lack of labour mobility?"
At least some of the people arguing this usually don't make unfounded claims, e.g. the CEO of BHP-Billiton.
"and b)can we affect that by reducing or eliminating stamp duties?"
It always seems to me to be a good idea to get rid of inequitable, economically inefficient taxes like stamp duty on land. State governments have more important political considerations, however.
"I just think any government would need to be cautious about doing too much at once"
As I implied above, the thing they need to be most cautious about is the property-borrower lobby. But they have too much power so negative gearing reform is never going to happen.
BTW, sorry about the -ve vote. I wasn't careful where I clicked to reply.
James Walker
logged in via Facebook
Stamp duties have wildly varying costs to collect. Payroll tax is incredibly efficient, since each public servant can be responsible for thousands of company accounts; The duties on rental agreements were so inefficient that we were losing money on them.
Robin Bell
Research Academic Public Health, at University of Newcastle
What a wonderful idea. Lets make the rich richer and the poor, oh they can work harder and longer and pay a larger proportion of tax.
This must be a comic rip-off, please.......
Roxane Paczensky
Registered Nurse
I recommend the author read two other excellent articles published by The Conversation. 1. Choose your Australian vision: an independant economic leader, or a hole in the ground, and 2. State of the future: Challenge One; sustainable development and climate change.
We're not buying Neo-liberal capitalism any more.
Byron Smith
PhD candidate in Christian Ethics at University of Edinburgh
"Our starting point is that economic growth is the great enabler of good policy across government. It provides the resources to improve the well-being of our citizens, to increase living standards and to enable communities to invest in the non-material factors that enrich people’s lives."
There's your problem right there. The only things that believe in infinite growth are economists and cancer cells. The claims in the second sentence are true, up to a point, after which further growth does not…
Read moreGeorge Naumovski
online political activist
The RSPT is one way and a very fair way to boost the revenue in the billions upon billions, another way is to stop tax cuts, tax subsidies, tax write offs and other tax benefits for the business elites which will save again in the billions upon billions!
If you lower the tax on the majority and stop taxing with an increase of the GST then people will spend more which in turn will boost revenue for businesses and tax collection.
In the case of women and the elderly back in the work force, well you actually need jobs to begin with and because “extreme capitalism” allow off shoring/outsourcing and bankruptcy bailouts, jobs are becoming scarce unless you want to work for minimum wage which is always available.
Australia needs to stop taxing the majority to feed the business elites!
Gavin R. Putland
logged in via Twitter
That's not a game-changer; *this* is a game-changer: http://t.co/Qaluuoe6 .
Cris Kerr
Volunteer Community Health Researcher, Advocate for the value of Patient Testimony
An economic forum was held in Brisbane this past week, and productivity
appeared to be top of the agenda.
News Item: 'Adapt or die - RBA's bitter medicine', Tim Colebach, Sydney
Read moreMorning Herald, 13 June 2012: ' ... Stop complaining about the economy,
start adapting to it - and adapt to it by raising productivity. ... That's the gist
of Glenn Stevens' (RBA Governor) ideas for Australia, and it's pretty much
the same message that Julia Gillard and Wayne Swan are delivering to the
Government…
Christine Walker
Doubter
I find it curious that this article states "Discrimination and employer attitudes are not major problems for most workers." I wonder why Mr Daly has reached this conclusion, as a series of studies have shown that age discrimination is still very much alive and well in the Australian job market.
The Salvation Army Employment plus recently released a study outlining the lack of job prospects for older Australians, and a lobby group for Seniors called COTA also conducted a study last year. Both of these studies highlighted the problems older workers faced in not only securing regular employment, but keeping a position past the age of sixty.