Many of the most controversial Budget tax changes have just passed into the law, but the question that sits at the heart of the debate hasn’t gone anywhere.
Treasurer Jim Chalmers has cited improving housing affordability and rectifying generational inequality, but it’s productivity that remains the crux of the challenge facing the Australian economy.
Australian productivity hasn’t improved since 2018, and the last decade has been the worst decade for productivity growth in 60 years. Had we simply followed the trend of the previous 25 years, the country’s economic pie would be 10% bigger today.
That can all seem fairly academic, but it translates to a stagnation in living standards.
It’s a question that is also preoccupying the team at Future Generation, which was created by Wilson Asset Management founder Geoff Wilson to support high-impact non-profit organisations that are trying to improve the lives of the next generation of Australians.
The charitable investment model that has raised more than $100 million for those non-profits and currently has $1.3 billion in assets under management.
In a webinar last week, Philip Lowe, Chair of Future Generation Australia (ASX: FGX), and Jennifer Westacott, Chair of Future Generation Global (ASX: FGG), sat down to discuss their views on the Australian economy, and what we can be doing better to address the fundamental question around productivity.
A path of stagnation
It’s worth stating that neither guest is sounding the alarm on the Australian economy. The country continues to enjoy some of the highest living standards in the world, despite stubborn inflation, and the country continues to grow, just not as quickly as arguably we need it to.
As Lowe said, “I don’t think we’re going to go backwards, but we’re not going to go forward.”
Jennifer Westacott echoed that sentiment, but noted other countries are managing to improve productivity despite the obvious macro challenges facing the developed world right now.
“We’re certainly not going to travel at the same pace as countries like the US, which is I think on average about four times more productive than we are.”
And it’s productivity that is the key driver of real economic growth that has tangible impacts on people’s living standards.
“A lot of people I think want to misrepresent productivity as a claim by business to work harder for less, versus we want to get more value out of the inputs we produce,” said Westacott.
“That’s about technology, machinery, skills, training, energy input costs and so on, but it ultimately results in higher wages and a bigger pie.”
“That means more money for government to spend on things that people need, more money in people’s pockets. And that’s the best way of really alleviating the cost of living crisis over time.”
What needs to be done
Westacott says there is a lot that can be done to improve productivity, from taking the skilling of Australians more seriously to finding a way to reduce energy costs, but believes tax reform is the biggest driver.
“Productivity is a creature of investment and incentives and we do not have that climate in Australia at the moment,” she said.
While that would include some of the taxes that were the focus of the recent budget, it extends well beyond that. Australia has one of the highest corporate tax rates in the world, high income taxes and other taxes, like stamp duty, that are antithetical to productivity.
“I’ve not seen any economist that says stamp duty isn’t anything other than the worst tax in Australia from a productivity point of view.”
And “piecemeal” tax reform won’t cut it, said Westacott, given the size of the structural challenge.
“Unless we’re willing to confront the fact that our tax system is neither going to produce the revenues that we need and, more importantly, it’s not going to create the incentives for businesses to invest in those bits of equipment and skilling and technology that allows them to be more productive, expand and grow and pay people more, then I just don’t believe we can actually turn the corner.”
Lowe agrees more can be done on tax reform, but believes that the country also needs a broader mentality shift around how we think about economic growth.
“At the moment, too much political discourse is focused on how we cut the pie rather than grow the pie,” said Lowe. “And we grow the pie by investing, innovating, building new businesses and hiring people with good skills. If that’s your mindset, then the approach should be to tackle everything that feeds into that.”
And there are myriad areas of the economy that should be the focus of that approach, he says.
“We tax innovation and entrepreneurship too heavily and consumption too lightly. And the way we tax land is all screwed up as Jennifer said. It’s too hard to establish new businesses. There’s too much regulation. The cost of energy is too high and a university system isn’t working to the full advantage of the people.”
“We don’t have a growth agenda. We now have a redistribution agenda. We’ve got a big pie and we’re arguing over how we redistribute rather than make a bigger pie.”
But he’s optimistic we can turn things around given our strong economic fundamentals – natural resources, strong public institutions, reliable energy and an entrepreneurial workforce.
Another factor in our favour is that our political system is extremely robust and sensible relative to even our closest global peers.
“The other source of optimism I have is that over the long sweep of time, our politicians end up making the right decisions,” said Lowe.
“We go through periods where we’re all saying, ‘well, this is not so good’, but the political system does tend to deliver ultimately politicians who make the right decisions.”
Westacott says Australia’s access to Southeast Asia, one of the world’s fastest-growing economic regions, is also a tick in our favour.
“Our proximity to countries that are growing with fives in front of their GDP numbers is a real advantage,” she said.
The next generation
Future Generation was created with the express purpose of supporting disadvantaged younger Australians, and it’s that ideal that drives much of Lowe and Westacott’s concern around the economy.
Australia has been dealt a great hand, says Westacott, and its incumbent upon current policy-makers and decision-makers to not squander the enviable opportunity we continue to enjoy.
“We don’t want to leave future generations with either stagnating living standards or relative declining living standards,” said Westacott.
“I don’t want to be the first generation that left the next generation with lower living standards when we had all the policy tools in front of us that we could have used in a way that says to our grandchildren and our children, ‘we’ve actually left things in better shape.
