John Fraser, Secretary to the Treasury spoke today to the Committee for Economic Development of Australia (CEDA). The speech, “Australia’s Economic Policy Challenges” outlined some important priorities for economic reform, as well as setting out the background to the reform imperative.
Boosting productivity will require improvements across all markets – input markets such as the labour market, financial markets, and infrastructure markets as well as final goods and services markets. Failure to undertake necessary reforms in related markets will mean that the potential benefits of reform in any single market are not realised. The Government has commissioned a number of policy reviews that will recommend ways to enhance Australia’s economic prosperity. Making the most of these reform opportunities is essential, where three areas stand out as priorities for raising Australia’s productivity performance.
The first is tax reform.
Studies have consistently shown that tax reform offers one of the largest policy opportunities to increase incomes and living standards. And the fact is that the structure of our tax system today looks remarkably like it did back in the 1950s — but our economy looks very different. That may tell us something. Tax reform can promote strong investment and encourage workforce participation. Our company tax rate is high by international standards. In the context of far more mobile capital, high tax rates are dampening investment and productivity, while continuing personal income tax bracket creep would have negative impacts on workforce participation and incentives. An important criterion for a well-functioning tax system is fairness, where there are some contentious and important issues that need to be explored. For example, substantial tax assistance is provided to superannuation savings. We need to consider whether the level and distribution of these concessions remains appropriate. These are the types of issues that will be considered in the upcoming Tax White Paper.
A second priority is continuing to modernise the workplace relations system.
Workplace regulation has been progressively and substantially reformed in recent decades. Many of the fundamental reforms were undertaken in the 1980s and 1990s, in particular the shift from centralised wage fixing to enterprise bargaining. These reforms have delivered substantial benefits. But elements of our workplace relations system may need to change to fit the workplaces of our future. The Productivity Commission’s Inquiry into the Workplace Relations Framework to be delivered later this year will be an important opportunity to create a modern system that will support jobs, promote productivity and lift living standards. A more flexible workplace relations system that supports the economy will help Australia respond to the challenge of lifting productivity growth. The rise of Asia, the ageing of the population and the transition away from resource-led growth will require significant adjustment. It is especially important that workplace laws are not impeding workplace transformation.
A third priority area for structural reform is driving greater competition in goods and services markets.
Previous product market reforms, and those associated with the Hilmer review in the 1990s, pushed competition into non-tradable sectors like electricity, telecommunications and rail freight. These were important changes, contributing to a GDP increase of around 2½ percentage points over the course of that decade. The proposals in Ian Harper’s draft report released in late 2014 provide the opportunity to boost Australia’s productivity performance. The final report will be released in March. Ian Harper proposes that we apply competition law and a new set of competition principles to all purchasing activities of government such as health, education and aged care. Even small improvements here, where government has a large footprint and where Australia’s population will impose greater demands on health and aged care, can deliver big benefits over time. The importance of strengthening competition was also a theme of the Financial System Inquiry. The Inquiry concludes that competition and competitive markets are at the heart of the philosophy of the financial system and the primary means of supporting the system’s efficiency. We must ensure that our banking and financial system more generally are more competitive. The Inquiry also recognised that, as the financial system becomes increasingly sophisticated and innovative, the importance of receiving appropriate financial advice and access to appropriate and competitively priced products has increased.
These are challenging issues and will require the Commonwealth and the State governments to work together.
