The Grattan Report has released a report outlining what it thinks are the real game-changers in terms of economic reform. It even contains estimates of the supposed gains to GDP, which actually look small. Also the methodology for arriving at these estimates is pretty suss. (Hint: both costs and benefits need to be taken into account, as well as a GE framework.)
Michelle Grattan (gedit? no relation?) has a take on the report in The Age:
”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. This could contribute over $70 billion to the Australian economy. There is nothing else big enough to change the game over the next decade,” the paper says.
On tax reform, the paper proposes broadening the GST, which currently excludes 40 per cent of spending, to include education, health and food. The higher take would be used to finance cuts in company tax and personal income tax, to boost incentives.
On female participation, the paper points out that only two-thirds of women aged 15-64 are in paid work, compared with 78 per cent of men. While just 55 per cent of employed women are full time, this compares with 85 per cent of men. Our rates are well below many OECD countries. ”Female workforce participation can only change significantly if more mothers have jobs,” says the paper, and this requires reducing high effective tax rates and the net cost of childcare.
- Even in the face of these high EMTRs, female participation has risen strongly in Australia, suggesting low elasticities. (Investment is a key motivator for many women with small children staying in the workforce; the penalties attached to complete withdrawal are pretty high);
- It is hideously expensive to do very much about the EMTRs in a fiscal sense – slow tapers cutting in at high income levels costs billions.
- Viewed from a community well-being point of view, maximizing labour force participation does not really make much sense. It is no free good to get more women into the workforce and the loss of home-based production needs to be taken into account.
A similar point can be made about older worker participation, which has actually increased most of all among the different age groups. But there is no free good in forcing older people to stay longer in the workforce.
As to expanding the coverage of the GST, it is pretty hard to tell. The compliance costs of the patchy current coverage are essentially sunk, so there would be no gain there. Changing the mix of taxes might be useful but it is hard to think that any change to the game will revolve around a change in the tax mix but with the overall tax take unchanged or possibly higher.
The proposition that there is nothing else big enough to change the game over the next decade does not stand up to any scrutiny. The real game-changer is productivity and it’s there where the agenda of free markets and deregulation become the key factors.