With productivity flagging, the debate about what needs to be done seems to be between the Keynesians, who want to see government stimulation through lowering taxes and increasing spending, and those who want an alternative means of government stimulation through increasing the supply of money via lower interest rates. But we can only increase productivity and growth through deregulating supply and no longer discouraging savings and investment.
Treasurer Josh Frydenberg proclaims himself open to other options. He says, “I’ll be having discussions with my international counterparts about productivity-enhancing reforms in their own economies.” It is, however, unlikely he’ll find too many good ideas beyond those of the Trump administration at the forthcoming meeting in Japan of the G20 finance ministers.
What we need is to cut the welfare and education programs that the Rudd Gillard government initiated and undertake a sector-by-sector reforms that can have a positive effect, as was the case in the deregulation/privatisation era of the 1990s.
The Productivity Commission identifies agriculture and electricity, gas, waste and water were two activities which saw considerable falls in productivity in the latest year.
The decline in agricultural productivity is due not only to the drought but also to the deprivation of an essential input that the diversion of water from irrigators to nebulous environmental goals. Over recent years, the Murray Darling, which accounts for 40 per cent of Australian agricultural output, has lost as much as a quarter of high security water formerly used by irrigators.
Another sector with a sickening decline in productivity is energy where we have seen we have seen a re-regulation with the requirements to incorporate low productivity renewable energy into the mix, resistance to new gas and coal developments, a considerable heightening of environmental restraints on output and far greater reporting requirements.
Both these sectors saw increased investment over the past five years but the regulatory corset ensured these resources were directed to areas with a low payoff.
Future policy, if we wish to see higher living standards, requires both an assault of regulatory measures and a winding back of government as a share of GDP generally.
A more extensive version of this piece is in Quadrant.