Chapter 1. The short-term challenge: riding the commodities rollercoaster
The major short-term challenge is to maintain macroeconomic stability in the face of a commodities price boom that has boosted the terms of trade by around 30% over the last three years. Recent monetary tightening in the face of relatively weak output growth needs to be seen in the context of strong income gains due to the surge in the terms of trade and the prospective effect this is likely to have on spending. Unusually buoyant tax revenues related to the commodities boom also raise the question as to how ambitious short-term fiscal objectives should be. Recent budget tax cuts are also considered in the context of previous Survey recommendations and a recent study comparing Australia’s tax system with that in other OECD countries.
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Chapter 2. Long-term Structural Challenges
Judged in terms of GDP per capita, Australia’s ranking among the OECD countries has steadily improved since the beginning of the 1990s. It has now surpassed all G7 countries except the United States. This chapter reviews the main challenges that policy-makers need to address to sustain this strong performance. In framing policy responses it is important to recognise the over-arching framework of fiscal federalism which is of key importance in many areas which are crucial in determining long-run performance. In common with most other OECD countries, population ageing threatens to slow the growth in living standards over coming decades. To offset the adverse effect it will be important to pursue policies that underpin swift productivity growth and raise labour utilisation. International benchmarking is used to evaluate recent performance and to highlight weaknesses which need to be addressed by policy. With respect to productivity the most obvious areas which need addressing are improving product market competition in terms of infrastructure services, and raising labour market flexibility through streamlining industrial relations and improving workforce skills. There is scope for increasing labour supply from lone parents, women with families, the disabled and those aged over 55. Australia is better placed than most to deal with the fiscal pressures from ageing given a strong starting point and relatively modest growth in public pension liabilities. The main spending pressures are instead expected to come from health spending.
Chapter 3. Fiscal Relations Across Levels of Government
Key areas of public service provision are subject to complex patterns of joint government involvement that can lead to inefficiencies. Clarifying government roles and responsibilities is likely to have a significant potential for improving public sector efficiency. Fragmentation of decision making and funding arrangements, particularly in the areas of hospital services and old-age care, creates incentives for cost and blame-shifting between government levels. A collaborative approach between government levels to overcome some of these problems, as recently initiated by the Council of Australian Governments, would help to develop better governance arrangements and improve spending assignments. A less cAomplex system of inter-governmental transfers would also contribute to a more effective specification of spending responsibilities. Stronger revenue-raising capacity of the states, through a further improvement in the efficiency of the state tax system, would raise the ability of sub-national governments to meet expenditure responsibilities and be better prepared for coping with demographic change.
Chapter 4. The need for further reforms to infrastructure services
Australia’s National Competition Policy (NCP) has set out competition principles which extended the reach of competition law to previously exempt activities and provided a coherent framework for reforms in essential infrastructure industries. Among the major achievements are the establishment of an overarching national access regime — together with sector specific regimes — which introduced third party access arrangements for infrastructure services such as gas pipelines and rail track networks. Independent authorities were established in all jurisdictions to monitor and set prices for monopoly services. However, there remains unfinished business and the NCP infrastructure reform agenda was not exhaustive, leaving room for additional measures to improve the efficiency in essential areas such as electricity, water, road and rail transport. Implementing them, including through the new National Reform Agenda, should raise multifactor productivity further and should help to narrow the gap between Australia’s per capita income and that of the OECD’s best performers.
Chapter 5. Reforming Industrial Relations
The industrial relations system has evolved gradually from a very prescriptive set of rules set by judicial bodies to a much more flexible system, with many enterprise and individual agreements. However, the judicial rulings have remained important in setting a floor on what can be agreed upon. Many attempts have been made in recent years to instil greater flexibility, while maintaining a social safety net. The latest is the WorkChoices legislation, which took effect in March 2006. This chapter reviews WorkChoices and assesses the room and options for further reforms.
Chapter 6. Improving incentives to work
Raising labour force participation is of major importance for sustaining vigorous growth, especially in the face of population ageing. The major challenge is to increase participation among women with families and lone parents, disability benefit recipients and older workers over 55. While participation decisions reflect personal choices, these are influenced by policy settings. Despite improvements in “inactivity traps”, Australia ranks high internationally in terms of “low wage traps” for lone parents and one earner households. Tackling such “low wage traps” either by addressing allowance and parenting payment income tests or by reducing the lowest income tax rate or raising the threshold at which income tax is first paid, should be a priority. Access to affordable child care also plays an important role in facilitating female participation, and efforts towards this end need to continue. Encouraging older people to stay in work longer requires removing incentives for early retirement. Imposing the recently announced tighter eligibility and participation requirements for disability pensioners uniformly across all recipients would also be beneficial.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Australia 2006 is available from:
For further information please contat the Australia Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by David Turner and Vivian Koutsogeorgopoulou under the supervision of Peter Hoeller.