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Recent and prospective performance is good
The Australian economy is still benefiting from the programme of widespread and deep reforms that started in the 1980s and was especially intensive in the 1990s. These made it easier to set macro policies in a stability oriented medium term framework. The combination resulted in a thirteen year long economic expansion accompanied by low inflation, high resilience to external and domestic shocks, and very healthy public finances. The short term outlook is for continuing brisk low inflationary growth.
Challenges lie ahead, but policy actions are required now
The main challenges lie in the medium and longer term, but to address them, further policy actions should not be delayed. Ageing will exacerbate the underlying rise in public health costs and to a lesser extent in public pensions, putting pressure on public finances. More fundamentally, although Australia has moved up the “league table” in terms of per capita incomes during the past decade, it has returned only to the relative position it already held in the early 1970s and remains well below the leading countries in terms of labour participation and labour productivity. Hence policies that raise both are desirable. Faster growth of output will also help counter the growing burden of social expenditure, reducing or eliminating the need to raise taxes or cut spending in other areas.
Participation rates should be encouraged to rise.
As in many countries, participation rates of women are rising but those of men have fallen. There has also been a disconcerting long-term trend increase in inflows into the disability pension scheme by older workers, although part of it is a cohort effect. Policies have been proposed that would assess work capabilities of the entrants to the disability scheme more intensively. A number of “making work pay” measures have been introduced to encourage labour-force attachment of welfare recipients in the face of effective marginal tax rates on work effort that are comparatively high on modest incomes. It would be desirable to further reduce the high marginal tax rates themselves and give more attention to benefit entitlement conditions and activation and mutual obligation strategies. The low-skilled face additional barriers to enter employment, or remain in it, because of relatively high minimum wage scales, and remnants of the formerly pervasive and excessively legalistic industrial wage award system still discourage flexibility. Further reforms are needed in these areas.
Higher participation rates will not be enough in themselves
It is estimated that if Australian employment rates were raised to the highest among OECD countries, real GDP levels would be some 9 per cent higher than under the status quo in about twenty years’ time, accompanied by strong positive impacts on public finances. Nevertheless, this would not suffice to fully offset the demographically induced reduction in the relative size of the working age population in coming decades. The growth of per capita incomes would fall below long run trend rates and a fortiori below recent rates. Faster growth of labour productivity will also be necessary to boost per capita income growth to desired rates.
Further strengthening of competition is part of the solution
Australia has made remarkable progress from a very unsatisfactory starting point, but there remains unfinished business, including the removal of restrictions to competition which legislative review has shown not to be in the general public interest. Such restrictions were found in agricultural marketing arrangements, liquor licensing, compulsory insurance schemes, pharmacies, the professions and some occupations. Regulatory inconsistency arising from the co existence of state and national regulators in both the electricity and gas sectors needs to be removed as planned. Urban water reforms have made significant improvements, but the pace of rural water reform has been slow. National land transport reforms planned under the AusLink framework need to be effectively implemented and efforts should be made to promote competition in ocean shipping. Competition in fixed line telecommunications should be promoted by strategies designed to facilitate further access by competitors. Telstra should be required to divest its cable network and its shareholding in a major pay TV supplier provided independent assessment shows that the benefits of divestiture would exceed the costs, and efforts to open the postal services market to competition should be renewed.
Raising human capital will also help
Educational standards and outturns have both improved in the past 25 years, but there remain wide discrepancies in achievements, and many youngsters still leave school early with few qualifications. Aligning school curricula to better meet the aspirations of the pupils and the requirements of their future employers will help. An intensification of the more holistic approach to life long learning will also encourage employees to remain longer in the workforce, and employers to retain them there.
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