The productivity roundtable
The hard numbers
We’re working harder, not smarter.
The most commonly used indicator of productivity is GDP per hour worked. That is subject to the usual limitations of GDP, but the story is in the trend. Now that the measurement distortions of the pandemic are behind us, we can see that GDP per hour worked stopped rising around 2015. By this measure the strongest growth was between 1995 and 2005, but that was boosted by favourable terms of trade during the mining boom (for which Howard claimed credit). But even so it’s clear that up to around ten years ago we were enjoying a growth in productivity.
The graph below also shows, in the blue line, GDP per capita. That has risen recently. How can that happen when productivity is stagnant? It’s because we’re working longer hours: we’re working harder, not smarter.
Tax reform
Proposals for corporate and personal tax reforms are coming on to the government’s productivity agenda. Will our conservative risk-averse government take them on?
On Friday August 1 the Productivity Commission released its paper Creating a more dynamic and resilient economy, one of its five submissions to the government’s productivity review. As summarized in the roundup last week, it is about re-shaping our corporate tax structure.
That re-shaping, besides entrenching a two-level tax rate – a higher one for the ASX200 and other big companies, a lower one for smaller companies – includes a super profits tax designed to tax economic rent in the form of a cash-flow tax. The purpose is not about collecting revenue (the Commission claims that its proposals are revenue-neutral); rather it is about encouraging firms to direct more of their profits to re-investment, rather than to shareholders as dividends.
Alex Robson, Deputy Chair of the Commission, in his capacity as an adjunct professor at the Queensland University of Technology, has a Conversation contribution summarizing and reinforcing the Commission’s submission: The company tax regime is a roadblock to business investment. Here’s what needs to change, emphasizing the case for decreasing the regulatory burden on industry.
The ABC’s Gareth Hutchens has a post explaining how the proposed cash-flow tax would collect more revenue from firms’ above-normal profits – from economic “rent” in economists’ terms. Or it may even encourage firms to direct more of their profits to re-investment rather than to paying dividends to their Australian and foreign shareholders. He summarizes research by economist Chris Murphy showing that more than half of Australian firms’ corporate profits arise from economic rent, particularly in the financial services and mining sectors. He also refers to work by Ross Garnaut, who points out that while competition policy goes some way toward reducing opportunities for firms to extract economic rent, other policies, particularly tax policies, have to be brought to bear.
Unsurprisingly, in relation to personal tax, there are many calling for reform of capital gains tax and negative gearing, particularly as they apply to rental properties. Patricia Karvelas has a post explaining what she sees as the shifting politics around these taxes, including a clip from Insiders where ACTU Secretary Sally McManus convincingly argues the case for putting reform of these taxes on the productivity agenda.
Most of Labor’s political strategists are terrified about reforming these taxes, believing that they contributed to their party’s defeat in the 2019 election. But that was six years ago. More recently Dutton’s attempt to run a scare campaign around negative gearing and capital gains tax fell flat, and since 2019 housing affordability has become a much stronger political concern, particularly among young voters.
Also in comparison with 2019, there is no talk of limiting the tax deductibility of imputation credits – a poorly considered proposal laden with unintended consequences: unfairness on those who missed out on superannuation, incentives for savers to direct their investments to housing rather than to Australian equities, and evasion opportunities for the really rich. It would be hard to think of a dopier proposal to take to the electorate.
It seems that Labor, now in office, can rely on better-informed advisors than those who took it down the disastrous imputation credit path. In any case, if firms respond to incentives to invest more and pay less in dividends, shareholders would be claiming much less in imputation credits.
Industry policy
A strong manufacturing sector can contribute to a nation’s productivity. A pity we let our manufacturing industries dwindle.
Roy Green, writing in InnovationAus.com, notes that well-crafted industry policy can boost productivity, providing insightful observations on the economists’ guiding rule of comparative advantage: Economic reform must include industrial transformation.
First, he notes that in most advanced economies productivity improvements have been most prominent in their manufacturing industries. Because we have a small manufacturing sector in Australia we have not enjoyed those benefits. That’s one reason our productivity performance is poor.
Second, he observes that just because we are a large exporter of raw materials, there is no inevitability that we should suffer the “Dutch disease” of a high exchange rate rendering trade-exposed industries uncompetitive. If we apply resource-rent taxes, and spend some of the proceeds on encouraging R&D in manufacturing and related industries, we can avoid the Dutch disease – as countries such as Norway have done.
Third is his observation on the doctrine of comparative advantage – an idea often stretched beyond the limits of its basic assumptions. The economists’ conventional wisdom about Australia is that we have a comparative advantage in mining and should not dabble in stuff we’re not so good at.
There is no doubt that in comparison with other resource-endowed countries we do mining very well. Green points out, however, that mining is an industry with diminishing returns to scale – as a mine expands it usually has to deal with a lower grade of ore, for example. By contrast manufacturing, particularly the manufacturing industries that are prominent in advanced economies, enjoy expanding economies of scale. Ricardo’s theory of comparative advantage is a valuable insight into the economics of specialization, but it says little about the dynamics of scale economies.