Australian economics – productivity
Productivity – an explainer
Clarifications about a word that its users seldom explain.
Basic explanations
At one level the idea of improving productivity is a no-brainer. It’s about doing more with the same effort, or doing the same with less effort. When we cooperate with a neighbour to bring in trash bins, we increase productivity from one bin per trip to two bins per trip. (More output with no increase in effort.) When we learn how to reverse park in one move rather than in three moves, we increase productivity. (Same outcome with less effort.)
When we install a dishwasher our labour productivity – clean dishes per hour worked – improves. That’s a case of productivity improving from “capital deepening” to use the economists’ term, which has been the source of much productivity gain in the economy over the long term. But we can overdo it. If, on an average Australian block, we replace a push lawn mower with a ride-on mower, our labour productivity may improve, but our capital productivity – lawn cut per hour per $ invested – has probably fallen. That’s why economists have developed the idea of “total factor productivity”. It’s not an exact science, but it’s a useful reminder of the need to consider productivity in terms of all resources, although labour productivity is usually the focus of our attention, because it is most easily linked to our returns in terms of pay or extra leisure.
It's important to remember that productivity is measured in terms of some ratio of output divided by input. The ratios may have little meaning in themselves, but what counts is the direction of change. That’s why policy discussions are almost always in terms of productivity growth – or decline – rather than absolute measures.
Watch what goes into those productivity numerators and denominators. National productivity indicators generally use some measure of value-added in the numerator – most commonly GDP or one of its components. GDP is not a good indicator of wellbeing, but that doesn’t particularly matter, because movements in GDP correlate pretty well with movements in human wellbeing.
What goes into the denominator counts, because we can get vastly different trends depending on the basis of measurement: the whole population, the population of working age, the workforce, the employed workforce, hours worked. For example, if Australia were to be hit with a severe recession resulting in 10 to 12 percent unemployment, GDP per hour worked would probably increase, assuming that it’s the least productive workers who lose their jobs. But by most other indicators productivity would fall. In this context Ian Verrender has a post on productivity, explaining how an influx of students working in low-paid unskilled jobs has probably lowered our productivity in certain sectors: Off the productivity round table: What won't be discussed this week.
And beware of rushing to judgement. Discussions on productivity often involve a comparison between USA, a high performing outlier on most productivity indicators, with other “developed” countries, particularly European countries and Australia. But an example, drawn from readily-available data, illustrates the limitation of such a comparison.
Danish GDP per head is only 85 percent of America’s. But while on average Americans work 1800 hours a year, Danes work only 1400 hours a year: that’s only 78 percent of Americans’ working hours. Economists remind us that the dividend of productivity can be paid in higher income or “leisure”. I don’t know what Danes do with those 400 hours denied to Americans – they may be working hard childminding, shovelling snow, cooking meatballs – but it’s time they have at their disposal. And in any event, there is no evidence that Danes are queuing outside US immigration offices in the hope of eventually getting a Green Card. (If you haven’t come across it there is a fable about a businessperson and fisher which makes this same point.)
The roundtable is concerned not only with high-level indicators. It is also concerned with specific industries, particularly construction, health and disability care, energy production. When we look at specific industries it gets trickier. In some private markets with simple products physical productivity metrics are comparatively straightforward – number of cars produced per worker, days to build a three-bedroom house, fuel use per airline passenger. But in most industries providing human services, many of which are in the public sector, such metrics can become meaningless. And in the private sector, impressive productivity indicators, such as high measured value-added per employee, can simply be an indication of exploitation of market power rather than efficient use of resources.
Gareth Hutchens has a post on the ABC website: What is productivity?, going into more detail, and tracing some of the structural reasons for our poor productivity performance.
When productivity improves, who benefits?
Whenever there is a debate on productivity Paul Krugman’s statement gets trotted out:
Productivity isn’t everything, but in the long run it’s almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
Illustrating Krugman’s point about the long term, below is a chart, drawn from Productivity Commission data, showing how labour productivity, real incomes and real wages have risen over the last 62 years. Over that time our material living standards have trebled.
Labour productivity and income have been closely related, but they haven’t moved in lock-step.
To re-frame Krugman’s statement: if productivity doesn’t improve, workers’ real incomes won’t improve. But it would be a violation of syllogistic reasoning to assert that if productivity improves, workers’ real incomes will improve.
That’s why the distribution of the benefits of improved productivity counts. If competition and labour laws are weak, and if there are policies in place deliberately suppressing the strength of unions, it is possible that few or none of the benefits of improved productivity go to workers. The standout example is the USA, whose impressive productivity performance over many years has not translated into improved pay for large categories of workers. There is also evidence that something similar has been happening in Australia over a long period in which the labour share of factor income has fallen while the profit share has risen. This is shown in the graph below – a graph often presented in these roundups when national accounts are updated.
Such a chart paints only a broad picture of the change in the distribution of productivity. Much of News Corp’s CEO’s $42 million pay would be recorded as “wages”, and a fair share of the profits are distributed as dividends to superannuation funds. But the trend is clear and is hard to explain away through such classification details.
As a case in point the McKell Institute has studied the retail sector, which since 2007 has experienced a 26 percent growth in productivity and improved profits, while over the same period real wages in the sector have fallen by 1 percent: Achieving the productivity promise.
As can be seen at the end of that graph, in the last two or three years there has been some distribution back to wages, but any such growth in wages cannot last unless productivity rises.
The benefits of improved productivity flow not only to profits and wages. Consumers too should enjoy benefits in terms of lower prices and better service. In relation to the roundtable’s concern with housing, those benefits can be significant, taking the form of more affordable housing and faster construction times. It is too easy to forget that before the tariff and competition reforms of the 1980s, there were sectors of the Australian economy subject to “sweetheart deals” between employers and unions to share the benefits of market power while shutting out consumers.
Who “owns” the productivity agenda?
As argued above there is nothing wrong with Krugman’s statement, and in the long term there is a confirmed link between improved productivity and wages. But the experience of many workers, subject to the demands of performance management systems, is of workplaces that drive them to work harder, not smarter. Surveillance technologies have brought the oppression of Taylorism to industries where workers, individually and collectively, once had a degree of agency. It’s little wonder that there is a degree of cynicism about the government’s push for improved productivity.
That’s why it’s important that no one interest group, particularly a group who claims to speak for “employers”, owns the productivity agenda.
In the context of distributing the gains from productivity, it is telling that the Australian Chamber of Commerce and Industry, in an interview on Radio National, has reacted negatively to the Federal Court’s decision to award the Transport Workers’ Union $50 million of the fine imposed on Qantas for illegally sacking workers: Australian Chamber of Commerce and Industry outlines priorities for roundtable. The ACCI has no problem with the part of the compensation that has been paid to workers, but they object to the payment made to the union.
But that’s a narrow interpretation of the judgement, as law professors Shae McCrystal of the University of Sydney and Tess Hardy of the University of Melbourne point out in The Conversation: The “wrong kind of sorry”: will a record fine for Qantas deter other companies from breaking the law?. As they quote from Justice Michael Lee, directing that payment to the union “should encourage others to pursue compliance with industrial relations law”. Similarly, writing in the Financial Review David Martin-Guzman quotes Justice Lee’s statement that the payment will “strongly incentivise [the TWU] and other trade unions to bring prosecutions under the Fair Work Act, particularly against employers who have extensive resources to defend their position”.
It's an important judgement, because it confirms that the TWU – and by implication other unions – was not simply a litigant in a specific case. Rather it was, and is, a party acting in the public interest to ensure that workers get a fair deal from corporations. That’s particularly important in the productivity debate, because if we improve productivity without benefiting workers, we simply move closer to a US-style economy.
Setting the productivity agenda
The roundtable will be a success if the hard issues of structural reform stay on the policy agenda.
It is not hard to get a group of intelligent and well-informed people to sit around a big oval able and agree about what should be done. Passive voice declarations are easy to write; the hard part comes when those declarations have to be in the active voice, specifying who does what and when.
The roundtable has done well in getting policy concerns on to the policy agenda – concerns that are covered only superficially in election campaigns, such as housing, concerns that don’t normally come to public attention, such as the low level of business investment, and concerns that trigger scare campaigns when they are aired, such as tax reform.
The roundtable process has put these issues on the agenda in the best possible way, by specifying the problems to be addressed and moving to the principles that should guide specific policies, while holding back on specific measures. For example tax reform should be based on intergenerational equity, encouragement of business investment, and simplification.
So far we have not heard roundtable participants asserting “positional” statements. Statements ruling measures out, and statements specifying limits – no increase in taxes, no change to environmental regulations for example – are the surest way to kill creative problem-solving negotiation. Unfortunately the Canberra press gallery has too many poorly-trained and partisan journalists prone to ask lobbyists “what is your position on X?”, or “will you rule out Y”. If issues can be kept open for now, that will be a success.
Many observers have noted that while Treasurer Chalmers is inviting all ideas to come forward, Prime Minister Albanese has been more inclined to suggest that the government will limit reforms, particularly taxation reforms, to proposals already put to the electorate. Those who have observed Canberra for a long time would hardly be surprised; it’s almost an established way treasurers and prime ministers work together. Also, in delaying the election until May, the Albanese government denied itself the option of an immediate post-election hard budget – or perhaps it never had such an intention.
Although solutions to most problems involve the long haul of structural change, it will be useful in terms of the government keeping faith with the community if it can chalk up some easy short-term reforms, countering cynical assertions by Coalition politicians that the roundtable is simply a talkfest. Getting rid of nuisance tariffs, and developing a system of road user charging, may fall into that category. It appears that there could also be reasonably rapid progress on streamlining construction approvals and recognizing qualifications.
These requirements for success are touched upon in a Saturday Extra segment Can the productivity roundtable deliver genuine economic reform?, in which Geraldine Doogue interviews University of New South Wales economist Richard Holden, and Melinda Cilento of the Committee for Economic Development of Australia. You can also find CEDA’s submission to the roundtable on their website, written in terms that leave options open.
The Productivity Commission’s pitch to the roundtable
The Productivity Commission is going for a series of incremental reforms, rather than one big solution, and ducks the issue government capability.
Most developed democracies have a set of economic institutions corresponding to our Treasury, Reserve Bank, Finance Department, Audit Office, Bureau of Statistics, and Parliamentary Budget Office, but the Productivity Commission is distinctly Australian.
Through several transformations it grew out of a body known as the Tariff Board, whose task was to assess the level of tariff or similar protection necessary to support Australian industry, back in the days of high tariffs. Over time its economists became adept at bringing to the government and to the financial press, estimates of the costs and distributional consequences of tariff protection. As Australia weaned itself off tariffs, those same economists found a new role in assessing the costs and benefits of government policies generally, and over time looked at almost all aspects of government policy. For example it has reported on child care, school reform, aged care and is responsible for monitoring progress towards Closing the Gap.
It is set apart from other government agencies in two aspects. First, while bodies such the Finance Department are focussed on fiscal policy, the Productivity Commission’s concern is with all aspects of economic policy. Second, for a body whose staff are on the public payroll, it comes about as close to an independent advocacy body as possible. Although its commissioners would stress that its role is analytical, it is effectively an advocate for the population at large upon whose shoulders the cost of rent-seeking behaviour lies.
Because its research exposes economic privileges the beneficiaries of which would rather see hidden, it is not universally loved. At times various bodies, “left” and “right”, have called for its abolition.
It is not surprising that the Commission is taking a central role in the productivity roundtable. It has published five papers under the general heading Growth mindset: how to boost Australia’s productivity.
Commission Chair Danielle Wood has outlined the Commission’s priorities at her Press Club address: Growth imperative, how to fix our productivity problem. (33 minutes, followed by 33 minutes Q&A.)
Without naming names she attributes much of our present productivity slump to poor policy choices in the past. It’s clear that she’s referring to the lost opportunities of the years when the Howard government was in office – a government that squandered the proceeds of high commodity prices, and re-shaped tax incentives away from public and private productivity-improving investment, favouring fast financial turnover and housing speculation.
She summarises the Commission’s five themes – “pillars” to use the fashionable terminology. Apart from the Commission’s ideas about re-structuring corporate tax to incentivise investment, which in themselves are revenue-neutral, she steers clear of tax reform.
She has much to say about the regulatory burden on businesses, particularly in housing, but she doesn’t throw her weight behind the right-wing deregulation push we hear from some quarters. Rather, she talks mainly about smoothing and speeding up regulatory processes, removing duplicate or even conflicting layers of regulation, and ensuring that regulation is about outcomes rather than processes.
Elon Musk’s public service productivity enhancer
In this regard she could have gone into issues about public service reform. A body like the Productivity Commission should be able to find out why government agencies are so slow to evaluate projects – everything from single houses through to big windfarm projects. Is it because of understaffing – a result of misdirected “efficiency dividends”? Is it because governments got rid of experts in the public service and replaced them with general administrators (the curse of “New Public Management”)? Is it because of management culture – a failure to delegate and to push decisions up the line where they face bottlenecks? Is it because of an administrative belief that there should be a firm separation of policymaking staff and administrative staff? Has privatization required a growth of detailed regulatory laws to replace simple administrative directions that guided the performance of government business enterprises, such as state housing authorities?
These all have to do with government capability, an issue that seems to have been overlooked in the roundtable. It’s about government doing its job well, and it’s apparent, particularly in relation to the construction sector, that government isn’t performing its regulatory task well. That’s quite different from the right’s deregulation push, because it accepts the need for regulation.
Notably Wood does not put forward any one grand solution on productivity. Rather, productivity has to be improved by one small measure after another, many of which are mentioned in the Commission’s five themes. This means that the task is very different from that which faced the Hawke-Keating government, which had the opportunity to address a few big reforms – reducing tariffs, deregulating the finance sector and introducing competition policy. In this context she notes that floating the Australian currency was a once-off reform, for example.
She touches only lightly on political issues, but there are some political inferences to be drawn from a comparison with the Hawke-Keating era.
First, a sequence of small reforms may be easier to enact than big reforms such as abolishing tariff protection, which had been one of the basic aspects of the Federation settlement. That was a huge task for the Hawke-Keating government.
Second, the Hawke-Keating government had the benefit of 13 years in office, which gave it time to do the hard work of bringing parties together. Some people suggest that it had a degree of bipartisan support, but although its pro-market policies were generally in line with Liberal Party stated principles, it got little help from the Coalition opposition. But it was helped by Coalition disunity, including the disastrous “Joh for Canberra” push in 1986.In 2025 the general belief is that Coalition disunity once again will give a reforming Labor government at least a 3-term run in office. This means there is little point in businesspeople going on strike and waiting for a supposedly “business friendly” government to be elected, as they did during the Whitlam government.
Related to this is the presence of reasonably supportive state governments. It’s not so much that four of the six states have Labor governments – partisanship counts less than is often assumed. But apart from the Northern Territory (a tiny jurisdiction) there is no state government with a conscious and deliberate policy of thwarting policy reform – a role played by Queensland governments of earlier times.
Third is a more technical point, revealed in one of the Commission’s graphs reproduced below, which shows 10-year bands of productivity growth.
Unprompted by such data, most economists would probably say, with some justification, that the Hawke-Keating period, 1983 to 1996, was when the government tackled the most serious productivity issues. But in fact measured productivity growth over that period was poor. Also, wage growth was quite poor.
This illustrates the age-old hard truth about productivity-improving change, be it at the enterprise level or the national level. It involves short-term costs before long-term gains are achieved. It also means that successors may enjoy, and take credit, for the benefits. If, as an outcome of the roundtable, that message can be communicated to the voting public, it will have been a valuable exercise in preparing for reform.
Who pays for roads?
The appearance of electric vehicles on our roads has forced the issue of road user charges on to the agenda for the productivity roundtable.
Electric vehicles have taken off slowly in Australia. By the end of last year EVs accounted for only 1.5 percent of the country’s light vehicle fleet. The Electric Vehicle Council however, reports that sales of EVs are growing quickly, reaching 9.5 percent of new car sales in mid-2024.Also the mix is changing. Plug-in hybrid vehicles have been popular for a few years, but pure EVs, without an internal combustion (IC) engine are now dominating the EV market.
Even in the Treasury staff car park
This means that fewer cars are subject to fuel excise, charged at $51.6 cents a liter on gasoline and diesel. That works out to be about 5 cents a km on average. At present fuel excise contributes $25 billion to public revenue.
So far the impact of EVs on public revenue is slight. Of that $25 billion only $7 billion is from gasoline excise (cars and other light vehicles), while the larger amount, $18 billion, is from diesel excise (trucks): the electrification of trucking is in its infancy. Also EVs travel shorter distances than IC cars which means that the loss of revenue is less than proportional to the size of the EV fleet.
Even if politicians want to kick the issue down the road, this threat to public revenue should not have taken policymakers by surprise. For example the Parliamentary Budget Office put up ideas for EVs to pay a road user charge in 2019 at a rate that would fully compensate for lost fuel excise.
So the related issues of road user charging and the future of excise made their way on to the agenda for the productivity summit.
To understand the issues it’s worth going into some of the history of excise and road user charging, explained in detail in a Parliamentary Budget Office document Fuel Taxation In Australia.
How we got to where we are
Fuel excise was introduced in 1929, specifically to fund Commonwealth expenditure on roads. This specific link endured until 1992, from which time it has simply been treated as a part of general revenue, rather than as a road user charge.
Treasury departments hold strongly to the idea of consolidated revenue, which maximizes their control of expenditure. Hypothecation – the linking of a stream of revenue to particular expenditure – has always been anathema to Treasury. And Treasury has never been enthused about funding roads – in part because of the way road grants to the states show up on Commonwealth accounts as recurrent transfers rather than capital outlays, and in part perhaps because Treasury officials live in Canberra which already has the nation’s best urban roads and they don’t have to deal with the traffic in other capitals.
Nevertheless, since 1992 there has been political pressure, from motoring and trucking lobby groups, to see that the combination of Commonwealth revenue collected from fuel excise, and state revenue collected from vehicle registration fees, more or less matches total government road expenditure.
This matching has roughly held, but for two developments. One is improvement in fuel efficiency, reducing fuel use and therefore excise (although importers of monster utes are doing their best to reverse these gains). You can read about the net effects of efficiencies in the National Transport Commission’s report on trends in light vehicle emissions. The other was a 2001 decision by the Howard government to stop indexing fuel excise to inflation. Indexation was restored in 2014, but wasn’t backdated. Over that period of non-indexation the CPI rose by about 40 percent, which means excise revenue is now about 30 percent lower than it would have been had excise been indexed. Much of the current deficiency in our transport infrastructure can be traced back to the economic indolence of the Howerd government.
As a result in Australia we have some of the “developed” world’s lowest gasoline prices, as shown in the graph below, constructed from OECD data. That is in spite of our distances in comparison with other countries – or maybe it’s because of our distances, considering the way the National Party grizzles about the supposed burdens on farmers who travel long distances.
Consequently Australia has severe deficiencies in almost all our major trunk roads. For example Adelaide and Melbourne are still connected most of the distance by a dangerously inadequate two-lane road. When you hear that a road project, such as the murderously dangerous Barton Highway, does meet the cost-benefit test applied by Infrastructure Australia, it’s because limited capital funds have to be prioritized to even more deadly roads, such as the Bruce Highway. Road – and other infrastructure investment – is rationed by the application of a high hurdle rate, 7 percent real, even though the Commonwealth real bond rate is about 2 percent.[1]
So even if EVs had never made an appearance, we would have a road funding problem, or a revenue problem, depending on whether excise is defined as a “user charge” or as a “tax”.
The textbook distinction is that a user charge is directly associated with provision of a good or service, while a tax provides general public services. Economists (apart from those employed in Treasury), are generally in favour of user-pay systems, and they see the need to develop a road user charging system as a means of achieving an economically efficient way to finance roads.
We also have a carbon abatement problem, because if excise and registration fees are not covering the cost of building and maintaining roads, they are certainly not covering the environmental costs of tailpipe emissions. These are their contribution to global warming through CO2 emissions, and the contribution of diesel vehicles to local particulate pollution. In a Conversation contribution on road charging, John Quiggin argues that there should be at least another 28 cents a liter charge on gasoline and diesel to cover these externalities: Stop the free ride: all motorists should pay their way, whatever vehicle they drive.
The introduction of EVs into the mix has therefore given the government an opportunity to tackle transport emissions which are currently around 22 percent of our total emissions, and to reduce our electricity sector emissions because EVs have a role as batteries on wheels. That is why governments, state and Commonwealth, have given incentives for people to buy EVs rather than IC vehicles – incentives which help overcome what economists know as “first mover disadvantage”. But at the same time the government wants to plug revenue leaks and to fund road construction and maintenance. Such apparently conflicting policy objectives are hard to explain to the public. Also the Commonwealth EV incentive – an exemption of fringe benefits tax for corporate buyers – is a clumsy and inequitable way to support buyers, because it patronisingly privileges corporate buyers over individuals.
Because most road funding comes through state budgets, the public’s political pressure concerning roads is probably most acutely felt by state governments, who have been trying to move ahead of the Commonwealth on setting user charges on EVs.
In 2023 the Victorian government tried to set a road user charge on EVs, but it was struck down by the High Court on the basis that excise is reserved as a Commonwealth revenue-raising power. That’s a fortunate outcome, because we might have been headed towards a replication of our rail-gauge problem. Victorian governments, Labor and Liberal, are renowned for behaving as if the rest of Australia doesn’t exist. Also the system was administratively clunky.
The New South Wales Government has now proposed to develop a scheme of its own in 2027, unless there is a Commonwealth scheme in place by that date.
Where we go from here
Ideally a charging system applying to EVs would cover at least the cost of providing and maintaining roads, but the difficult part is setting a base. Who should pay and how?
The schemes under consideration so far are generally about setting a charge of X cents per km. In back-of-the envelope calculations X would be about 5 cents to replace excise for cars. But roads aren’t built only for cars: they are built to withstand the wear imposed by heavy vehicles, and the wear on roads is proportional to the third or fourth power of axle load.
Please don’t scratch it with work tools
Also a flat X cents a km would remove the small (unplanned) justice in the present fuel excise, which sees users of monstrous and menacing utes pay more excise than the users of lighter vehicles which pose less risk to other road users. Tax concessions for these vehicles are costing public revenue more than $250 million a year. These concessions are supposedly justified on the basis that these are tradies’ business vehicles, but as the Australia Institute points out, they are really private vehicles. (Have you ever seen a Fort Raptor with scratches from a tradie’s tools?)
Nevertheless the present fuel excise system, in coordination with state government registration systems, is designed to have some cost recovery from users of heavier vehicles proportionate to their contribution to road wear. These charges, being based on axle loads, capture road wear, but because some of the largest and therefore most fuel-consuming vehicles, such as road trains, distribute their loads over many axles, the charges are actually administered as a discount on the diesel fuel rebate. That is, while they contribute to efficient road pricing, they act in the opposite direction to the way a carbon price would operate.
There is a politically plausible argument that road user charges on EVs, because they are not contributing to pollution, should be less than what is collected in excise, but that would leave roads even more poorly funded than they are now.
There is also the question whether a road user charge, besides replacing fuel excise, should replace state registration charges. Why do we charge for vehicle ownership when it’s the use of vehicles that contributes to road wear and congestion? (The counter-argument is that whether we use motor vehicles ourselves, we all benefit from having a system of roads.)
David Hensher of the Institute of Transport and Logistics Studies at the University of Sydney, explains on the ABC how a road user charge might work – with the charge varying according to conditions such as congestion.
In a session on Radio National Life Matters Christopher Jones of the Electric Vehicle Association and John Quiggin present a strong case for a road user charge to apply to all vehicles – EV and IC: Is a road user charge for electric vehicles fair?. That would overcome issues concerning hybrids, for example. They suggest that the present fuel excise should remain as a de-facto carbon price. (It would need to be re-shaped away from its axle-load model.) If the negative externalities of air pollution are to be included in a charging regime, so should the negative externalities of monstrous utes be included because of the hazard they inflict on other road users.
The Treasurer seems to have been flagging the possibility of starting with a road user charge on electric and fuel-cell trucks, even though there are only around 500 such vehicles on the roads. That makes political sense. Although the Electric Vehicle Council has no in-principle objection to road user charges, people find it politically confusing when they perceive a contradiction in government policies – one set encouraging them to switch to EVs, and another policy setting a new fee.
The challenge for the government therefore is to keep the debate on road user charging on a rational basis, which isn’t easy when the Murdoch media’s contribution is to run up a headline “Aussies explode over Albo’s latest cash grab: The Albanese government is proposing yet another tax and it’s fair to say Aussies have had enough.”
There is also the issue of technology. The Victorian scheme was laughable: it relied on everyone with an EV taking a photograph of their odometer on June 30 each year. Technologies that can record vehicle use in great detail are already in use in better-organized trucking companies, and owners of EVs are constantly feeding data to corporate websites. Users of toll roads have been using electronic tags for many years. But bringing it all together in a comprehensive charging system will be difficult: it is wise for the government to proceed slowly on details while it works hard on developing a system that is fair, achieves allocative efficiency, preserves people’s privacy, and makes up for a long period of inadequate road funding.
The roundtable has given the government the political licence to proceed with road user charging. It should be possible to implement a system, applying to all vehicles, that pays for roads, eliminates CO2 emissions, discourages the use of unnecessarily large and dangerous vehicles, and is equitable. We can recognize success when the tradies’ choice is the EV equivalent of the once dominant Holden ute.
1. The current ten-year bond rate is 4.26 percent, and the government’s mid-range inflation target is 2.5 percent, implying a real bond rate of 1.72 percent. ↩
Artificial intelligence and the nature of work
AI, if well-conducted, could contribute to productivity by reducing the burden of overheads carried by the real economy.
One of the Productivity Commission’s “five pillar” papers on productivity, its Harnessing data and digital technology report, covers the productivity potential of artificial intelligence. If AI is introduced without unnecessary regulatory impediments, it could result in a 4.3 percent gain in labour productivity over the same period. (Specification to a decimal point maybe reveals a degree of computational overconfidence, however.)
The Conversation has a whole series Your job in the age of AI. One article, by Janine Dixon and James Lennox, of Victoria University, puts some numbers on the changes in employment by 2050, comparing a future with AI with a future without AI: These jobs will thrive – but others may vanish – as AI transforms Australia’s workforce. The graph below shows their projections.
To use a traditional classification, the division seems to be along the lines of “white collar” (loser), “blue collar” (winner). Another way of framing the division is between “overheads” and “direct workers”, to use a common classification in manufacturing establishments.
Not listed is the occupation “influencer”, but that task seems ripe for replacement with AI.
Also not covered in this study is the future of some high-skill professional occupations. Lawyers may find much of their work can be replaced by AI, but police and parole officers are probably more secure. The task of diagnosing disease can take away work from GPs, but hospitals still need nurses. These disruptions are covered in Joe Walker’s long podcast, linked in this roundup.
Businesses and government agencies would be unwise however if they overuse AI as a way to reduce the costs of interfacing with customers and users. Even though it wasn’t an AI system, Robodebt should remind everyone of the consequences of delegating that task to non-human entities. AI offers even more dysfunctional opportunities. It’s usually the issue for which the robot has not been trained that the user wants to resolve with the supplier.
But if AI helps relieve us of the burden of a large private sector overhead it will certainly contribute to productivity in the real economy.
Sharing the work
If we can achieve a productivity recovery, let’s take it in terms of less work rather than more pay.
Most modelling being brought to the roundtable is about the way productivity gains can result in higher wages.
But we should not forget that productivity gains can also be realized in terms of fewer working hours. In fact, simply by the operation of diminishing returns, a shorter working day can increase productivity per hour worked – think how your performance probably deteriorates over the working day.
In fact Australia was among the leading countries in the 19th and 20th centuries in realizing productivity gains as shorter working hours, writes Sean Scalmer of the University of Melbourne in The Conversation: Why the working week – and what we get out of it – has perplexed Australian governments for more than 100 years.
Labour-market economist John Buchanan, of the University of Sydney, has a similar Conversationcontribution: Australia used to lead the world on shorter work hours – we could do it again. His reference to doing it again is in relation to the ACTU’s proposal to put a four-day week into the ideas considered at the roundtable.
As he says, the proposal has hardly met with an enthusiastic response from business groups, who seem to have a visceral response to anything that might result in shorter working hours.
Even more enlightened business lobbies, however, will still go for higher wages over shorter hours, because higher wages translate into higher consumption expenditure: that’s the basic dynamic of market capitalism. Also we can expect the same preference from government, because it’s more fun to be running a country with a larger GDP. Shortening working hours to distribute work more evenly remains a major challenge.
Baby steps towards tax reform
Against the odds, tax reform is on the agenda.
Anyone who observes Australia’s attempt to keep its rank as almost the lowest-taxed of all prosperous countries knows that something has to give. Our population is ageing, there is more demand for intrinsically labour-intensive government services, much of our public infrastructure is in poor shape, there are pressures to increase defence spending, and the Commonwealth is running what economists call a “structural deficit”. “Budget repair” (whatever that means – the budget doesn’t seem to be broken) is on the roundtable agenda.
The day after the roundtable Grattan Institute CEO Aruna Sathanapallthe put the issue plainly on Radio National:
We are going to have to think abouthigher taxes or we are going to have to think about taking chunks out of service expactations.
The need to increase tax is always a difficult issue to raise, particularly when there is an opposition party running the line that because the only real growth in the economy is that which comes from private sector activity, the government is simply an unproductive overhead. This superficially plausible theory was promulgated by Angus Taylor, and has been taken up by his successor as opposition Treasury spokesperson, Ted O’Brien, on a 730 interview last Monday.
In that program the interviewer challenged O’Brien on many issues, but not on this one, unfortunately, but it’s easy to see its absurdity. It means that a million private dollars spent on a new casino contributes to our economic wellbeing, while a million public dollars spent on a road doesn’t. An influencer promoting a cosmetic contributes to our welfare in a way that a government road safety campaign doesn’t. A million private dollars advertising junk food contributes to our welfare, while a million public dollars treating diabetes doesn’t.
The simple economics is that government is part of the productive economy, and there are good reasons to do with the limits of private markets (“market failure”) that over the long run in advanced “developed” countries, public spending has grown as a percentage of total spending.
It was refreshing therefore to hear Peter Martin and his guests, Bob Breunig of ANU’s Tax and Transfer Policy Institute, and Michael Janda, on The Economy Stupid, taking for granted the case for collecting tax and discussing the question Who should pay more tax in Australia?. Nothing was “ruled out” or “off the table”. Even the sacred “family home” as a source of capital gains tax or a tax on imputed rent was up for discussion
Taxation of housing is also raised by Peter Siminski from UTS Sydney and Roger Wilkins of Melbourne University in their Conversation contribution The government has asked for bold proposals. Maybe it’s time to consider taxing the family home. Gareth Hutchens, reporting on their work, shows how in comparison with most other “developed” countries, Australian homeowners are treated very lightly.
Martin and his guests turn to other ways to raise tax revenues, including increasing or widening the GST, instituting a wealth tax, collecting more taxes from well-heeled retirees and reforming capital gains taxes. In effect they are pulling the 2010 Henry Review proposals out of the bottom drawer.
Breunig points out that when the Howard government abolished indexation of capital gains tax they used a crude and inaccurate way to try to compensate for inflation which overcompensated short-term speculators, and relatively penalized long-term holders of assets.[2] Several lobbies, including ACOSS, are calling for the discount, presently 50 percent, to be lowered to 10 or 20 percent, but that would only worsen the problem of penalizing long-term investment. To remove that distortion we should return to a zero discount and indexation.
2. They assumed inflation would be 4 percent and that assets would turn over in 10 years. That more or less aligns with proper indexation, but for that class of assets only. I have been told by a retired Treasury official that the Ralph Review was able to sell this idea to the government because Treasurer Peter Costello couldn’t understand indexation, but have been unable to verify this claim. ↩
Productivity in a broader and longer-term context
Three policy experts cover productivity in its broadest context.
Joe Walker has brought together two economic policy experts in a podcast: Austraia’s “great stagnation”: everything you need to know about the productivity crisis. They are Greg Kaplan, of the University of Chicago (an Australian), and Michael Brennan, former Chair of the Productivity Commission. Both are involved in the non-partisan, independent economic research institute e61.
It's a long session – three hours – and it’s pitched to people who have some basic understanding of economic terminology. But it comes down from the theoretical plane to everyday practical economic issues as they relate to Australia. For example they discuss the reasons why over the long term agriculture in Australia has shown extraordinary gains in productivity, while over the same period the construction industry has gone backwards.
They move from the macro to the micro, explaining why it is so difficult to say anything much about productivity at the industry enterprise level: does a firm’s high value-added per employee indicate efficiency or does it reflect exploitation of economic rent?
They observe that rather than rising steadily at X per cent a year, productivity gains tend to come in spurts, before they settle down for a period.
Their wide coverage of productivity takes them into urban and regional policy, and the influence of national culture on productivity – including discussion and speculation on reasons why the US has had a productivity surge in recent years while we have stood still. And they conclude with some political observations, including a counterfactual: what if Rudd had shown the courage to stand up to the Greens and called a double dissolution to establish a carbon pollution reduction scheme?