The government investing in productivity is a recipe for higher wages, stronger budgets and economic growth
14 November 2024
In a welcome move, Federal Treasurer Jim Chalmers announced this week a $900 million incentive fund to encourage states and territories to implement productivity-enhancing reforms. This initiative is a crucial step towards addressing a fundamental economic challenge: increasing real wages. (Source 1)
This matters because sustained real wage growth hinges on productivity improvements. By becoming more efficient, we can produce more goods and services with the same or fewer resources.
Potential initiatives noted could include:
Adopting international product safety standards and a general right to repair. This could reduce compliance costs on businesses, leading to lower costs for consumers.
Streamlining commercial planning and zoning. This could help to address commercial land shortages and can thereby unlock investment and growth opportunities. This is particularly acute in areas like NSW with extremely low availability rates; industrial and logistics vacancy rates in Sydney are hovering at 1.2%, the second-lowest rate in the world (Source 2)
Embracing modern construction methods: Utilising prefabricated components and other innovative techniques can reduce labour and materials in the commercial construction sector and speed up construction times. Precast concrete, for example, has been demonstrated to reduce construction times, by up to 20 per cent, when compared to on-site construction. (Source 3)
This is a good start, but we could set our sights even higher
This is a good initiative and a good start that should have meaningful impact if implemented. We could also set our sights higher.
Infrastructure Australia's 2018 Making Reforms Happen report, showed the significant impact that a national productivity fund could have to help states and territories implement some particularly tricky political reforms. (Source 4) The technical work supporting the Making Reforms Happen report analysed the impact of: energy sector privatisation and competition reforms; metropolitan water privatisation; road user pricing; public transport franchising; and a switch from stamp duty to land tax.
Based on the research undertaken at the time (Source 5) it noted the direct impacts of these reforms were:
Electricity generation privatisation - Between 1.5% and 1.8% capital productivity improvement.
Electricity networks privatisation - 15% operating cost saving to the electricity supply sector.
Energy retail pricing competition - 11% reduction in NSW gas prices, 7% reduction in QLD electricity prices and 13% reductions in WA electricity prices
Metropolitan water utilities privatisation - 10% productivity gain
Heavy vehicles user pricing - 10% productivity improvement to road transport sector.
Rest of fleet user pricing - 15% reduction in the cost of congestion delays to various service sectors using roads.
Public transport franchising - Rail: 5% initial operational saving scaling up to 32.5%. Bus: 10% initial operational saving scaling up to 35%.
Government owners financial saving - In addition to the above, there is also an estimated 0.15% borrowing cost saving leading to a capital productivity gain for new government investments. (this would be higher today given higher costs of borrowing)
Stamp duty reform - Average 3% total capital productivity gain across the economy (higher in ownership of dwellings and high land use industries).
While this list is a bit dated as some of these reforms have been undertaken in part, many of these remain outstanding reform items. This list nonetheless provides a good reminder of the potential economic benefits available if the politically tough reforms are pursued.
The benefits to the economy and taxpayers are significant
Infrastructure Australia's 2018 Making Reforms Happen research showed the economy-wide impact and the gains to taxpayers if these reforms were tackled. It showed the implementation of all reforms resulted in an estimated gross domestic product (GDP) increase of $46.0 billion in 2031 and $66.0 billion in 2047, accounting for approximately 1.9 per cent of GDP in both periods. And while a common refrain against some of these reforms is that they would hurt taxpayer revenues, the analysis showed tax receipts would be higher. Total tax revenue received by the Australian, State and Territory Governments was estimated to increase above baseline by $10.0 billion in 2031 and $19.0 billion in 2047 as a result of the reforms. (Source 5)
The $900 million incentive fund represents a good first step towards a more productive and prosperous Australia. By embracing these reforms, we can unlock significant economic potential, create new opportunities for businesses and workers, and build a stronger foundation for future generations. By setting our sights even higher, we can build on this good first step and make Australia even more productive and even more prosperous. And we could have more taxpayer funds to spend on the many worthy social needs that are piling pressure on government budgets.
Sources;
(1) Kehoe, 12 November 2024, 'Chalmers sets up $900m productivity fund', Australian Financial Review. Link
(2) Maddison and McGowan, 1 April 2024, 'Why Sydney’s other rental crisis is also hurting your hip pocket', Sydney Morning Herald. Link
(3) Jaillon & Poon, 2008, 'Sustainable construction aspects of using prefabrication in dense urban environment: a Hong Kong case study', Construction Management and Economics. Link
(4) Infrastructure Australia, 2018. Making reform happen. Link
(5) PwC, Estimated impact of selected policy reforms on government revenues: Technical report, June 2017. Link