An antidote to impotent Canberra reforms

Just as interesting as the Grattan Institute's recommended reforms are those it deemed politically popular but economically insignificant.

The latest paper from the Grattan Institute has some remarkably pragmatic advice and a few surprising things to say about the priorities for economic reform.

A lot of "reform" is piecemeal and scattergun and ultimately, if not ineffective, then immaterial in the context of a $1.3 trillion economy. It was recognition that relatively brief periods of government are crowded with attempted reforms that use up time, energy and political capital to little real effect that led the Grattan Institute to develop a quite different approach to the usual lengthy business lobby wish lists.

The underlying approach of the paper is straightforward. If reforms are to be prioritised, then those with both the potential to have the biggest impact on GDP in the near to medium term (rather than in the long term) and where there is the most confidence in the ability to implement them successfully should be prioritised (Three game-changers for Australian growth, June 8).

The institute came up with three "game-changers", but just as interesting is what they relegated on the basis that the reforms either wouldn’t make a significant enough difference, or where there wasn’t sufficient confidence the solutions would be successful, or where they would simply take too long to have a meaningful impact.

Among those considered too problematic, or of insufficient impact, to prioritise were the health costs of the ageing, higher education, urban water, schools performance and transport infrastructure.

Grattan labelled the much-discussed reform of transport infrastructure one where there was high confidence in the solutions but less than $1 billion of potential impact on GDP. Healthcare costs and education reforms it considered would take too long to have a meaningful impact and were in any event areas where there was low confidence in the solutions.

Industrial relations, innovation and federal state relations didn’t even make it onto the list, not because they have don’t the potential to have a big impact on GDP but because there aren’t any concrete proposals floating around to enable Grattan to come to any developed conclusions about the size of their potential.

The areas where it did think government could have a very large and relatively near-term impact – and they are loosely inter-related – are female participation in the workforce, the participation of older people in the workforce and reform of the tax mix. All of those were seen as having the potential to add $20 billion-plus each to GDP within a decade.

Of the three, the easiest to tackle is the participation of older people in the workforce, which Grattan says could add about $25 billion to GDP. Comparable economies have significantly higher participation rates.

The blueprint is already there. Under current policy, the pension age will rise progressively from 65 by six months every two years until it reaches 67 in 2023. The age at which workers can access their superannuation is also scheduled to rise from 55 to 60 in 2024.

If you want to keep people in the workforce longer, accelerate the increase in the pension age and lift the end-point to 70, while doing the same with the preservation age for super.

The approach to lifting female workforce participation is somewhat more complex give that the interaction between the tax and benefit systems provides a disincentive for some women with young families – particularly those in low-income households – to enter or re-enter the workforce. Grattan says that if Australian women did as much paid work as Canadian women Australia’s GDP would be another $25 billion higher.

The key to "encouraging" women into the workforce would be to reduce what are, because of those interactions between the tax and benefit systems, high effective tax rates as well as to lower the cost of childcare. In effect there would be a "stick" in the form of reduce benefits for those choosing to stay at home but a far more attractive "carrot" in terms of the net financial gains to the households from choosing to work.

The other even more complex reform Grattan prioritised was a radical change in the tax mix. The simplest (but politically sensitive) one would be to broaden the GST coverage to include the 40 per cent of spending devoted to things like education, health and fresh food. That alone would add about $20 billion to GDP.

At the state level, Grattan says there is another $5 billion of GDP available if there were a shift away from stamp duties and insurance taxes, and perhaps land and payroll taxes, to rates (currently imposed by local governments). Doubling rates would pay for the abolition of stamp duties and quadrupling them would get rid of the rest. Mind you, that wouldn’t be popular with property owners, particular older people with no intention of selling their homes.

The point Grattan was making, however, is relevant. Rational shifts in the tax mix from inefficient and distorting taxes to more broadly-based and more efficient taxes would be an objective in itself. If the GST agreement with the states were re-negotiated it would also be possible to significant lower personal and corporate tax rates.

If we could have much lower tax rates – and perhaps drop the top personal tax rate significantly – there’d be a lot less unproductive, distorting and sometimes risky tax-driven activity and it might help address the workforce participation rates challenge as well.

Governments might find Grattan’s particular priorities too difficult politically. Its approach of looking for reforms that can make a material difference within a relatively short time-frame – rather than confusing lots of activity that individually and collectively has no material positive impact on the economy with real and worthwhile reform – is, however, not a bad framework against which to test policy.