OECD tips for growth after the boom

Yesterday the Organisation for Economic Co-operation and Development (OECD) released its annual Going for Growth report which focuses on global and country-specific structural policy reforms and economic performance for countries within the OECD. Although Australia is performing better than most developed economies, significant reforms can be undertaken to our labour market and tax system to boost productivity and partially safeguard the economy against the economic challenges we face in the aftermath of the mining boom.

Globally the OECD is particularly concerned about persistent long-term unemployment and slowing productivity growth across developed countries. In addition ageing populations, infrastructure investment and competition reforms are necessary in many countries to support growth.

Progress has been made, particularly in countries in the eurozone periphery which had little choice in the matter, but progress has slowed over the past couple of years. The OECD Secretary General Angel Guirra said that reforms need to be undertaken quickly; however, while there should be some urgency the Secretary General is perhaps underestimating how disruptive the reform process has been for countries in the midst of a downturn or fragile economic recovery.

According to the OECD, a major concern for Australia is that productivity gains have slowed and is now below that of leading OECD countries. Slow productivity growth, combined with the mining boom ending and the economy rebalancing, is a leading reason why growth is expected to run below trend over the next two years.

The OECD believes Australia needs to focus on improving infrastructure and knowledge-based capital and work towards boosting labour force participation to ensure the economy continues to grow solidly in the long-run.

Focusing on productivity, infrastructure and education is obviously incredibly important to the Australian economy at the best of times. But after neglecting infrastructure for so long and effectively wasting a once-in-a-lifetime resource boom, the Australian government needs to play catch up to improve our productivity performance. That might prove politically unpalatable given the Coalition’s desire to cut government debt.

With an ageing population, our participation rate will continue to fall but measures that work toward slowing that decline will boost the economy temporarily. The OECD suggests expanding early childhood-education services to allow more women to enhance their human capital and either enter or remain in the workforce. The cost and availability of childcare services is a disincentive for many Australians to re-enter the workforce.

It was an interesting insight by the OECD and one that I hadn’t previously considered. Nevertheless, addressing female participation is only a temporary solution to an ageing population. So is Australia’s high rate of immigration, or proposals to raise the retirement age. Both will slow the effects of an ageing population but only temporarily. The reality is there is no silver bullet that can solve this problem.

After winning the election the Coalition pushed the notion that Australia is now ‘Open for Business’ - but according to the OECD we already were. By international standards, Australia has relatively low barriers to entry compared with other OECD countries, although we do have fairly high corporate tax.

If anything the OECD overestimates the level of competition in many Australian industries. Australia is too often home of oligopolistic or monopolistic industries, which have limited competitive pressures and reduced productivity growth. Despite the media focus on trade-related job losses in the manufacturing sector, most Australian businesses are not exposed to any international competition.

It is perhaps unfair to direct blame on either side of Parliament. Both sides could have done more to boost competitive pressures across Australian industries, particularly after many of the reforms resulting from the Hilmer report were completed. Nevertheless it is unfortunate to hear comments from the Minister for Trade and Investment Andrew Robb and the head of the Prime Minister’s Economic Advisory Council Maurice Newman pushing for the creation of ‘national champions’. Effectively they are comments in favour of creating and sustaining market power and limiting competitive pressures.

Finally, the OECD recommends tax reform by reducing corporate tax rates in favour of indirect taxes such as the GST and property taxes. Australia has a pressing need to broaden its tax base (which is much more critical than reducing expenditure) and increasing the GST and implementing a broad-based land tax would be two ways of achieving this (though the former would be difficult to achieve).

The OECD made a number of good points regarding the Australian economy and we would benefit greatly from tax reform, infrastructure investment and policies which promote greater labour market participation. Unfortunately they neglected to comment on Australian housing policy, which is in desperate need of reform and would free up funds that could be better used reducing the deficit, increasing infrastructure expenditure or improving the long-run sustainability of the federal government budget.

Although quite broad in its recommendations and lacking in detail on how best to approach reform, the report provides a valuable starting point for discussion. The issues faced by the Australian economy are similar to those faced by other developed economies – with the obvious exception of long-term unemployment – and the OECD report addresses areas that are essential if we wish to continue our 22 years of uninterrupted growth.