Rate Cuts Won’t Be Enough — the productivity roundtable must unleash an ideas boom

With inflation back in the target band and economic growth faltering, the Reserve Bank must continue cutting rates. But while monetary easing can add to demand, it won’t fix Australia’s long-run challenge: an inability to adequately grow new supply. For this we need bold, productivity-enhancing reforms that unleash ideas and capital, not just cheaper credit.

It’s the only way to improve the dire economic statistics that have become the reality of this unique post-pandemic, fiscally-constrained, ageing, warming, warring world. Australia’s GDP per capita has declined in eight out of the last nine quarters. Real household disposable income per capita has fallen over the last five years and the OECD has pointed out that our standard of living is more than 6 per cent below 2022 levels.

Beyond helping fix our current problems, propagating additional supply is also the way we can build a more sustainable and inclusive economy. Imagine eradicating dementia, lowering working hours, growing nutritiously dense vegetables in skyscraper farms and heating our homes with only clean energy. For a taste of what’s possible, read Ezra Klein and Derek Thompson’s introduction to: “Abundance. How We Build a Better Future”.

Improving the economy’s ability to supply more isn’t easy. More labour helps — through migration and increased workforce participation — but has natural limits. More capital would boost production, but large pools of local superannuation funds continue to flow offshore, where better returns are available.

That leaves a third lever: ideas. The best part. And they're unlimited. In the language of economics, ideas map onto total factor productivity in the Cobb-Douglas production function. Lifting total factor productivity increases the marginal product of both capital and labour and therefore overall output. It also gives the Reserve Bank more room to lower interest rates and lift demand without stoking inflation.

Every successful outward push of the production frontier has come from inventions: plumbing, the combustion engine, photovoltaic cells, semiconductors and spray on skin. All started as ideas. All became standards of living.

The role of government in seeding new ideas cannot be overstated. It can create and change the regulations and laws that inspire inventions and direct the market to outcomes that are socially and environmentally acceptable. As Klein and Thompson point out, “the market cannot, on its own, distinguish between the riches that flow from burning coal and wealth that is created by bettering battery storage”.

The Treasurer’s address to the National Press Club is exactly what we needed to hear. It was welcome renewal of the Government’s reform vision, putting forward possibilities that had been stifled in long lead up to the election.

Building on the Productivity Commission’s work across five pillars: economic dynamism, workforce, care, technology, and energy, the Treasurer outlined a need for “proper consideration of more tax reform” and said the upcoming roundtable in August will be about “shaping the direction for long term economic reform”.

And so... to work.

Focus will be essential amongst the couple of dozen people selected to join a roundtable that will be convened by the Treasurer in August. Only the most affordable and broadly supported ideas can proceed. The Treasurer’s pre-condition that the ideas brought to the roundtable must be budget neutral at a minimum, and preferably budget positive, rules out a lot. It means wholesale tax reform will not be considered.

But in the spirit of the practical, pragmatic and problem solving middle ground, there’s lots that can be done.

The Treasurer said he will write to regulators across government seeking specific, measurable actions to reduce compliance costs without compromising standards. Improving tax administration alone could reduce compliance burdens and allow resources to be used more productively, without lowering government revenue.

More significantly, changes to the tax system to make it more internationally competitive could lift our economic performance by attracting capital, people, ideas and production, reinforcing the economy’s able to supply more. Policies like accelerated depreciation and enhanced investment allowances would encourage firms to deepen their capital base, a pre-requisite for higher productivity. Likewise, improving the competitiveness of R&D tax incentives - through both increased deductions and reduced tax rates on intellectual property income - could have an outsized impact.

Essential to the success of the government’s productivity focus will be a forward-looking opposition. If the Ley-led Liberal Party supports the Government on difficult but important reforms, it could help convince voters of their value. Backing good ideas from the roundtable and the Productivity Commission’s work is in the opposition’s interest, because it is in all Australian’s interests.

As the Reserve Bank cuts rates, we should also cut political resistance to affordable, well-targeted ideas. The August productivity roundtable must not be wasted. It's a chance to seed ideas the Government and the opposition can realistically support: ideas that will build a stronger supply side and a more abundant Australian future.