The recent election was won by looking ahead. But a better economic future requires an economic reform agenda, and getting agreement will not be easy. However, there are encouraging signs that the government is up to the task.
The economy, and especially the cost of living, dominated the recent election campaign. It seems likely that Anthony Albanese won because he invited us to look forward instead of looking back, as Peter Dutton invited us to do.
While real wages are still 4.8% lower than their pre-pandemic level, and interest rates are still high, the expectation is that we have turned the corner. Real wages have at least started to rise and interest rates to fall. But there is some distance to go.
Labor was also able to point to the assistance that it offered to the most needy during the cost-of-living crisis. For example, analysis by the ANU’s Centre for Social Policy Research revealed that Labor’s highly progressive first-term tax and welfare reforms boosted the incomes among the least well-off households by an average of $1672 in 2025-26. In contrast, the wealthiest households will be nearly $800 worse off, mainly because of the rejigged income tax cuts.
In addition, the government has supported pay increases for poorly renumerated employees in aged care and childcare. Childcare support has been extended, rental assistance increased and cheaper medicines have been delivered.
Tight fiscal constraints have, however, limited the amount of support that the government can provide to those who are doing it tough. Indeed, as will be argued below, a Labor Government will need more revenue if it is to fully play its role in ensuring that no-one is left behind.
But tax reform is only one part — albeit a key part — of what should be a wider agenda for economic reform. Most obviously, productivity is the key to raising our living standards over time. In addition, the Grattan Institute in its policy priorities includes:
- Taking advantage of the opportunities for new high-value industries that use Australia’s exceptionally cheap renewable energy.
- Making housing more affordable by boosting supply by relaxing planning constraints and providing more training places and the incentives for skilled construction workers.
- In health, the most important is improving the funding of chronic disease management.
- In education, ensuring that the next generation of students gain essential skills, which in particular, will require restoring the funding of universities.
Progress on many of these issues is occurring already, and so this article will concentrate on productivity, housing affordability and taxation reforms.
Productivity
To coin a phrase, every Galah in the pet shop has a recommendation about how to improve productivity – very often a self-serving recommendation for changes in taxation and/or the regulation of workplace relations.
The most comprehensive review of reforms to lift productivity was produced by the Productivity Commission in 2023 in its five-year Productivity Inquiry: Advancing Prosperity. There are 29 reform directives drawing on 71 separate recommendations.
These reform directives include education and skills training, the selection of skilled migrants, the adoption of digital technologies, addressing the lack of competitive market incentives in highly regulated sectors and taxation incentives.
While for the most part these recommendations are sensible and should be capable of being implemented over time, it is, however, questionable how much difference these reforms will make to what has, in recent years, been a very low rate of productivity growth.
The problem is that productivity growth in the last couple of years has been significantly lower in almost all the advanced OECD economies than the average rate of productivity growth a couple of decades previously between 1997 and 2007 (see Table 1). The only exceptions are Japan and Spain, which had poor productivity growth around the turn of the century, and Denmark and Ireland.
Table 1 Labour Productivity Growth
Percentage changes
The obvious reason why productivity growth has fallen almost everywhere is because by far the most important driver of productivity increases through history has been technological change. Further, these days new technologies typically spread rapidly through all the advanced economies at much the same time and at much the same rate and that is why they mirror each other’s productivity experience.
In short, the most likely reason for the slowdown in productivity growth is that despite the claims being made for AI, it is not having the impact on productivity that previous major new technologies, such as steam and electric power, automation, and modern communications have had.
Nevertheless, we should encourage productivity growth where we can if we want real wages to rise. While the reform agenda of the Productivity Commission is a good starting point, the highest priority is to foster innovation by encouraging research and development investments and higher education.
Housing affordability
Interest rates are starting to come down, and each interest rate cut of one quarter of a percent reduces the typical mortgage payment by a little more than $100 a month. That certainly reduces substantially the cost-of-living pressures being faced by the around one third of households with a mortgage.
But as I argued in my articlei in Pearls and Irritations, (26 April), the reason why the national dwelling price to income ratio has climbed from five times to eight times in the last 20 years is because of supply constraints. These supply constraints have driven up the price of land, and if we want affordable housing we need to change the zoning arrangements to allow more dwellings to be built where people want to live in the inner and middle suburbs of our major cities.
The NSW and Victorian Labor Governments are taking steps to increase housing densities, particularly near major transport nodes, and the Albanese Government should encourage and assist these planning changes.
Taxation
In a recent article (Pearls and Irritations, 3 May), Heininger and Craig outlined a comprehensive agenda for tax reform. In their view the objective should be to “build a tax system that supports productivity, secures revenue for essential services, reduces complexity and improves the intergenerational wealth divide”.
I generally agree with Heininger and Craig’s reform agenda, although I would give less weight to the need to change the tax system to support productivity. In my view, the evidence does not support their contention that “Our current tax system acts as a brake on productivity” because “it can blunt work-related incentives”.
Instead, the number one priority should be the need to raise more revenue to finance the services that will add more to our well-being than the consequent reduction in after-tax income.
As Heininger and Craig note, expenditure on the NDIS, defence, aged care and climate change are all expected to rise steadily over the next decade. There are also several other areas that remain underfunded. For example, universities have been forced to depend more on income from foreign students than is desirable. The income support for unemployed people is generally agreed to be inadequate and, over time, the funding for public housing will need to increase further if past levels of availability are to be restored and homelessness reduced.
In addition, Australia is projected to have a structural budget deficit for at least the next decade. In an uncertain world economy, it would be prudent to return the budget to surplus, or at least balance, as soon as economically feasible.
Nevertheless, I expect a major problem will be to convince the electorate that we need to raise more tax revenue. For that reason, I think the government should establish a public review of how much revenue will be needed to adequately finance the services that we all demand.
In the meantime, my rough assessment is that the review will find that the additional revenue needed is equivalent to around 3% to 4% of GDP – quite a lot.
The second and equally difficult issue will be to then determine how best to raise this additional revenue. The two most obvious sources of additional revenue would be to (i) reduce the loss of revenue from tax concessions, and (ii) increase the revenue from the GST.
I suspect that the Left and the Greens will tend to favour the first option as that will have less of an impact on people with low incomes. The biggest so-called tax concessions that are most favoured for review are for superannuation, negative gearing and the concessional rate of capital gains taxation. Interestingly, the Greens have already indicated their support for reducing the concessional treatment of capital gains and reducing the amount of negative gearing allowed for tax purposes.
In pure tax theory, there is no case for only taxing 50% of nominal capital gains. Instead, the system should return to taxing all real capital gains at the same rate as all other income.
Negative gearing is, however, somewhat more difficult. The amount of tax paid should reflect the taxpayer’s ability to pay; interest payments reduce that ability to pay and have, therefore, always been deductible. The question then arises as to why, and in what circumstances, a limit would be put on the tax deductibility of interest payments.
Equally, the extent to which superannuation is concessionally taxed is also debatable. In all other countries, superannuation is taxed when the money is withdrawn, usually as a pension, and this is consistent with the purpose of superannuation. However, in Australia superannuation is taxed at the contribution stage, although the taxpayer cannot access those contributions.
Further, the typical person’s income is around 30% more when they are working and contributing to their superannuation, than when they are retired and drawing their superannuation pension. Consequently, modelling has shown that the amount of tax people pay on their superannuation contributions is, in fact, about the same as if they were fully taxed on their superannuation pensions. In other words, it is arguable that for the vast majority of people superannuation is not taxed concessionally.
In sum, removing tax concessions, while it seems attractive, is unlikely to raise all the additional revenue needed. Instead, the reform agenda must also consider both broadening the GST tax base, which is exceptionally narrow in Australia, and increasing the GST rate which is also low in Australia.
In addition, tax reform should also consider introducing a resource rent tax, the lack of royalties on some gas and mineral production, and even a wealth tax in the form of death duties.
Conclusion
Clearly, getting agreement on a sensible economic reform agenda will be a considerable challenge. But equally, it is also necessary, and the sooner the government takes up this challenge the better.
And as Albanese said on election night in response to Labor’s landslide victory: “This is a time of profound opportunity for our nation.”
Treasurer Jim Chalmers told the ABC on Sunday that, “The best way to think about the difference between our first term and the second term that we won last night [is the] first term was primarily inflation without forgetting about productivity, the second term will be primarily productivity without forgetting inflation.”
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.