Dog Days: Australia After the Boom (Redback) (12 page)

Answering the question of how Australia can meet its revenue requirements at lowest costs involves being open to fundamental change in the structure of corporate taxation, so as to minimise the cost of capital to industries in which competition and open entry to all opportunities mean that there are no durable rents. It means being open to the efficient taxation of economic rent – returns above the minimum necessary to attract capital to an activity – including generally applicable rent taxes across all of the resource industries, and on oligopolistic rents elsewhere in the economy.

The new government has said that it will establish a taxation review. This is the place to examine our revenue system from first principles. It has also said that it will establish a review of federal financial relations. The two reviews are closely related to each other and should be undertaken in parallel. The tax review needs to be expert, like the Henry Review, and independent, unlike the Henry Review. Part of its role should be to synthesise, assess and extend the results of past work. Close analysis from a public interest perspective would reveal that the proposal most favoured by business at present – a simple cut in company income tax rates without structural reform – would not be a cost-effective approach to tax reform. This time the resulting report should be made available for extensive public discussion before the government makes policy decisions.

THE WORK OF BREAKING UP MONOPOLIES IS NEVER DONE

A second major item for the Long-Term List is the promotion of competition, along with the efficient regulation of prices and quality standards. This is one area where some progress has been made over the past half a dozen years, including by the Australian Competition and Consumer Commission.

The task of maintaining a competitive economy is never done. Adam Smith advised us at the beginnings of the modern economy that ‘people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’.

The removal of exchange controls and most protection in the Reform Era introduced a high degree of competition into the one-third of the Australian economy directly exposed to international trade. Competition policy in the late 1980s and 1990s made markets more contestable in much of the rest of the economy. However, reform was incomplete, and there was backsliding during the Great Complacency.

One upshot of the trend to privatisation and corporatisation was the creation of utilities and suppliers of transport services, and of investors in public–private partnerships and private contractors to government, which were in positions to exercise monopolistic or oligopolistic power. Problems in these parts of the economy not exposed to international competition contributed substantially to the early 21st-century decline in productivity. There are opportunities here for large gains, although the agenda is complex and subtle. Some reforms must await long periods of analysis, consultation and negotiation, and development of new administrative structures.

In the third area of reform for the Long-Term List, industrial relations, it is relevant that we have seen frequent change for over two decades now. As Prime Minister Tony Abbott says, it is important that the pendulum cease its oscillation. Stability will bring large economic and social benefits.

The chances of maintaining full employment following the end of the China resources boom would be higher if statutory minimum wages were held steady in response to higher import prices. But this will be difficult in our democratic polity without reform of taxation and social security payments to help maintain household incomes while also increasing incentives to participate in the labour market (as discussed in the next chapter). For the rest, it is important that formal arrangements do not stand in the way of management and employees working out more productive means of doing things and sharing the benefits.

A reform programme must be widely seen to be fair if it is to have any chance of enduring success in our democratic polity. The economic underperformance that would be the future companion of a ‘business as usual’ approach tends naturally to generate unfair outcomes. It concentrates the burden of reduced living standards on the unemployed, on those who are discouraged from work, on those whose skills lose value because they are unable to use them, and on owners of small businesses which are forced to close.

Full employment with high participation, adequate income support for disadvantaged Australians, universal access to good basic health and education, and an effective progressive tax system are the most important contributors to equity in Australia. The recent election campaign confirmed that there is common ground across the polity on the need for a more effective provision for the advancement of Indigenous Australians and a more substantial provision for that of Australians with disabilities.

The big challenge in the period ahead is a conservative one: to maintain these elements of an equitable society through tough times. A number of things will make this difficult: pressure on the budget and incomes through the adjustment to the end of the resources boom; the increased cost of an ageing population; the corrosion of the tax base through piecemeal reduction and abolition of taxes, especially over recent times of high prosperity; and the political barriers facing reform to raise efficiency in the delivery of government services at the mature end of the Great Complacency.

The challenge is to raise adequate revenue to fund the state and its education, health and social security programmes without unnecessarily reducing investment and economic growth. More generally, an economically successful society – with rising productivity, average incomes and taxable capacity – is more likely to be able to provide adequately for public services and transfer payments. The productivity agenda discussed in the previous chapter is therefore important to equity.

This chapter discusses a few other issues important to equity – issues related to population, participation and employment. I begin with a discussion of immigration and population, because it is sometimes thought that pulling back on them in hard times will help Australians who are already here. These issues are bound to arise again when jobs become more difficult to find as the resources boom recedes.

IMMIGRATION HELPS POORER AUSTRALIANS

Since World War II, high immigration has kept the Australian population growing much more rapidly than in other developed countries. As a result, our population has also aged much more slowly than that of comparable nations. This has been a source of continuing economic dynamism.

Will this continue in the Dog Days? If the economy slows and jobs are fewer, population growth will automatically ease back. Migrants from New Zealand, and family reunion and business migrants, will come in fewer numbers. Other immigration categories are capped, and the caps tend to be wound back at times of economic downturn and high unemployment. The combination of these two influences caused immigration and population growth to fall considerably during recent recessions (1974–75, 1982–83 and 1990–91) and their aftermaths.

Does lower immigration and population growth make it easier to restore full employment during and after a downturn? The evidence mainly says ‘no’. It may even exacerbate unemployment. Immigration contributes as much to
demand
for labour and employment as it does to
supply
. Confidence in steady population growth underpins investment in housing and infrastructure. During downturns, population growth reduces the chances of Australia sharing with other developed countries the large falls in house prices that cause new residential construction to stop. Immigration makes it easier to attract international capital, which is required to employ an expanding workforce productively.

The tendency for Australian governments in modern times to fund major capital expenditure out of current revenue has contributed to underinvestment in infrastructure, which has led to immigration being associated with a deterioration in transport and other urban services. Catching up with a backlog of investment in such infrastructure would make a positive contribution to the economy as the resources boom recedes. This opportunity would not be so readily available in an economy without population growth.

So it is unlikely that cuts to immigration would help to reduce unemployment in the period ahead. But what about the longer-term effects? Here, too, a sustained cut in skilled and educated immigration will in fact eventually
lower
the average incomes of Australians, especially those with less economically valuable skills and on lower incomes.

This is an ‘on balance’ judgment, as there are negative as well as positive effects. Negatively, the spreading of a finite endowment of valuable natural resources among a larger number of people reduces the amount of natural resource rent that is available to each Australian.

Positively, there are economies of scale in supply of many national services and public goods. These economies are crucially important for Australia’s civic and cultural assets (literature, theatre, sporting competitions, media, economic debate, universities, foreign relations and defence). In a country with a widely dispersed population of modest size, there are also economies of scale in national transport and communications infrastructure. A larger and more concentrated population allows more competition among the suppliers of goods and services who are not kept on their toes by products from abroad. What matters for civic and cultural assets and infrastructure are average rates of population growth over long periods rather than whether high rates of immigration are maintained through recession.

Also positively, immigration affects the composition of the population in two ways that are important for national economic performance: age and skill structures. All developed countries have fertility below replacement levels and declining proportions of working-age people. This means that output per worker must rise over time to keep output and incomes per person steady. However, immigration tends to increase the proportion of working-age people in the population, especially since Australian policy gives priority to the relatively young.

Immigration also affects the average level of skills in the community. There are remarkable differences between Australian and US approaches to immigration. The United States in practice (taking into account large-scale illegal arrivals) favours unskilled immigration, so that newcomers compete with and lower the employment opportunities and wages of poorer Americans. We do the opposite, more powerfully since the mid-1990s, so that immigration increases the employment prospects and wages of poorer Australians. This is one reason why income disparities have widened much more in the United States than in Australia over the past generation.

Not all categories of immigration have the same mix of skills and education. Refugees and family immigrants tend to be less educated; skilled (including ‘457-visa’ temporary workers) and business migrants tend to be more so. The skilled categories often bear the brunt of discretionary cutbacks during recessions.

The 457-visa question was prominent in Australian politics in the first half of 2013 and is bound to become important again as unemployment rises. The skilled nature of 457-visa migrants helps maintain the living standards of relatively unskilled Australians. But the ‘temporary’ nature of these migrants is problematic if this becomes the normal way of supplying skills, rather than a response to specific shortages.

AUSTRALIAN IMMIGRATION DOESN’T DAMAGE GLOBAL SUSTAINABILITY

Since the 1970s, some Australians have opposed high immigration on sustainability grounds. To the extent that the concern is about the Australian environment, it has a place in a debate about conservation. My own view is that intelligent (and economically rational) planning of cities and sound conservation policy can reconcile a larger Australian population with environmental amenity.

To the extent that the concern is about a global environmental problem, it is largely misplaced. Yes, there is a global population problem – increasingly concentrated in Africa and other regions in which economic development was late to start and has yet to bear rich fruits. Fertility rates remain well above replacement levels in most countries with low living standards. While anti-natal policies have been effective in China and Singapore, these do not seem to be acceptable or replicable outside East Asia. Economic development is the only known instrument that reliably reduces fertility, although the provision of information and technology to women in developing countries can help.

To the extent that migration to Australia has any effect on global population, it helps to slow the increase – fertility declines on average among people who migrate here from poorer countries.

An argument has been made in recent years that immigration should be reduced because it makes it more difficult for Australia to contribute its fair share in the fight against climate change by meeting targets for reducing greenhouse gas emissions. A more challenging version of this view notes that Australian emissions per person are well above those in many of the countries from which our migrants come. But if the world is to avoid dangerous climate change, average emissions in Australia and in other countries will have to converge on some low figure. The world will be thinking of emissions entitlements per person, and Australia’s entitlements will be larger if immigrants increase our population. The international effort will not be helped or hindered by the location of a bit less of the globe’s emissions in the country of origin and a bit more in Australia.

WHAT WE MEAN BY PARTICIPATION AND EMPLOYMENT TODAY

However many Australians there are, average incomes are mainly determined by productivity, participation (the hours that people want to work compared with the hours available) and how close we are to full employment (the hours worked compared with the hours people want to work). If average incomes fall because of higher unemployment, it is likely that a high proportion of the loss will accrue to Australians with relatively low incomes and wealth.

Australians’ ideas about how much they want to work under varying circumstances and at different times in their lives have changed radically over the past one to two generations. What the Adelaide economist Sue Richardson calls the ‘Harvester Judgment family’ of a man who works full-time for pay, a woman who works at home without pay, and two or three dependent children, once ubiquitous, is now a small minority.

Standard unemployment data simply compare the number of people who are employed (those who have worked for an hour in the last week) with the number who are unemployed (those who were looking for work in the past week but did not work for an hour). The Australian Bureau of Statistics and some private pollsters now provide estimates of people who are not looking for work but would like to work. These new measures still do not take into account gaps between hours worked and the hours people would like to work.

However you measure it, the labour market was strong in 2011 and has steadily weakened since then. The single factor that I think gets closest to measuring the state of the labour market is monthly hours worked per person over fifteen years. This ratio has been falling since late 2011 (see Chart 1). It is not falling as rapidly as during the 1990–91 recession, but it is still heading consistently lower more than two years into the downturn, when employment was already heading up at the same distance from the peak in the early 1990s.

The immediate task is to have the economy generate more jobs relative to the adult population – to stabilise the employment ratios and then turn them around. Then the task is to increase the participation of all sorts of Australians if they want to work for pay – old people, mothers with children of various ages or who have ceased to have dependent children, people on disability benefits, people with disabilities who are not on benefits, Indigenous Australians in remote communities and others.

We used to think and write and talk a lot about how to increase employment back in the 1990s, because unemployment was high. The issue went away during the second half of the long boom – hours worked per adult remained reasonably strong here even in the year after the Great Crash, when they shrunk disastrously in most of the developed world. But we are moving towards the lowest monthly hours worked and highest unemployment of the twenty-first century. It will be time for us to go back to the ideas about how to increase employment that we were considering in the ’90s.

The most important thing that we can do is to make sure we sustainably increase demand in the economy. But that is still likely to leave a lot of relatively unskilled people wanting more hours of work than are available to them.

Minimum wages for unskilled workers, high by international standards in the 1990s, are further out of line with other countries now. At the exchange rates of early 2013, they were twice what minimum wages are in the United States, and one and a half times those of European countries with similar systems. While high minimum wages raise the incomes of low-income working households in which there is no unemployment, at Australian (as distinct from US) levels they discourage employment of unskilled people. This has not been a large problem through the boom, but it will be more and more important in the harder times ahead, because high minimum wages inhibit growth in jobs for workers on the edge of the labour force.

In 1998, the ‘Five Economists’, coordinated by the then director of the Melbourne Institute at the University of Melbourne, Peter Dawkins, put forward a proposal to encourage increases in employment while maintaining the incomes of families with members earning the minimum wage, and to reconcile higher social security payments with stronger incentives for workforce participation. This proposal was built around the provision of an earned income tax credit alongside a freeze in minimum wages.