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Abbott’s threat to productivity

December 2013

  • Stephen Koukoulas

From an economic perspective, there has been a very disconcerting start to Tony Abbott’s Prime Ministership.

While it may not be deliberate, the Abbott government is embarking on a set of policy decisions that are certain to damage Australia’s productivity growth. 

Productivity is an essential ingredient in sustaining economic growth with low inflation, which when achieved lifts living standards and wellbeing for the population. Unlike some economic policy changes which can be turned on or off with quick results, productivity enhancing policies are generally influenced by decisions taken many years before.

This means that there are no quick-fixes to productivity, but there are policies that can enhance or hamper the goal of higher productivity.

High quality education for all of today’s five to seven year olds is one example of a long run productivity enhancing policy. Giving education opportunities to today’s children will not yield higher productivity until they enter the workforce in 10 or even 15 years’ time.

Foreign investment inflows to Australia are also an important for productivity. Strong foreign investment in Australia allows firms to build factories, mines and financial services platforms, for example, that might not have been built without the foreign capital. Even non-economists understand how investment creates jobs and boosts economic growth. Without it, every economy is doomed.

The economics profession is probably unanimous (there may be an eccentric somewhere) about the virtues of education and foreign investment as drivers of productivity. Which brings us to the concerns of some of the early policy actions of the Abbott government.

The Abbott government is setting about restricting opportunities to access high quality education by cutting funding to public schools. This will mean that fewer future workers will have the skills needed by the corporate sector when they look to expand their businesses. Those who miss out on better education and training will be condemned to lower paying, lower productivity jobs. There is an unquestionable link between educational attainment and skills and productivity and income.

In addition to this, there is the decision of Treasurer Joe Hockey to block the foreign takeover and associated capital investment in the grain distribution company, Graincorp. Australian grain growers will remain beholden to a capital-deprived and therefore relatively inefficient company for the distribution of their product around the world. This ‘lost’ investment in agriculture as a result of the decision to block the foreign investment in Graincorp comes at exactly the time that mining investment is tapering off and it has been hoped by Treasury and the Reserve Bank of Australia for the non-mining investment sectors of the economy to pick up.

Blocking the opportunity for investment into Graincorp is the wrong policy at the wrong time.

The decision of Treasurer Hockey to spend $8.8 billion in a payment to the RBA when he was advised not to do so is again misplaced with considerable opportunity and financial cost. It is extraordinary to consider that the $8.8 billion is around 0.6 per cent of GDP and will mean the government has chosen quite unnecessarily to add approximately $350 million a year in interest costs. This money that could have either been saved or allocated to education or some other productivity enhancing function. 

While the Abbott government was elected on a platform to abolish the carbon price, it has become apparent in the post-election environment that the business community is not comfortable with the policy uncertainty that surrounds this and the move to the Coalition’s Direct Action policy to reduce carbon emissions.

It was always a dubious commitment to move to Direct Action and Australia is now moving from being one of the global leaders in climate change policies to one of the laggards. Without a price on carbon from the middle of 2014, the Abbott government risks a more severe and therefore more costly fix to carbon emissions in the years ahead. Future generations will almost certainly pay a higher price for action on climate change which will crimp future growth. In the meantime, it is likely that Australia will fall behind in the transition to renewable energy innovation and production with consequences for the future investment needed to ‘catch up’.

A further policy that will damage productivity is the decision to severely downgrade the National Broadband Network. What was a major productivity driving technology will, under the Abbott plan, be slower, less powerful and have a narrower coverage than was planned under the previous government.

There may be some offsets to this list of productivity limiting policy changes. Mr Abbott is keen to increase infrastructure spending which, if well targeted, can yield gains over the medium term. It is to be hoped this is the case to offset the damage elsewhere.

All up, the list of policy changes that will restrict productivity far outweighs that policy changes that will enhance it. From an economic perspective, it is a very disconcerting start to Mr Abbott’s Prime Ministership. He may be meeting some ideological objective with these policy changes on education, carbon pricing and the NBN, but he is hurting Australia’s potential growth rate in the process. 

The issue is that the negative effects will probably not be felt for many years to come, almost certainly well after Mr Abbott has left politics and some future government will have to deal with the problems.

Stephen Koukoulas is Managing Director of Market Economics.




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