We need productivity on the election agenda

The case to cut was not unambiguously strong. A credible case could have been made to hold steady or to cut, although we expected a cut, as was delivered.

One way to think about the decision is to ask what would have happened if they had not cut.

First, there would probably have been many questions about why the market had got it so wrong – with overnight index swaps pricing a 90 per cent chance of a cut just prior to the meeting. It would probably have raised questions about the RBA’s communications strategy.

Second, had it not cut on February 18, there would have been a much higher chance for a cut at the April 1 board meeting.

Critically, much of the national economic conversation at present probably would then have been dominated by questions about interest rates and whether the RBA would cut on April 1.

This cacophony of voices and views would then have drawn focus away from the many other critically important national discussions we ought to be having about much-needed economic reform, as we head towards an election that must occur by May 17. As it stands, with the RBA having cut and given guidance that another cut should not be expected soon, the RBA and monetary policy should now not be the key focus. This is particularly important during an election campaign.

After all, the RBA has only one key policy instrument and one primary objective – its cash rate and its 2-3 per cent inflation target. All the other policy instruments are in the hands of other policymakers.

The focus should be on policy measures that can help to lift productivity. Australia’s productivity performance in recent years has been dismal. Output per hour worked is no higher now than it was in 2016.

This a key contributor to the recent fall in living standards, with real disposable income per capita declining for the past two years, the fastest rate of any developed economy.

Weak labour productivity is also manifest in a cost base that is rising more quickly than it should, which in turn discourages businesses from making much needed investment in new growth engines.

Monetary policy cannot fix this. The policy instruments that can help are those in the hands of elected officials. Unfortunately, there is still little in the way of ­announcements or proposals by either of the major parties about what they plan to do to lift productivity.

In recent weeks, the main policy focus has been on boosting spending on healthcare. This area of the economy is already growing rapidly.

It has underpinned public demand recently, rising to its highest level in more than 50 years as a share of the economy. It has also drawn workers from other industries, with the “non-market” sector accounting for 75 per cent of job creation over the past year, crowding out other industries, leaving the jobs market tight and the economy close to its full ­capacity, despite significantly weakened private demand.

Policymakers should focus on areas of reform that could help to lift productivity and support new growth engines. This is almost certainly needed to sustainably lift living standards.

We see three areas that ought to be in focus:

• Competition policy, as increased competition encourages businesses to innovate, adapt, invest and become more productive.
• Tax reform, as our tax system is becoming increasingly inefficient, with its high reliance on the personal income and corporate tax system, but low revenue-take from the more-efficient goods and services tax. Improvements would help support efficient labour market allocation and business investment.
• And, deregulation, including looking at industrial relations to ensure it can deliver productive labour as efficiently as possible.

In this light, we have been describing this year as “crunch time” for policymakers. The produc­tivity problem is well understood and documented, and the policy solutions that should help to achieve it are well telegraphed, ­including by the productivity commission.

The key now is that policymakers propose reform that will be in the national interest as part of the election process. To some political observers, this may seem like wishful thinking, as they point out that large-target economic reform agendas have not been a winning strategy in recent elections. But this is the way the system is supposed to work.

Perhaps, as some observers suggest, reform will only be driven by an economic shock. But this cannot be relied on either – with no discernible productivity-­enhancing reform coming out of the pandemic-related recession, despite massive government spending.

It’s crunch time. Let’s hope it can be done.