Photo Lee Constable / Daily Mercury
Photo Lee Constable / Daily Mercury Lee Constable

Is Australia's prosperity holding us back?

IN the last quarter of a century while New Zealand has suffered three recessions, Australia has enjoyed an uninterrupted and unprecedented run of economic growth.

But in Australia, we have little to be smug about.

Our prosperity - some of it hard-earned and some of it accidental - is now holding us back.

In the past few years, New Zealand has been able to push through economic reforms that will place it in good stead for the future, things like reversing the budget deficit, raising the GST and freeing up the labour market.

Arguably there was an appetite among voters for reform in the wake of the 2008 recession, which demonstrated that changes were needed.

In Australia, meanwhile, we have our ever-expanding McMansions, with a big screen TV in every room and a jet ski in the garage. Why would we need economic reform?

The answer, of course, is that the accidental part of our prosperity - the mining boom - is well and truly past us and so too are the good times.

There are a range of reforms the government needs to act on - raising the GST; reining in government spending to fix the deficit; increasing the national rate of savings; and pursuing free trade.

The problem in Australia is that any suggestion of economic reform gets shouted down before it has even had a chance to be debated and considered.

Take the goods and services tax, for instance. Australia's GST rate is just 10 per cent, compared with an OECD average of close to 20 per cent, and food, healthcare and education are untaxed.

There are many persuasive arguments about why it should be raised. It would help restore the tax base, which is being eroded by companies shifting profits offshore and it is a more efficient method of collecting tax.

According to an extensive government review of the tax system a few years ago, the GST is "one of the least damaging taxes to economic growth" so using it to replace other taxes would be to the benefit of us all.

The argument is that all taxes to some extent hurt economic growth by distorting consumer and business choices away from the most efficient use of their resources. Broad-based taxes such as the GST do this less than other taxes.

"When products are taxed at the same rate, relative prices will be unaffected and there will be less impact on the decisions of individuals and businesses," according to the report by former Treasury secretary Ken Henry. "Broadly-based taxes are, therefore, more consistent with an allocation of resources in the economy that supports a high rate of economic growth and individual satisfaction."

That's what the boffins say about raising the GST, but the politicians tell a different story.
It's almost impossible for a political leader to float the idea of raising the GST without being subject to a huge scare campaign. The result is that reform proposals don't even get debated by politicians, or if a leader is brave enough to entertain an electorally unpopular idea they the inevitably succumb to pressure to take it off the table.

The post-Trump, post-fact world we now find ourselves in won't make arguing for reform any easier.

The hard-earned part of Australia's prosperity is due to economic reforms introduced by the Hawke and Keating Labor governments of 30 years ago. They too the shackles off but cutting import tariffs, deregulating industries, opening up the banking system to competition, and modernising industrial relations and wage setting.

Many of these were very painful changes. Businesses which had been benefitting from high tariffs or from being in regulated industries closed; many workers lost their jobs.

But Australia as a whole is reaping the rewards of these changes, as we have a more open, efficient and flexible economy that is better placed for economic growth.

Prime Minister Malcolm Turnbull has acknowledge that change is necessary and it won't be easy.

"The need to undertake reforms to deliver long-term gains for all Australians, which may create winners and losers in the near term, isn't keenly felt in many parts of Australian society," Turnbull told the Business Council of Australia at a dinner last week.

"We risk becoming victims of a complacency that fails to recognise the hard work that enabled our economic success, and the need for it to continue if that success is to be enduring."

These are certainly the right sorts of sentiments, but it remains to be seen how much the words will translate into action and that will involve upsetting trade unions, the business lobby and nervous backbenchers.

In the past, Turnbull has shown himself to be an eloquent and persuasive advocate of reform, who doesn't actually introduce the reforms for which he argues.

We can only hope that this time we'll see some action.