“There has been little economic reform from either side of politics for many, many years and productivity growth is not what it was,” he said.
Time to ‘get serious’ on reform
A national income surge from China-inspired high commodity prices after the 2008 global financial crisis initially masked weakness in underlying productivity growth, but wages are now restrained.
Industry Super Australia chief economist and former Treasury official Stephen Anthony said the IMF had sent a message to the Coalition and Labor to “get serious again” on economic reform.
“We must raise the quality of spending and revenue measures through a suite of policies to tax, the labour market, infrastructure and how we run our organisations,” he said.
“Otherwise our real living standards are not going to rise as much as we thought they would.”
Top economists said politicians must also stop rolling out counterproductive policies that hurt productivity, such as a tax regime that favours small business over more efficient large companies, energy market interventions, re-regulating the labour market and cash handouts to voters.
The 1980s, ’90s and early 2000s was marked by big reforms to tax, enhancing labour market flexibility, deregulating the financial system, cutting tariffs, privatising government assets, opening the economy to foreign competition and floating the dollar.
The golden era for productivity, when it averaged about 2 per cent in the 1990s and incomes grew strongly, also coincided with a global productivity surge underpinned by information technology helping businesses become more efficient.
Peter Downes, director of Canberra-based consultancy Outlook Economics, said in the past few years Australia’s productivity growth had lagged United States, which was experiencing a cyclical pick up and may have been helped by the cutting of US corporate taxes to stimulate business investment.
“We had a productivity boom in the 1990s partly as a result of structural reform to areas like competition and also the global IT revolution,” Mr Downes said.
“There is not as much structural reform these days and as industrial economies mature their productivity growth naturally slows down.”
Treasury forecasts under pressure
Reserve Bank of Australia governor Philip Lowe has expressed angst that if wages fail to pick up as the bank hopes, the result will be weaker consumption growth for the economy.
He urged politicians last week to have a “laser-like focus” on productivity-enhancing reforms to infrastructure, human capital such as education and training, innovation and tax to lift household incomes.
With tepid wage growth in recent years, Treasury’s optimistic forecasts for a return to 3.25 to 3.5 per cent wage growth by 2020, from just above 2 per cent currently, also appear to be under pressure.
In its review of the Australian economy, the IMF last Friday projected weak inflation-adjusted net national disposable income per capita growth of 0.2 per cent this year, 0.4 per cent in 2020, 0.1 per cent in 2021, 0.2 per cent in 2022, 0.4 per cent in 2023 and 0.6 per cent in 2024.
The IMF’s inflation-adjusted per capita national income forecasts are a proxy for wage income, but might even overstate the gains going to households because it includes corporate profits that have been rising faster than household incomes.
“There arguably has been a structural shift in Australia and around the world between the share of economic growth showing up in the number jobs and the share in wages,” Mr Richardson said.
“If you don’t get the wage growth and you do get overall economic growth, the gap will show up in a combination of better profits and more jobs.”
Productivity began to slow before the 2008 financial crisis and has averaged about 0.4 to 0.8 per cent growth since then.
Treasury assumes productivity growth will equal its 30-year average of about 1 per cent.
Australians enjoyed healthy per capital real disposable income growth after the early 1990s recession.
Inflation-adjusted per person income growth peaked at about 5 per cent in 2011 when the iron ore price peaked at about $US180 a tonne, before an “income recession” followed in the mining boom bust.
Slow wage growth ‘payback’
Real net national disposable income per head contracted between 2012 and 2016, after the end of the mining boom.
Since then commodity prices have rebounded, employment has grown strongly but wages have only risen modestly.
Dr Lowe acknowledged last week that over the last five years wages had not kept pace with improved productivity growth for the economy and business profits.
He said part of this might be a “payback” for five years earlier when real household incomes “rose more quickly than justified by underlying productivity growth”.
“When I look at the whole 10 years together workers have basically got their normal share of productivity growth but it’s quite different over the two five-year periods,” Dr Lowe said.
“It might be we’re just seeing the workings out of the resources boom or it’s also plausible that these forces of [global labour] competition and technology mean workers aren’t getting [pay increases].”
In many advanced economies such as the United States, Britain and Australia, unemployment is around multi-year lows of 5 per cent or less, but wages are struggling to pick up.
Writing in The Australian Financial Review today, former Labor government minister and economist Craig Emerson notes: “The party that wins the coming election will have its work cut out for it if the IMF’s projections about material living standards are any guide.
“Shirking hard decisions in favour of populism will, ironically, fail to gain popular support, as workers continue to struggle on flat wages in a slowing domestic and global economy.”
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