AI: Much ado about something that one day may be important

AI. AI. AI. Maybe if I utter those magic initials one more time, you’ll reach peak ecstasy. Worried about our lack of productivity? Fear not. The economy will soon be rocketing ahead.

What’s that? You’re worried AI will soon put all of us out of our jobs? Never fear. You’re gonna love it on the dole. All that spare time.

What are we to make of all the fuss about AI – or A1, as someone at my place calls it? Well, I’ll tell you what I think, although I’m no expert on the technological marvels that will be unveiled any time soon.

But that’s the first point. None of us knows what AI involves except a few self-appointed experts, who are doing all the talking about how fabulously big and revolutionary it will be. Well, maybe. Maybe not.

I’ve been around long enough to notice when it’s the proponents of the world-shattering development – the people who stand to gain most from it being big, big, big – telling us how wonderful it will be. (I’m so old I can remember when AI stood for artificial insemination.)

The experts are generating much of the hype about AI and what a revolution it will be because they want to attract the attention of governments, whose approvals and co-operation the proponents need to do what they want to do.

Of course, some experts have broken ranks to warn about the many thousands of workers who could lose their jobs. But this, too, is probably part of the proponents’ efforts to attract governments’ support.

Which brings us to the sharemarket. It’s booming right now, thanks to all the excitement about AI and the big profits it will bring to investors. We’ve seen such booms before, and they don’t end well.

I remember the “dot-com bubble” in the late 1990s. Investors were greatly excited by the advent of the internet and all the opportunities it presented to make a buck. Many people put their money in website start-ups they hoped would make a killing.

Soon enough, people realised that these weren’t going anywhere. The bubble burst and the “venture capitalists” did their dough. But this, of course, didn’t stop the internet being the great change we now know it was, with a few tech giants – Google, Facebook/Meta etc – making a fortune.

In the present sharemarket boom, speculators have bought shares in those tech giants, hoping to make a motser from the development of AI. The companies probably will do well, but not as massively well – or as immediately – as the get-rich-quick brigade imagined.

So it’s safe to assume the present boom is a bubble that will burst. You can never tell when, but my guess is it won’t be long. When it happens, many smarties will do their dough, but it won’t be a great disaster for the economy. As I never tire of explaining, the sharemarket and the economy are two different animals. The sharemarket will take a hit; the boring “real” economy of production and consumption will steam on.

What the bursting of the AI sharemarket bubble will do, however, is kill off most of the hype. What I’ve concluded from years of watching these excitements wax and wane, is that they’re never as wonderful as the marketing department claimed, nor as terrible are their critics feared.

My third conclusion is that these world-changing technologies always take a lot longer to materialise than the advertising led us to expect. Often, the big firms jump onto the new technology, but the smaller firms take their time. This protracted dissemination stops the change being so overwhelming, giving firms and workers notice of what’s coming and time to adjust.

So, I’m not saying there’s no substance beneath all the hype – there is. A significant change in the way businesses and other organisations use workers to do whatever it is the outfit does is coming. This will involve numerous workers losing their jobs and having to find other ones.

What I don’t believe are the predictions that AI will spread through the nation’s employers like a bushfire, making many thousands of people jobless at much the same time, so that the economy’s hit for six and new jobs are impossible to find.

So you can forget the fear that we’ll soon be beset by mass unemployment and depression. I say this with great confidence because people have been predicting that some new technology or other would cause mass unemployment on and off for at least the past five decades, without it coming to pass.

Last time I looked, the rate of unemployment was only up to 4 per cent of available workers. Add to that the 6 per cent of workers who have part-time jobs but would prefer to work more hours, and you’re only up to 10 per cent.

Remember, businesses have been investing in labour-saving equipment – that is, using machines to get rid of workers – continuously since the Industrial Revolution. So why didn’t we hit an unemployment rate of 90 per cent decades ago?

Short answer: because having employers use better machines to cut the resources needed to produce all the goods and services we consume improves the nation’s productivity – the efficiency of the economic machine – and so leaves us better off.

Our higher real income – we’ve had to spend fewer resources to acquire the same quantity of the goods and services we want – means we can afford to pay the now unemployed workers to produce more, and often different, goods and services.

It’s because there’s no limit to our appetite for goods and services that the workers “displaced” by labour-saving technology shouldn’t have too much trouble finding other jobs to do. Some individuals may find themselves unsuited to the new jobs but, with a bit of retraining, most jobless workers won’t.

Find that hard to believe? Just look at the history of capitalist economies using machines to replace workers for the past two centuries. It’s worked pretty well so far.

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We're going up in the financial world, but no one's noticed

Economists like us to think they’re cooly rational in all things. Nah. They’re just as susceptible to fads and fashions as the rest of us. In my working life they’ve gone from being obsessively worried about Australia’s financial dealings with the rest of the world to neither knowing nor caring.

When the “balance of payments” figures – which summarise all our financial dealings with other countries – are published each quarter, they go almost totally unreported and unremarked, meaning most economists have no idea of how our position in the financial world has changed, or why.

But two honourable exceptions are the Reserve Bank’s Penny Smith, who gave an amazing but little-noticed speech about it in 2023, and Deloitte Access Economics’ John O’Mahony, who has written an eye-opening paper about it.

O’Mahony noted that, when you looked at rich countries’ “net international investment position” they could be divided into those that were always owed money by the rest of the world and those that always owed money.

The “creditor nations” included Germany, Switzerland and Japan, whereas the permanent “debtor nations” included Canada, New Zealand and ... Australia. But, O’Mahony said, we may be on the way to becoming a “switcher nation” – moving from global debtor to global creditor.

To Smith, there’d been an “extraordinary decline in Australia’s net foreign liabilities”. She noted that, after reaching a peak of 63 per cent of gross domestic product in 2016, our net foreign liabilities had fallen to 32 per cent, “the lowest level since the mid-1980s”. Since then, they’ve fallen to 24 per cent.

So what’s causing this extraordinary change? Many factors have contributed, but one stands out: the Keating government’s decision in 1992 to introduce compulsory superannuation. But first, when were economists so terribly worried about our international finances, and why?

It was in the late ’80s and early ’90s, after we’d been forced in 1983 to abandon our fixed exchange rate and float the dollar. Economists saw the current account deficit was blowing out, causing huge growth in the net foreign debt. In the 12 years after the float, the current account deficit averaged 4.5 per cent of GDP. Whoa! Not good.

I can remember that whenever the latest balance of payments figures were published, the radio shock jocks would read the government another lecture on the folly of allowing the country to “live beyond its means”.

The consternation continued until the ANU’s Professor John Pitchford told the econocrats to wake up. All the international borrowing and lending was occurring in the private sector between “consenting adults”. They should be free to act as they saw fit – and bear the consequences should any of their decisions prove unwise.

With hindsight, it’s easier to see, as Smith has, that the economy was simply adjusting to the removal of the controls on inflows and outflows of financial capital, which had been part of maintaining a fixed exchange rate. After the float, foreigners could more easily invest in Oz, and Australians could more easily invest overseas.

Plus, back then we had to remember that the balance on the current account of the balance of payments represents the difference between how much the nation’s households, companies and governments choose to invest in new housing, business plant and structures, and public infrastructure, and how much those three sectors choose to save via bank accounts and superannuation etc, company retained earnings, and budget operating surpluses.

To an economist, the current account deficit equals national saving minus national investment. So, invest more than you save during a period – as we almost always do – and your current account is in deficit. You fund that deficit by borrowing the savings of foreigners, or allowing them to own Australian shares, businesses or property.

Which brings us to compulsory super. Keating and his ACTU mate Bill Kelty decided to introduce the “superannuation guarantee” mainly to give ordinary workers something better than the age pension to live on in retirement, but also because the econocrats decided Australians should be saving more.

The other rich countries had introduced national retirement schemes after World War II, but Keating’s scheme was very different. Whereas their schemes had contributions going straight into the budget, and pension payments coming out of that year’s budget, our contributions go to a private sector super fund for investment, with the same fund sending you regular payments once you’re in “pension mode”.

It’s mainly because our scheme has money invested and piling up in super funds, and because roughly half that money is invested on foreign sharemarkets, that our net foreign liabilities have fallen so far relative to GDP – and may one day fall to the point where our foreign liabilities become our foreign assets. Our super savings now total $4.2 trillion, with O’Mahony estimating they could be as high as $38 trillion by 2063.

The national super scheme has been far more successful than expected in increasing Australia’s rate of saving. We’re not only saving more than we used to, we’re saving more than other rich debtor countries.

Largely as a consequence, we’ve been running a surplus on our international trade in goods and services since June 2018. And although we still run a current account deficit, it’s much smaller – about 2 per cent of GDP.

Back in the ’80s and ’90s, our net foreign liabilities were high because as well as our high and growing net foreign debt, we also had much foreign equity investment in Australia, particularly ownership of our mining industry.

But this equity liability to foreign owners of Australian companies and shares has steadily been outweighed by our growing ownership of shares in foreign companies. In June this year, our net foreign equity assets of $760 billion offset our (still-growing) foreign debt of $1420 billion, to reduce our net foreign liabilities to $660 billion, a mere 24 per cent of GDP.

And although it’s had help from an undervalued Aussie dollar and an overvalued world share market, most of the credit for this “extraordinary” fall in our net liabilities to the rest of the world goes to our unusual national super scheme.

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If we care about fairness, it's not the well-paid that are the worry

When we talk about inequality, we tend to focus on income. After all, if some people are raking in thousands of dollars a week while others get by on just a few hundred dollars, that would seem to be a key contributor to inequality.

Income inequality is certainly an issue, with the top one-fifth of Australian households taking home two-fifths of the country’s income. But it’s actually our distribution of wealth that’s the biggest driver of inequality between the “haves” and the “have-nots”. It’s also, crucially, holding us all back from economic growth.

A report by the Australian Council of Social Service (ACOSS) and the University of NSW last year found that in Australia, the top one-fifth of households hold nearly two-thirds of the country’s wealth.

With an average of $3.25 million locked away, these households have their hands on about 90 times the amount of wealth stocked up by those in the bottom one-fifth of households.

And if we look at the number of people with “ultra-high wealth” – more than $750 million – Australia ranks fifth in the world (probably not a ladder we want to be topping).

It’s little surprise that most of the inequality in wealth comes down to our distribution of housing: especially the big gaps in the value of the family homes people own, but also the wealth held in investment properties.

But the research found shares and investment properties were the most unequally distributed forms of wealth – the top 10 per cent holds nearly two-thirds of the total value of these assets.

Many young people – especially those without family help – are locked out of home ownership, and older generations (on average) tend to be wealthier, partly thanks to rising property prices and simply the build-up of wealth over time. But there’s also a big gap in the amount of wealth held within generations.

Picture this: the average “older” household (those aged 65 and older) – are about four times wealthier than the average “younger” household (aged under 35).

But it’s actually older households that also happen to be in the top 10 per cent of all households by wealth, that hold nearly one-fifth of the country’s wealth.

It’s a different story for the one in 10 older people who rent, about half of whom live in poverty.

That might be part of the reason why so few older households pay any income tax, compared with nearly all younger and middle-aged households.

But even the wealthy older households pay very low rates of income tax: about 16 per cent on average compared, with 28 per cent for wealthy young and middle-aged households, and more than one-third of wealthy older households pay nothing at all.

Basically, as ACOSS principal adviser Peter Davidson puts it, the issue isn’t that older people are generally rich, but there’s a decent chunk of older, wealthier Australians who pay very little or no tax.

But Davidson, who helped write the report, also points out the problem is not that young people pay too much income tax. “They don’t,” he says. “And young people’s share of income tax paid is diminishing.”

According to the Parliamentary Budget Office, the share of personal income tax paid by those aged 29 and under has shrunk steadily from more than one-quarter in 1979-80 to about one-tenth in 2021-22.

So while we talk quite a bit about younger working families being unfairly punished and being heavily burdened by tax, the issue is more with the way we tax (or don’t tax) wealth.

That’s especially the case because when we talk about wealth in Australia, it’s undeniably linked to the housing market: one of the biggest drivers of wealth and wealth inequality, but also one of the biggest areas of financial stress for those who don’t already have a foothold in it (or financial help to get there).

We’re also seeing a worsening of inequality within the younger household demographic. Not only do they have less wealth on average than older generations, but also the most unequal distribution of wealth within their age group.

The bottom 60 per cent of younger households by wealth, for example, have only about $80,000 in wealth each. Meanwhile, the wealthiest 10 per cent have more than $2 million each stashed away on average, meaning they account for more than half of the entire wealth of that age group.

“It is likely that transfer from parents [the bank of mum and dad] contributed significantly to this concentration of the wealth of young households in the hands of the highest 10 per cent,” the authors of the report said.

A lot of the wealth difference comes down to some people owning their own homes while most don’t. Very few of the bottom 60 per cent of younger households own their own home.

As older generations die and pass on their wealth, this gap will grow. From 2003 to 2022, the share of wealth held by the top 10 per cent has grown, while the wealth of those in the bottom 60 per cent fell.

Davidson says the problem areas are obvious: taxation of super, capital gains and private trusts, which tend to be taxed at lower rates or present tax loopholes.

The government’s decision to raise the discounted rate of tax (from 15 per cent to 30 per cent) on earnings from super balances over $3 million is a good start.

But we should also extend the 15 per cent tax on income from superannuation investments so that it applies to those who are retired. Currently, once people are retired, they can withdraw money from their super tax-free.

We also need to fix the way we tax housing to discourage – or at least stop encouraging – much of the speculative investment which tends to inflate home prices. That includes curbing negative gearing and reducing the 50 per cent capital gains tax discount to a rate closer to the rate of inflation.

Allowing – and encouraging – wealthy people to lock away their wealth, especially in things such as existing housing, worsens inequality and pushes home ownership further out of reach for many Australians. But it also reduces the potential of our economy by directing money away from more productive uses, such as investment in education or innovation, and encouraging wealth accumulation over work.

If we want a fairer society – and a stronger economy – we need to make sure wealthy Australians are paying their fair share and that we’re giving everyone a fair go.

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Our future prosperity is bright. We've hidden an ace up our sleeve

As you may have noticed, the nation’s economists are in a gloomy mood and warning of tough times ahead. Our standard of living stopped rising a decade ago and, they tell us, it won’t improve much in coming years unless we really lift our game.

Just this week one leading economist, Chris Richardson, predicted that real household disposable income per person – a common measure of living standards – wouldn’t get back to the temporary peak it reached in 2021 until 2037.

Why are our economists so downbeat? What’s worrying them? Well, unless you’ve been living under a rock, you’ve already heard about it – ad nauseam. The main thing that drives our material standard of living is ever-improving “productivity”.

Since the Industrial Revolution, we’ve used improvements in technology and education to make the economy’s output of goods and services grow at a faster rate that its inputs of raw materials, labour and capital. That is, we’ve made the economic machine a bit more efficient every year.

What’s worrying the bean counters is that this process of steady improvement seems to have stalled lately. There’s been no improvement in our productivity. They expect this lull to be temporary, but they have good reason to fear that the annual rate of improvement will be a lot slower than it used to be.

Whereas Treasury’s forecasts of economic growth used to assume that the productivity of labour would improve at an average rate of 1.5 per cent a year, this year the Reserve Bank has cut its assumption to 0.7 per cent a year.

In almost every sermon they preach about our need to lift our game on productivity, economists never fail to quote the American economist Paul Krugman saying that “productivity isn’t everything, but in the long run it’s almost everything”.

There’s much truth in this. But as John O’Mahony, of Deloitte Access Economics, has been the first of all Australia’s economists to realise in a paper written for the Australian National University, in Australia’s case it’s highly misleading.

Why? Because in 1992 we did something none of the big economies have done. The Keating government set up a national superannuation scheme which compelled almost all employees to contribute a certain percentage of their wage to an appropriate fund. It started out at 3 per cent, but in July reached a huge 12 per cent.

What’s unusual is that all this money doesn’t go to the government, but to non-profit “industry” and for-profit super funds, which invest it mainly in company shares. By now, the amount invested totals $4.2 trillion. O’Mahony estimates that, in about 40 years’ time, superannuation assets will be worth more than $38 trillion. (After allowing for inflation, this would be an increase of more than four times.)

If all that money was invested in listed Australian company shares, our sharemarket – and our economy – would be overwhelmed. So much of it is invested in foreign shares. This means that many dividends from foreign companies flow back to Australia, to be held in workers’ superannuation accounts. And this flow of foreign income will grow and grow in coming decades.

Because we’ve had a lot of foreign investment in Australia – including a lot of our mining companies – we’re used to shelling out a lot of dividend income to foreigners each year. But now we’ve got a lot of dividend income flowing in to help offset all the money flowing out.

Think of it this way. The introduction of compulsory super more than 30 years ago constituted a decision that working Australians would henceforth save more of their income toward their retirement, leaving less for immediate spending on consumer goods.

This meant the economy grew by less than it would have. That’s particularly the case over the past five years as, on July 1 each year, the compulsory contribution rate has been increased by 0.5 percentage points, taking it from 9.5 per cent of wages to 12 per cent.

(Legally, super contributions are made by employers, not employees. But economists have demonstrated that, in practice, employers pass that cost on to their employees in the form of smaller pay rises.)

But that’s the negative side. The positive side is that the extra money being paid into our super accounts hasn’t been sitting in a jam jar, it has been invested mainly in shares, both Australian and foreign. And those shares have been paying dividends. Those dividends coming from overseas constitute a net addition to Australians’ income, whereas the dividends on Australian shares are just a transfer from one part of our economy to another.

You may wonder what great benefit comes from those foreign dividends if they’re sitting in people’s super accounts, waiting for them to retire. But, remember, the scheme has been running for more than 30 years, with some older people retiring each year while their place is taken by younger people joining the workforce.

Remember, too, that every day, old people are dying. Increasingly, they’re dying with super balances unspent and inherited by their spouse and dependents. So, one way or another, the money from foreign dividends is spent.

Every five years Treasury prepares an intergenerational report, assessing the prospects for the economy over the following 40 years. The latest report in 2023 found that, over the 40 years to 2063, real gross national income per person – another measure of living standards - was projected to grow by 50 per cent to $124,000 a year.

But the report took no account of all the foreign income our superannuation savings would be bringing our way. When O’Mahony redid the numbers, he had real income per person 13 per cent higher. And whereas productivity improvement largely accounted for about 72 per cent of the increase since 2023, the projected growth in our foreign income accounted for 28 per cent. Who knew?

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Why we'd be mugs to cut the rate of company tax

Ask any businessperson if we should cut the rate of our company tax and, almost to a pale and stale male, they’ll unhesitatingly tell you we should. Why? Because our rate of 30 per cent is high among the rich countries, and this must surely be discouraging business investment. Sorry, not that simple.

Just how un-simple was something I didn’t realise until the Productivity Commission proposed cutting the company tax rate to 20 per cent in one of the reports it issued in preparation for last month’s economic reform roundtable.

At present, the general rate of company tax is 30 per cent, although smaller companies with annual turnover (total sales) of less than $50 million pay 25 per cent. The commission wants to cut the rate to 20 per cent for all companies with annual turnover of less than $1 billion.

The commission got two different modelling outfits – Chris Murphy, and Professor Janine Dixon’s Centre of Policy Studies (CoPS) at Victoria University – to use their “computable general equilibrium” econometric models of the Australia economy to estimate the likely effects of the company tax cut on the economy.

On the face of it, the two models’ findings were similar, though Murphy gave the change higher marks, so to speak. He found that, by 2050, the tax cut would cause the level of business investment spending to be 1.4 per cent higher than otherwise, with the level of output per worker 0.4 per cent higher, and real gross domestic product 0.4 per cent higher.

In contrast, CoPS found an increase in the level of business investment spending of only 0.6 per cent. It found a similar improvement in the level of output per worker of 0.3 per cent, and a smaller rise in the level of real GDP of 0.2 per cent.

But get this: whereas Murphy had the level of something called “gross national income” increasing by 0.2 per cent by 2050, CoPS had it actually declining by 0.3 per cent. What’s that all about? Good question.

Among economists, it’s a long known, but long forgotten truth that GDP isn’t the best way to measure our economy and its growth. The better way is what used to be called GNP – gross national product – and these days is called GNI, gross national income.

As you know, GDP measures the value of all the goods and services produced in Australia during a period. But this includes goods and services produced by foreign companies, so the profits made by those foreign companies in Australia belong to foreigners, not us.

Australians’ savings have always been insufficient to finance all the investment opportunities in the Wide Brown Land, so since white settlement we’ve gone on inviting foreigners to bring their savings and expertise to Oz and help us develop the place. We’ve ended up with a lot of foreign ownership of our economy.

That’s why GNP/GNI is the better measure of our economy. It measures the value of the goods and services produced by Australian citizens. It’s our bit of our economy. But that’s why GDP is bigger than GNP/GNI – although the two probably grow at much the same rate.

Historically, foreign investment in Australia is the big story. In recent decades, however, we’ve had investment going the other way: Australians investing in overseas businesses. That’s particularly the case since the introduction of compulsory superannuation in 1992. Rather than swamp the local share market, about half our total superannuation savings of $4.1 trillion is invested offshore.

So GNP/GNI is GDP minus income paid to foreigners, but plus foreign income paid to Australians. Combine those last two and you get NFI – net foreign income.

It’s after allowing for net foreign income that Murphy’s estimate of real GDP being 0.4 per cent higher turns into real GNI being only 0.2 per cent higher. But here’s the point: under the CoPS modelling, higher real GDP of 0.2 per cent turns into real GNI being 0.3 per cent lower. This translates as Australians being less prosperous by almost $300 a person.

How does that come about? It’s because Murphy’s model is “comparative static” whereas CoPS’ model is “dynamic”. Murphy compares the state of the economy before the tax change with its expected state after it has returned to equilibrium over the “long run” (about 20 years in this case).

In contrast, the CoPS dynamic model traces the economy’s path year by year between the pre-change equilibrium and its return to a new equilibrium X years later. But why should this approach suggest that the company tax cut would leave Australians worse off rather than better off?

Well, the first thing to remember is that Australia’s rare system of “dividend imputation” (franking credits) makes our story very different to most other countries. Because the Australian shareholders in an Australian company get a tax credit for their share of the company tax their company paid, they don’t have to care what the rate of company tax is.

So it’s really only the foreign shareholders in Australian companies who end up paying company tax. Thus, if we were to cut our company tax rate from 30 per cent to 20 per cent, it’s really only foreign shareholders who’d benefit.

And, as the CoPS people point out, cutting the company tax rate by 10 percentage points would deliver a massive windfall gain to the foreign owners of Australian companies. They were perfectly happy to invest in Australian companies when the tax rate was 30 per cent, but we cut it anyway.

And if foreign investors are paying less tax to our government, that leaves Australians bearing more of its costs. That’s true even if the lower company tax rate were to induce foreigners to invest more in Oz. We’d start with a big minus before we got any pluses.

But if our company tax rate is so high, how come foreigners have always been happy to invest here? Because we’re a highly attractive investment destination for many obvious reasons. Other countries may need to offer a low tax rate to attract the foreign investment they need, but we don’t.

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If you've been treating yourself more, you're not alone. Here's why

By MILLIE MUROI, Economics Writer

If you’ve recently bought a new car or furniture, have a big holiday on the horizon, or are eating out a bit more, welcome to the club. After years of squirrelling money away, households are finally coming out of hibernation.

We know some – especially affluent Australians with heaps already stashed away and no big home loan to worry about – breezed their way through the cost-of-living crisis. Some even spent more or became richer thanks to higher interest rates on their savings.

But for others – including many mortgage holders and lower-income Australians – the years since the COVID-19 pandemic have been all about sacrifice: cutting back spending and trying to keep up with home loan repayments and bills.

That seems to be changing according to the latest national accounts figures from the Australian Bureau of Statistics.

Those numbers show real gross domestic product – a measure of the economy’s production of goods and services (and equally a measure of spending and income) – grew by 0.6 per cent over the three months to the end of June. That took growth over the year to June to 1.8 per cent.

That’s not to say the economy is roaring. Generally, a healthy growth rate for a developed economy such as Australia is 2 per cent to 3 per cent a year. But it’s a sign things are finally looking up for many Australians and that they don’t mind loosening their purse strings a little.

The biggest contributor to economic growth – or weakness – is always households. Spending by households accounts for more than half of Australia’s GDP, so when they’re having a good time, generally speaking, so is the economy.

In the three months to June, household consumption spending grew nearly 1 per cent, contributing 0.4 percentage points, or two-thirds, of the country’s economic growth.

Spending on essentials was a little higher as households coughed up more on medical services thanks to an especially strong flu season and forked out more to keep the lights on as energy bill relief ended in states such as Queensland and Western Australia.

But it’s spending on non-essentials including holidays, concerts and eating out, that generally gives us the best idea of how households are feeling.

This non-essential spending jumped 1.4 per cent in the June quarter. And according to Commonwealth Bank’s head of Australian economics, Belinda Allen, who gets to see overall, anonymised data from the bank’s huge customer base, it’s not just older or richer Australians starting to enjoy themselves a little more. Younger and lower-income households – which scrimped the most over the past few years – are finally regaining their mojo.

The bureau’s head of national accounts, Tom Lay, says end-of-financial-year sales and new product releases helped nudge people to spend more on things including furnishings, cars, and recreation and culture goods: things such as books, music and sporting equipment.

Australians also took advantage of the closeness of Easter to Anzac Day this year to extend their holiday break, meaning they ended up spending more on services such as hotels, cafes and restaurants and artistic, sporting or cultural experiences.

But Allen points out there are also some broader economic drivers of households’ willingness and ability to spend.

While many of us are still facing a cost-of-living crunch (prices, after all, aren’t going backwards for the most part), there has been a slowdown in price rises of most things. The latest inflation figure for consumer prices, for instance, came in at 2.1 per cent in the year to June – well down from the peak of 7.8 per cent in December 2022.

Then, there’s the growth in disposable income (the money households have left to spend or save after tax). Over the past year or so, wages have climbed a bit faster than inflation, meaning many households have a bit more cash to play with.

Add to this, the fact that interest rates have been coming down. This year, the Reserve Bank has cut rates three times, saving many mortgage holders hundreds of dollars a month in repayments.

Finally, Allen says there’s been a notable fading in the “scarring effect”.

Essentially, households have been “scarred” from the pandemic and inflation surge, preferring to save and continuing to be cautious about spending even as their financial situations have improved.

But that’s beginning to change. The household saving ratio – the share of disposable income people choose to save – has dropped to 4.2 per cent in the June quarter. That’s down from 5.2 per cent in the three months to March, and below its pre-pandemic average of about 5 per cent. Households are becoming happier to spend rather than save.

For some time following the pandemic, Australia’s economic growth was being propped up by two things: population growth and government spending. In fact, without these things, Australia would have dipped into a recession last year.

Government spending still grew by 1 per cent in the June quarter, largely because of stronger federal government spending on social benefits including Medicare and the Pharmaceutical Benefits Scheme (again, partly because of the strong flu season). While state and local government spending dropped, mostly because of the winding down of energy bill relief measures, federal government spending was also higher because of spending to run the election in May and a step-up in defence spending.

But combined with less investment spending by the government on things such as building infrastructure, the overall effect of government spending on economic growth was zero.

That’s a good thing according to Treasurer Jim Chalmers, who told journalists this week that the private sector was now taking its “rightful” place as the primary driver of growth. “This is the private sector recovery that we were planning for, preparing for and hoping for,” he said.

Private business investment rose 0.1 per cent but made no significant contribution to overall economic growth, while net international trade (the real value of exports minus imports) helped to expand the economy slightly. Iron ore production ramped back up after suffering some setbacks because of bad weather in the March quarter, while a strong grain harvest added to the country’s exports.

GDP per person ticked up a little to 0.2 per cent in the three months to the end of June (a better result than the falls we’ve been seeing for much of the past two years), meaning our economy isn’t just growing because there are more people.

Reserve Bank governor Michele Bullock, taking questions after a lecture at the University of Western Australia this week, said the bank had expected the increase in household spending but that it was a gradual recovery with people searching for bargains.

“For some time, we have been predicting that the Australian consumer would start to spend a bit more,” she said. “Real disposable incomes have been rising for about a year now, wealth is rising because housing prices are rising, and normally under those circumstances, you would expect to see consumptions starting to rise.”

But Bullock also warned that continued strength in spending could also mean fewer interest rate cuts to come. “It’s possible that if [household spending growth] keeps going, then there may not be many interest rate declines left.”

That might be bitter news for those with big home loans to pay off. And the economy still has to grapple with the stubborn problem of stagnating productivity. But alongside historically low unemployment, and inflation within the bank’s target band, the latest GDP figures are a sign of the end to a long winter for many Australians.

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If Albanese has lost his bottle, he should retire

Sometimes I think that Sussan Ley and the Liberals’ big problem is that Labor has stolen their clothes. What the Liberals stood for in the good old days was minimum change. Only when changes could no longer be avoided were they made. The Libs’ big selling point was: “Vote for us to keep Labor out. Labor’s never happy unless it’s ‘reforming’ something.”

Well, not any more. Under the leadership of Anthony Albanese, Labor has lost its reforming zeal. It knows we have plenty of problems, and would like to do something about them, but not yet.

Albanese always has a reason for caution. Having lost the 2019 election against Scott Morrison that many thought it would win, Labor’s been in living in fear of that three-letter word “tax”.

Along with its policy to help first home buyers by restricting property investors’ use of negative gearing, Labor planned to help pay for its promises by making a small change to the “franking credits” that go to people who own shares.

Its Liberal opponents made this sound like Labor was planning an almighty tax grab, and Labor lost the election. Now that frightening three-letter word never passes its lips.

To ensure he won the 2022 election, Albanese made Labor a “small target”, promising to do a few nice things, but nothing nasty. The plan to fix negative gearing was gone, as was any threat to franking credits.

Once in power, Albanese discovered another reason for not doing anything someone mightn’t like. He’d won with a very narrow majority, so had to focus on consolidating Labor in power. This would set him up to really start fixing things in his second term.

With considerable help from the Liberals’ unpopular Peter Dutton, this strategy worked a treat at this year’s election. Labor won 94 seats in the lower house, the most seats any single party has ever won. And with a buffer of 18 seats, Albanese was now perfectly placed to get on with some controversial measures.

With the Liberals decimated and almost all the teal independents re-elected in the big-city seats they’d taken from the Libs, it was hard to see how Labor could lose the next election in 2028.

But no. Albanese had a new reason for proceeding with caution. With at least three terms almost guaranteed, he wants to steal the Libs’ status as the natural party of government.

If you can argue that the low risk of losing government in 2028 at last empowers Labor to make controversial reforms, you can just as easily argue it allows Labor to get away with doing as little as possible.

Labor much enjoys the big ministerial salaries and being driven around in big white cars. If you can enjoy the perks without doing the heavy lifting, why wouldn’t you? Albanese can’t think of a reason. He may have been a lefty firebrand when he entered parliament almost 30 years ago, but those embers have had a long time to cool.

These days, there’s no great ideological divide between Labor’s Left and Right factions. As one of the Left’s luminaries explained to me, these days they’re just rival management teams.

But the public doesn’t know that, and I have a theory that those from the Left faction who make it to the prime ministership – Albanese, and Julia Gillard before him – go to great lengths to demonstrate that they’re in no way left wing.

So what are the big problems Albanese isn’t game to get on with? Well, a big one is our contribution to global efforts to limit climate change by achieving net zero emissions of greenhouse gases by 2050 – and, since scientists’ modelling of how long we’ve got is proving optimistic, preferably much earlier.

The government keeps assuring us we’re “on track” to transition to renewable energy and achieve our commitment to reducing emissions by 43 per cent by 2030, but scientists aren’t so sure.

In any case, this month the government will need to announce our commitment for 2035, and anything less than a 75 per cent reduction will show a lack of resolve. By the same token, such a commitment won’t have much credibility without Labor having the courage to bring back an improved version of the carbon tax Gillard introduced in 2012 but that great statesman Tony Abbott abolished two years later.

As former competition boss Rod Sims has explained – and we experienced last time – the point of a carbon tax is to make building solar and wind farms more profitable relative to coal and gas, not to make people pay more tax. The proceeds of the tax would be used to compensate all but the high-earning taxpayers.

But Albanese and his troops have wrongly convinced themselves that Gillard’s carbon tax was the main reason the infighting rabble that was the Rudd-Gillard-Rudd government got tossed out in 2013 – which is why, in all the economic reform roundtable’s talk of tax reform, a carbon tax went conspicuously unmentioned.

The other big problem the government isn’t doing enough on is “intergenerational inequity” – the rough deal we’re giving our younger adults. You see this most clearly in the difficulty young people have affording a home of their own.

To be fair, the Albanese government has been working with the states to increase the supply of homes in the parts of our big cities where people most want to live, although we’re yet to see much progress.

But as well as seeking to increase the supply of homes, Albanese should also help by reducing the demand for the kind of places first home owners buy from better-off, negatively geared investors. These days, however, all mention of negative gearing is verboten.

And that’s before you get to the awkward truth that a young to middle-aged worker pays far more income tax on the same income than if it’s earned by a retiree with loads of superannuation or other investment income.

Speaking of retirement, that’s what Albanese should do if he wants to run a government but can’t bring himself to govern. No shame in being past it.

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The one big reform no one discussed at Labor's roundtable

Despite the strong support for tax reform at last month’s economic reform roundtable, perhaps the most important single reform hardly rated a mention: a carbon tax – or, in the economists’ preferred euphemism, “a price on carbon”.

I don’t doubt that virtually every economist attending the meeting would have agreed that a carbon price is needed.

So why was it unmentionable? Because Anthony Albanese and his faint-hearted troops have convinced themselves that the main reason the infighting-riddled Rudd-Gillard-Rudd Labor government was sent packing at the 2013 election was Julia Gillard’s introduction of a carbon price in 2012, which that great statesman Tony Abbott repealed in 2014. Yeah, sure.

Add in Labor’s promise to make a minor change to “franking credits” at the 2019 election, the misrepresentation of which probably does most to explain why it lost, and you see why Labor’s brave warriors have concluded that any mention of tax changes brings instant political death.

But in a speech last week, Rod Sims, chair of Professor Ross Garnaut’s Superpower Institute and a former senior econocrat, decided to take his life in his hands and speak truth to power. He offered five reasons why a carbon price is both “necessary and urgent”.

For a start, our present policies won’t allow us to meet our climate targets without further piecemeal, unpopular and “hideously costly” measures. When Labor regained office in 2022, it cobbled together arrangements intended to ensure we reached our climate targets – a 43 per cent reduction in greenhouse gas emissions by 2030, and net zero emissions by 2050 – despite the absence of the obvious solution: a carbon price.

To largely eliminate our emissions, we need to transition from fossil fuels to renewable energy. Trouble is, though renewable energy is much cheaper than coal and gas, its installation costs are high – much higher than the cost of coal-fired electricity from established power stations, plus a bit of gas.

Albanese and Co introduced a “capacity investment scheme” under which the government largely underwrites the commercial viability of renewable generation and storage projects. The government picks the applications it prefers. But the scheme may involve project delays and higher electricity costs that could become a political problem for Labor.

The Labor government also took over and beefed up the Coalition’s main substitute for a carbon price, the “safeguard mechanism”, which requires various carbon-intensive industries to continuously reduce their emissions from arbitrary baselines.

Trouble is, the mechanism covers only about 30 per cent of emissions. And businesses can avoid reducing their emissions by buying “carbon credits” from other companies that have been able to reduce emissions cheaply by sequestrating carbon in soil, plants or old mines.

This would be fine if it was all rigorously measured and accounted for but, in practice, the system is full of holes, meaning net emissions aren’t really reduced.

There are various other more specific measures to reduce emissions – such as exempting electric vehicles from certain taxes – but the Productivity Commission has found them to be hugely expensive ways to reduce emissions.

All these shortcomings of the substitute arrangements would be avoided if only we had a “price on carbon”. The price – or tax – raises the cost of fossil fuels relative to the cost of renewables, thus improving the incentive to build more solar and wind farms.

So the substitutes achieve the objective much less efficiently than a carbon price would – meaning that replacing them with a tax could be expected to improve the economy’s productivity. (Productivity is the big reason economists like taxes – which are price incentives – rather than government regulation and picking winners.)

And whereas the substitute arrangements add to consumers’ energy costs, they don’t raise any revenue for the government. As with Gillard’s carbon tax, the extra cost of fossil fuels goes to the government, which it can then use to fully compensate all consumers bar the high earners.

Sims reminds us that in the two years before it was abolished, Gillard’s tax did work the way intended. Overall emissions declined by 8 per cent. Use of black coal increased relative to dirtier brown coal; gas power expanded relative to coal, and renewables expanded relative to gas.

Exit polls at the 2013 election found only 3 per cent of Coalition voters thought that scrapping the carbon tax was the most important issue the Coalition was offering. This is hardly surprising since, by then, voters knew they had been compensated with a tax cut and higher benefit payments, while honest Barnaby Joyce’s scare campaign of soaring consumer prices and “$100 lamb roasts” was bulldust.

But Sims isn’t proposing a return to the Gillard carbon tax. He advocates a simpler, more user-friendly scheme, a “carbon solutions levy” as developed by Garnaut and himself in 2024. It would be levied on only 108 sites of coal and gas production, and on petroleum imports, at the rate of the European Union’s carbon price. You see how much simpler it would be.

It would be levied on the emissions from these products, no matter where the emissions were released. So it would apply to the fossil fuels we exported, except if the receiving country had its own carbon price, such as the EU’s “carbon border adjustment mechanism,” which will take effect next year.

This tax on our exports would answer the calls for our government not to license new coal mines and gas fields. If the proposed new projects couldn’t cover the full social cost of the greenhouse gas they’d produce (that is, production cost plus the cost to society of the pollution they cause), they’d simply be unviable and they wouldn’t proceed.

At the time, Garnaut and Sims estimated that if the levy applied only to domestic emissions at the Europeans’ carbon price, it would raise about $20 billion a year, “more than enough to generously compensate households for higher electricity, gas, petrol and diesel prices”. That would leave money for repair of the budget.

Finally, Sims estimates that our present pace of reducing emissions needs to be increased by 25 per cent if we’re to meet our 2030 target. This month, Albanese will announce his target for 2035. Reintroducing a carbon price would also allow, and give credibility to, a much more ambitious target for 2035. And all it would take is a little political courage.

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If you think you had it harder back in the day, think again

By MILLIE MUROI, Economics Writer

Whenever I write about intergenerational fairness, or lack thereof, there are a heartening number of supportive responses. But, without fail, there’s always a handful who (perhaps to try to make me feel better), point out they had it harder.

But these people are missing a few things laid bare in one of Deloitte Access Economics’ latest reports written about – and for a change, almost exclusively by – young people.

It’s not wrong to say previous generations had it hard. And within any generation, there are people who have been flung through the wringer more than their peers because of individual circumstances and plain old luck.

The biggest mistake, according to the report, is assuming today’s young people (Millennials and Gen Z) are behind only because they are young – and that they will eventually catch up.

Deloitte Access Economics associate director Rhiannon Yetsenga, lead author of the report, says sitting back and waiting for the problem to be resolved – or waiting for young people to climb into positions of power – is not an option.

“We can’t afford to wait,” she says. “The future of Australia is being shaped by decisions that are being made today … and we need to make sure it works for the very people who will inherit that future.”

There’s clear evidence from the report that some of the most consequential parts of our lives have changed.

Despite being the most educated generation, young people’s incomes have been growing more slowly than older cohorts and grinding backwards since the pandemic. Despite being the most digitally connected generation, Australians aged 15 to 24 have shifted from being the least lonely to the loneliest age group in just a decade.

It’s easy to blame the latter on young Australians being chronically online: nearly nine in 10 young people aged 18 to 34 are on social media, more than any other age group. And nearly two in five say it’s easier to connect with people online than in person.

But delve into the research and the young people surveyed say social media is useful for maintaining existing connections, such as with friends or family, rather than developing new ones. They also emphasise online connections alone are not enough to form a sense of belonging.

Perhaps it’s not social media usage most responsible for young people’s growing loneliness.

One of the biggest changes across the past few decades has been the monumental increase in the cost of housing: something that has enriched a large share of older Australians at the expense of younger people.

“Australia’s housing crisis is locking out prospective buyers and driving up costs for renters, leaving young people with fewer pathways to secure housing,” Deloitte’s report states.

Not only does the average Australian home now cost 16.5 times the average household income (up from 9.5 times in 1990), but for young Australians aged 21 to 34 living in our capital cities, rent chews up nearly half of their average wage.

That’s far beyond the 30 per cent figure which generally means people are experiencing housing affordability stress.

It’s no wonder only about one-third of 25 to 29-year-olds own a home, down from more than half in 1981: it has become almost impossible to save a deposit without family help. And it’s no wonder their mental health has taken a hit when their financial stability is on the rocks.

Nearly two in three Gen Z Australians report living paycheck to paycheck despite cutting back spending more than any other age group in 2023-24.

With cost of living pressures – and the dream (very literally) of homeownership drifting further away – it’s little surprise that more young people are taking on multiple jobs, hitting a record share of 7.6 per cent in December 2024.

Money might not buy happiness, but it buys stability and the ability to build relationships and a support network.

With most renters (who are mostly under the age of 35) on rolling monthly or one-year contracts, and vacancy rates stuck at historical lows across the country, there’s very little security.

And with property prices and rents constantly surging, and higher-density buildings being knocked back, many young people are being priced out and forced further away from their family and friends. That’s a bad thing for everyone.

As Yetsenga points out, having young people in cities means they’re closer to work and costing the government less by reducing the need to build more expensive infrastructure further out from the city.

The constant uprooting – and simply the threat of it – is costing time, energy and mental bandwidth, and making it difficult for young people to build and maintain relationships.

It’s probably one of the key reasons young people are less likely to be married and more likely to delay having children. Financial stress, insecure housing and being further away from family also aren’t compelling reasons to introduce a child into the world.

Of course, having fewer or no children is not necessarily bad if it’s purely a personal preference.

But it’s an issue if younger generations are being barred from having kids because of external pressures.

A drop-off in the number of children is also consequential for older Australians as they enter aged care and make more hospital visits. Not only does it limit the number of future health and aged care workers, but it also means there will be fewer workers to tax to pay for these essential services.

Yetsenga also points out full-time work weeks were designed when it was common to have someone at home to do most household chores and child-rearing.

She raises questions about whether a childcare system where children need to be picked up at 3pm is fit for purpose, especially at the same time as there is a big push to make office attendance mandatory despite most young people explicitly saying this isn’t what they want and that they require flexibility.

These are all things we need to act on. But chief among them is the housing market.

As the report notes, there is support across the political spectrum aimed at helping first homebuyers, but the “fixation on short-sighted political wins” fails to fix the biggest barriers.

The problem is that most of these barriers are in place to protect the interests of existing property owners at the expense of those who just weren’t born early enough.

Zoning laws, for example, which place restrictions on density in certain areas, are largely put – and kept – in place by homeowners who want to protect the value of their property or gatekeep their suburbs from apartment blocks and construction. Understandable … if we weren’t facing a housing crisis.

Then, there are the even more baffling tax concessions we provide to investors (including those with multiple properties) which incentivise them to treat housing as a wealth-building tool.

The capital gains tax discount – where only 50 per cent of the profit from the sale of a property held for than 12 months is taxed – is far too generous, especially for existing dwellings, and makes it more difficult for first homebuyers to get a foothold in the market by pushing up demand and therefore property prices.

For many young people, the only ticket out of financial insecurity and renting is money gifted to them by family.

At the very least, we need longer rental contracts to give renters the reassurance they can establish their roots in a place without fear they’ll be ripped away within months. It would also save many of them days or weeks every year worrying, searching for a new lease, inspecting and applying for rentals, and moving their belongings.

Young people today are the first generation at risk of being stuck with living standards below that of their parents and grandparents. For those who say they had it harder back in the day, too: we shouldn’t be aspiring for that.

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We have arrested the development of our young

I hope you’re not among those silly people who concluded last week’s economic reform roundtable was just a talkfest that will lead to nothing concrete. Breaking news: we have to get together and talk about things before we agree on what our biggest problems are and what we will do about them.

Lots of bits and pieces came out of the roundtable, but by far the most important thing was universal agreement that something had to be done about “intergenerational inequity” – an economist’s way of saying that our young people have been getting a raw deal.

This came after Danielle Wood, the boss of the Productivity Commission, drew on its research to warn we were in danger of breaking Australia’s generational bargain – that our children will live better lives than their parents, as their parents did of their own parents.

Economists, naturally, see this largely in terms of reforming our system of taxes and benefits. The independent economist Saul Eslake summarises this by saying that our tax system “imposes a disproportionately high burden on younger working Australians, and a correspondingly lower burden on older, asset-rich Australians”.

Much of this disproportionate burden is accounted for by a problem we all know about – young people’s inability to afford a home of their own unless they have considerable help from their parents.

But a report to be released on Wednesday by Deloitte Access Economics reveals there’s much more to it than that. (The report has been prepared by Deloitte’s own young people.)

It says there has been an unprecedented shift in how young people under 35 work, vote and live. They’re navigating a version of adulthood that feels less like a rite of passage and more like a locked door.

The Hungarian sociologist Karl Mannheim argued that the economic and social conditions of our youth leave a lasting imprint on collective values, expectations and behaviour.

“Through this lens,” the report says, “Millennials and Gen Z are not merely younger versions of ourselves. They are products of their own formative experiences. The greatest mistake is to assume today’s young people are simply behind because they are young – and that, with time, they will catch up.”

Today’s young Australians are more educated than any generation before them, the report says, yet they face more insecure work and delayed financial independence. They are the first generation to live entirely online, and yet they report rising loneliness.

“They show up for issues and are determined to find balance, but remain locked out of the systems their parents helped to build.

“When the rules were written before they arrived, and the road ahead offers little promise of change, it is no wonder young people feel sidelined. In fact, 42 per cent of young Australians (18 to 24) feel they are missing out on their youth, and 41 per cent worry they won’t be able to live a happy and healthy life as they grow older,” we’re told.

Deloitte has used the census results for 1991 and 2021 to see how people aged 25 to 39 have changed between the Baby Boomers and the Millennials.

For a start, Millennials are better educated. The proportion of young people with post-school qualifications has gone from just under half to almost 80 per cent. The proportion of women with bachelor degrees has gone from one in eight to one in two.

Next, today’s young people are less likely to be married. The proportion which has not yet married has doubled from 26 per cent to 53 per cent. The median age at which the young marry has risen from 27 to 34. And whereas the proportion of 25- to 39-year-olds living as a couple used to be just over half – now it’s one-fifth.

Thanks to better economic management, the rate of unemployment among older young people has more than halved, falling from 8.4 per cent to 3.5 per cent.

The proportion of people with bachelor degrees whose earnings are in the top 15 per cent has risen from 38 per cent to 65 per cent. This may be because more of the female graduates have jobs and are working full-time. We know that the rate of participation in the labour market for all women has gone from almost two-thirds to more than three-quarters.

Now we get to home ownership. We know Millennials are likely to be better educated, more likely to be working and more likely to be in well-paid jobs but, even so, are less likely to be home owners. Whereas 66 per cent of Boomers aged 25 to 39 were home owners, for Millennials, it’s down to 55 per cent.

And whereas by that age, 19 per cent of Boomers owned their home outright, it had fallen to just 6 per cent for Millennials.

Elsewhere, we’re told that the younger generations are having children later, and more than half say they’re unlikely to have children.

The report argues that today’s young Australians are fundamentally different from previous generations, noting that they’ve grown up amid intensifying globalisation, a climate emergency, the rise of social media and now generative AI. Those young enough to have been at school during the COVID lockdowns had their educations significantly disrupted.

The report tells us how much a rapidly evolving labour market and financial instability are narrowing young people’s opportunities for economic prosperity. The way they see it is that the system has persistently moved the goalposts: you stay longer in education, you take longer to earn good money and longer to afford to buy a home. You marry later and have kids later (and maybe don’t have time to have as many as you’d have liked).

Little wonder the report tells us young Australians feel sidelined and unheard by political decision-makers, with only one in three trusting the federal government to do the right thing.

The way I’d put it is that, by our neglect, we’ve allowed our young people to suffer a bad case of arrested development. But thanks to the roundtable, I think we may be ready to do something to give the young a fairer deal.

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We need to unclog the pipes of the capitalist machine

Of the many worthwhile economic reforms put on Treasurer Jim Chalmers’ to-do list after last week’s roundtable, I suspect the one that could – repeat could – produce the most lasting boost to our productivity is the one that didn’t sound like much: reform of the way we regulate the economy. Abolish more nuisance tariffs, anyone?

Economists are obsessed by taxes. So too are business people. So it wasn’t hard for those sitting round the oval table to convince themselves that reforming our system of taxes was the key to improving our “productivity” – the efficiency with which our capitalist economic machine converts inputs of resources into outputs of myriad goods and services.

But I doubt it. Our tax system does need major reform, but that’s much more about reducing its generational unfairness than increasing economic efficiency. Economists see taxes as just another price, and the “neoclassical” model of the economy they carry in their heads tells them prices are the key to understanding everything. That’s why they believe such absurd propositions as that every worker on the top tax rate – including all the worthies at the roundtable – is only doing it for the money, and is unmotivated by, for instance, the desire for power and status.

No, a more productive way to think of it is that, though many, many aspects of our lives need to be regulated – from outlawing theft and murder, to what and where we’re allowed to build things – there’s a real risk that the politicians and regulators will overdo it.

That, with the best of intentions, they’ll end up misusing their power. That they’ll make their regulation of the particular bit of our activity they’re responsible for too prescriptive, that they’ll try to perfect outcomes in their bit at the expense of all the other bits. That their demands will overlap with, or even contradict, the demands of other regulators.

This risk is greatly multiplied by our federal system of government, with at least two levels of government having the power to regulate most of the aspects of our activity.

As the Productivity Commission has confirmed, our businesses face a thicket of regulations. That thicket grows with each year of governments governing.

And then there’s the risk that multiple regulators will yield to the temptation to do their job in a way that makes things easier or cheaper for them, at the expense of those they’re regulating. Requiring too much form-filling, for instance.

Worse, regulators who take far too long to approve or deny applications to start a new business or build something. The delay probably saves them the cost of having to hire a few extra workers, but the cost to the rest of us, I now realise, is huge.

If ever there was a “negative externality”, as economists call it, this is it. The cost of regulatory delay has two aspects. It greatly reduces the productivity of the construction industry, affecting both housing, and commercial and infrastructure construction.

If ever there was a multifaceted problem it’s housing affordability; problems on both the demand and supply sides. But we’re indebted to Treasury for pointing out just how much of the problem is explained by the growing inefficiency of our home building industry.

It’s a cottage industry that’s done too little to seek economies of scale. But the average time it takes to produce a new home has worsened greatly in recent decades. This must surely be explained mainly by the growing time it takes for building permits to be issued.

So, if we were to greatly reduce the average approval time – which shouldn’t be too hard – we could expect this to significantly increase the number of homes the industry could produce each year, without any increase in its size. Productivity improvement doesn’t come more clearly than this. And this relatively easy policy measure could also put a decent dent in our home affordability problem.

The other respect in which delays in approvals are costly comes from what economists call “the time value of money,” and normal people call interest rates. Construction companies have capital – borrowed or from shareholders – tied up and waiting for the off from approval bodies. So for every day that capital lies idle, the business has funding costs that aren’t matched by income-earning work.

One of the most useful things about the roundtable is the way it has produced evidence of the extent of something we rarely notice: overlapping and conflicting regulations, the surprising number of approvals businesses must get and the growing delays in getting them, as well as all the forms that regulators demand be filled, repeating known information.

They want economic growth and rising living standards, but they also want to transition to renewable energy, protect the natural environment, keep people safe at work, ensure diversity in the workforce, and various other completely legitimate concerns.

Trouble is, we’ve got all these outfits busily regulating this bit and that bit, without any outfit sitting over the top, regulating the regulators. Making sure the various bits fit together without overlap and contradictions, finding the best trade-off between the conflicting objectives, and forcing all the regulators to rationalise their form-filling, using uniform definitions and common databases.

That would be hard enough at the federal level, but it has to be achieved by agreement between the feds and the states, with the states getting their local government into line.

When you think it through, it’s not hard to see how excessive, unco-ordinated and conflicting regulation of businesses, with all its approval processes and form-filling, is clogging up the capitalist machine. Unclog the pipes and the machine would produce more each year without any extra inputs.

But regulatory reform has been tried before and achieved little before being slipped quietly into the too-hard basket. And even if the roundtable decisions were to lead to an almighty clean-out of the Aegean stable and a one-off lift in the level of productivity, the capitalist pipes would start clogging up again as governments continued to govern and regulation expanded.

So what we need is another permanent government agency, whose only job is to regulate the nation’s regulators in the interests of the regulated and the continued success of the capitalist machine.

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Candles don't quite cut it in a powerless share house

By MILLIE MUROI, Economics Writer

The good thing about century-old share houses is that they tend to be (relatively) affordable to rent. The bad thing about them? At any given time, they’re probably falling apart in one way or another – which, I’ve come to realise, is probably why their owners choose not to live in them.

Why live in these shacks yourself when you can sit on them as an investment – and extract income from the tenants for effectively house-sitting for you?

These were the thoughts I fell asleep to this week as the power to our Canberra share house was switched off on a freezing Monday evening after what was supposed to be a look into why our hot water supply had dwindled to zero.

This same week, Treasurer Jim Chalmers herded about 40 experts and leaders – including from business, unions and the public service – into the cosy cabinet room at Parliament House to talk about economic reform.

But as Sally McManus, secretary of the Australian Council of Trade Unions, noted on the final day of the roundtable, many people who are facing the brunt of the housing crisis weren’t actually in the room.

“We wouldn’t want to be in a situation where we ask people [in the room] to declare how many investment properties they might have,” she said. “[But] I think people have to check all of that at the door, and they’ve got to think, what’s the most important thing?”

Some – including McManus, Australian Council of Social Service chief executive Cassandra Goldie, and former treasury secretary Ken Henry – have been outspoken about intergenerational fairness and the need for urgent action on housing.

But it’s difficult to trust that the interests of renters and aspiring first home buyers – who make up more than one-third of the population – would have been adequately represented at the closed-door meeting where most were on six or seven salary figures and probably own their own home, if not also one or more investment properties.

As I arrived home on Monday, the electrician (our third in two weeks) was leaving. “Hi. How are you going?” I asked. “Better than you will be!” he exclaimed, explaining it would be negligent for him to turn our power back on given our wiring was effectively fried: “I’m surprised you guys haven’t been electrocuted through your water.”

As the temperature crept towards freezing, my housemates and I lit some candles, laughed at the absurdity of our predicament while nibbling cold food in the dark and dialled our landlord with dwindling phone battery. “You’ve got to laugh, or you’ll cry, hey,” he offered. Helpful.

It was a return to the Victorian era for us, huddled up in our ancient abode. “It’s how the house was built to be lived in,” one of my housemates joked.

There are about 11 million dwellings in Australia. At any given time, some are under renovation, some are changing hands, and others are left uninhabited for most of the year as holiday homes.

I’m convinced a large additional chunk also fail to meet minimum standards, but are rented by pensioners, low-income families and younger Australians squeezed by cost pressures and left with little choice but to accept the cards they have been dealt.

There are minimum standards for rental properties, but renters have very little power to push landlords to meet them. Why? Because renters lack bargaining power. Push too hard over cold showers, flooding drains or a broken back door, and you’ll often be met with an unfortunate rent hike at the end of your (usually 12-month) contract.

In a housing market with greater supply, landlords would have to comply to avoid their tenants walking out – or worse, being reported by those tenants.

But with the vacancy rate – the share of empty rental properties – falling to 1.2 per cent in July (lower than the same time last year), renters have very little wriggle room when it comes to finding a better home or negotiating their rent. Rental markets with a vacancy rate of 1 per cent are considered “extremely tight”.

Longer-term contracts between renters and landlords (say, for three or more years) would help. Not only would they reduce the constant anxiety of rent rises and being evicted at the end of a one-year contract, but they would also make it easier for renters to raise issues without fearing an imminent jump in their rent.

We also need to boost supply and wind back the unnecessary rewards we’re giving to landlords investing in existing property.

Investing in homes that have already been built is an extremely unproductive use of money because it doesn’t contribute to our economic growth.

Since 1993 when our Canberra share house sold for $268,000, its estimated value has soared to nearly $1.7 million. And for most – if not all – of that time, our landlord has also been raking in hundreds of dollars in rent a week.

That he has spent very little on maintenance or improvements is clear from the growing cracks in the wall, lack of heating and dangerous electrical wiring. Getting our hot water fixed took the admirable persistence of one of my housemates who insisted to our landlord that he pay for an electrician who wasn’t just a mate down the road.

Investing in homes that have already been built is an extremely unproductive use of money because it doesn’t contribute to our economic growth. Buying your own home is, of course, sensible. But if you have some money left over to invest, that money should be funnelled into business, upskilling, or even new housing, which help generate growth and make us better at what we do.

Of course, there is justification for incentives that apply only to new housing because that adds to supply, helping to dampen house price and rent growth.

But by providing a far-too-generous capital gains tax discount (a 50 per cent reduction in the tax on any profit pocketed from selling an asset, such as property, after 12 months) for existing homes, we’re doing at least three rather silly things.

First, we’re encouraging more investment into something we don’t need (buying up existing properties as an investment) at the expense of things we do need, such as investment into businesses and spending on new housing.

Second, we’re making it harder for people to buy their first home because they have to compete with investors who might otherwise have decided housing wasn’t as attractive a place to park their money.

Third, we’re missing out on tax money from people who have, for the most part, simply been lucky and will still – even if the capital gains tax discount is reduced – pocket big profits.

We should also go a step further. The family home – or primary place of residence – is currently spared from capital gains tax. That is, people can buy multimillion-dollar homes and sell them for a huge (untaxed) profit.

That’s about $50 billion of revenue every year that the government misses out on according to Treasury. If we scrapped the capital gains tax discount on all property, that would amount to a further $19 billion.

That tax revenue could dramatically expand the government’s $10 billion Housing Australia Future Fund, but it could also simply reduce the tax burden on disproportionately younger and less wealthy workers.

Not only would this reduce inequality and give everyone a fairer go, but it would encourage more work and business investment, helping to kickstart our stagnant productivity.

While the lights were back on in our old house on Tuesday evening, my housemates were too scared to ask for a rent discount this week. Better to let this one through to the keeper, they said, in the hope we are spared a rent hike in a few months’ time.

The people hardest hit by the housing crisis are generally those without the power to speak up – either in the rooms of Parliament House or in the cold rooms of their share house – but we shouldn’t leave them in the dark.

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I've changed my mind about red tape: it's well worth cutting

This is the week to understand something most people don’t: businesses don’t do productivity. Although the nation’s productivity happens – or doesn’t happen – mainly on the floors of the millions of Australia’s businesses, their dominant goal is to achieve higher profits.

So most of the “reforms” the business lobby groups are calling for in the name of improving productivity are really intended to help them increase profit.

There’s actually no reason businesspeople would want to spend any of their time contributing to the political debate other than to win favours from the politicians that make it easier for them to increase their profits.

Productivity and profit are related, but not the same. Productivity is a measure of the efficiency with which businesses (and other organisations) take raw materials, capital equipment and human labour and turn them into the myriad goods and services they produce to meet our needs.

So wouldn’t making a business more efficient in doing what it does also make it more profitable? It could – although economists are hoping the strength of competition in their industry will end up obliging businesses to pass on the benefit of their greater efficiency to their customers in the form of lower prices. But even if a weakening in competitive pressure – which seems to have occurred in recent years – could allow businesses to retain the benefit of any improvement in their efficiency, it’s still just one way to increase profit.

Business will always be seeking the easiest way to do it, and achieving greater efficiency – improved productivity – isn’t easy. It’s easier for big businesses to reduce competition by buying out their smaller competitors, thus making it easier for the remaining big boys to put up their prices.

And this is just what research by Treasury and the Reserve Bank says has been happening over the past decade or so.

Of course, the easiest way to increase after-tax profits would be to persuade the government to cut the rate of company tax. And – purely by chance, you understand – this is the top proposal to increase productivity that the business side is taking to this week’s economic reform roundtable.

Another favourite supposed productivity booster would be for the Albanese government to reverse the industrial relations changes it made in its first term, which were intended to shift the balance of bargaining power away from employers and towards employees.

Business’s third idea is for governments to cut back all the “red tape” that has tied business up in knots and to improve planning and the approval of major projects. It’s not hard to see how this would make businesspeople’s lives a lot easier and add a bit to their profits.

But here’s the thing: it’s equally easy to see that reducing excessive regulation and speeding up the approval of major investment projects and even ordinary homes could indeed make a probably small but worthwhile improvement to the economy’s productivity.

Certainly, those hard-nosed folk at the Productivity Commission are convinced. In her speech on Monday, the commission’s boss, Danielle Wood, gave some hair-raising examples of excessive regulatory requirements.

One provider told the commission it is required to complete 15 separate accreditation processes across the health and social care services. Another said it is accountable to 350 pieces of legislation and regulations, and has a minimum of 16 program audits every three years – many of which require them to provide the same information over and over.

Yet another service provider said the cost of repetitive audits and accreditation processes runs into the hundreds of thousands of dollars each year.

Elsewhere, businesses complain of delays extending to years for the approval or rejection of major construction projects, and many months for ordinary homes.

Now, I used to be sceptical of demands to get rid of red tape, fearing they were disguised demands by business fat cats to be able to damage the natural environment wherever they saw fit and build housing anywhere and everywhere. But the greater specificity of the latest proposals has convinced me there’s a real problem that is indeed wasting a lot of the private sector’s time and money.

Part of the problem is government agencies responsible for protecting the environment, or occupational health and safety, or public safety who, in their zeal, set the highest standards without regard for all the other things we need to protect – including our standard of living.

They’re like the French teacher who wants their students to spend all their time preparing for their French test, at the expense of all the other subjects they’re being tested on.

But a further complication is overlap between our three levels of government. If businesses in particular fields are being regulated by federal and state and local government, with overlapping and conflicting regulations and separate forms to fill in, this is confusing as well as wasteful.

And then you’ve got the sad truth that government departments and agencies are constantly temped to abuse their power over the rest of us, and often do. We know how private monopolies commonly overcharge and give their customers poor service. They do this for no other reason than that they can.

But the government is also a monopoly, and its departments and agencies are just as commonly able to abuse their power over us. They are the law, we can’t take our business elsewhere, and if it suits them to make us wait many months for their approval to build something, that’s your problem, not theirs. They save a little by employing too few workers to keep the approval process to time, and you bear the cost of the delay.

The more you think about it, however, the more you realise that streamlining regulation, so that a better trade-off between the many conflicting objectives of government is achieved, and the many cases of overlap between the three levels of government, won’t be easily or quickly done.

Maybe it would take a royal commission, with a continuing monitoring authority, rather than a three-day roundtable.

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Want better productivity? Keep wages growing strongly

Our economy has become unbalanced and is in danger of slowing to a halt. But not to worry. The Reserve Bank is determined to ensure that, should we sink under the sea, we won’t have had an inflation problem to worry about.

This is the week we fix our productivity problem, but how far we get remains to be seen. The problem is that, while improving the efficiency with which the economic machine converts inputs of raw materials, capital equipment and human labour into outputs of goods and services has been the way we’ve raised our material standard of living over the past two centuries, there’s been no improvement in this productivity for a decade.

But if that’s the problem, we still have a problem: no one wants to accept responsibility for fixing the problem. That’s for the government to do. Even the Reserve Bank wants to pass the parcel to the government.

Last week, while finally cutting the official interest rate by a click, the Reserve lamented the need to lower its assumed annual rate of improvement in productivity from 1 per cent to 0.7 per cent, with governor Michele Bullock noting there was nothing the Reserve could do about productivity.

The weirdest thing about this episode is the way the business lobbies have got away with portraying the lack of productivity improvement as having been caused by the government. It’s as though productivity is something created on the Cabinet room table, the product of good – or not-so-good – policy decisions.

You’d never know that the figure for national productivity improvement is largely the summation of what’s happening in all our farms, mines, factories and offices. By how much have each of them become more efficient at doing what they do.

But no one ever bothers to ask the bosses – or even their Canberra lobbyists – why they’ve stopped getting better at what they do. If they did, they’d be told it was all the government’s fault. Too much regulation and red tape, too high taxes and too little freedom to change their employment arrangements.

Yeah, sure. You get closer to the truth when you remember Sims’ Law. Rod Sims, the former competition watchdog, never tired of explaining that improving their productivity was just one of the ways businesses could increase their profits.

So, why has productivity improvement stalled? Because businesses have found other, easier ways to increase their profits.

To be fair, there are other, more technical reasons that help explain the lack of productivity improvement. One is our continuing shift from capital-intensive goods to labour-intensive services: it’s easier to use better machines to achieve more output per hour than it is to speed up humans.

Another reason is our recent growth in employment in the “non-market sector”, particularly aged care. When the taxpayers are covering much of the cost, it’s hard to measure productivity. And when the care objective is as much about quality as quantity, it’s hard to replace a motherly nurse with a robot.

But the debate in the lead-up to tomorrow’s economic reform roundtable has done much to clarify the chief cause of the productivity pause. The main way we’ve made workers more productive is by giving them more and better machines to work with. Labour-saving technology keeps advancing.

However, Treasury tells us that, as a share of gross domestic product, business investment in equipment and structures is lower than it was in the early 2000s.

So, why have businesses slackened in their efforts to make their workers more productive? Most likely reason: because the increased “concentration” of many industries – more of the market served by fewer big firms – has reduced competitive pressure and given those big businesses greater freedom to keep their prices high.

This brings us back to the Reserve Bank. Last week it was at pains to point out that its reduction in the assumed annual rate of productivity improvement from 1 per cent to 0.7 per cent meant that average annual earnings can’t grow by more than 3.2 per cent – down from the previously assumed 3.5 per cent – without stoking inflation.

What? Sorry, this is the risk-averse, conventional thinking of a bookkeeper, that puts avoiding inflation ahead of getting productivity improving and the economy, growing. It’s saying I’m responsible for inflation; productivity is someone else’s worry.

It’s also thinking that’s biased in favour of business, at the expense of households – the people whose interests businesses are supposed to serve. It’s saying that businesses must be free to make profits any legal way they see fit: if this is bad for their employees and the households they come from, tough.

The pro-business bias comes from the neoclassical model of the economy every economist carries in their head, which assumes that businesses respond rationally to the incentives they face. No, they don’t. They’re just as susceptible to fads and fashions as the rest of us – fashions reinforced by the sharemarket and its analysts. “Everyone’s doing X, why aren’t you? What’s wrong with you?”

In the Reserve’s case, the pro-business bias coming from the model is reinforced by it having a board stacked with businesspeople but, at best, only one person coming from the employees’ perspective. As well, the Reserve consults extensively with businesses, while not bothering to talk to the union side. (Little wonder their forecasts for wage growth are so consistently wrong.)

So profits growth is unconstrained, while big pay rises are a terrible worry because they could add to inflation. Trouble is, the economy is circular: when business fattens its profits at the expense of its workers, those workers turn into households that don’t have as much to spend on the things businesses are selling.

When you tolerate businesses fattening their profits by finding ways to keep their wage bill down, you’re helping them cut their own throats. But no one will be able to accuse you of letting inflation get away.

Back on productivity. One big reason businesses haven’t been investing much in the labour-saving technology that increases their productivity is that they’re not paying a lot for their labour. Use generous pay rises to raise the cost of labour relative to capital, then watch our productivity improve, retrospectively justifying the generous pay rises.

The Reserve needs to switch to a “growth mindset”.

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For some, reaching old age marks a historic first

By MILLIE MUROI, Economics Writer

As much as it is a privilege, caring for our parents and grandparents – the people we have relied on – can be confronting. We see their vulnerability, their pain, and we have to step up in ways we’re often unprepared for.

But ageing is a process most of us are at least somewhat familiar with, especially as life expectancy in Australia has eclipsed 81 years for men and 85 for women. For some communities, though, the experience of aged care is a historic first.

Speaking at the Independent Health and Aged Care Pricing Authority’s conference in Adelaide last week, Stan Grant – distinguished professor at Charles Sturt University, and a Wiradjuri, Kamilaroi and Dharrawal man renowned for his journalism – pointed this out.

“I stand here today older than both of my grandfathers were when they died,” Grant, 61, said. “It’s an incredibly sobering thought that as First Nations people, we are experiencing the first generation of ageing.”

Grant’s father, who is 85, has lived well beyond the 71-year life expectancy for First Nations men. But if not for some key factors, Grant reckons he would probably have died earlier.

“My parents have had to bury nieces, nephews and grandchildren,” he said. “Just a week ago, we had to bury a nephew of mine who was just 40 years old.”

One of the most important factors behind his parents outliving the national average is tied to a challenge facing the entire nation – but especially First Nations Australians – according to Grant: housing security.

“Every Aboriginal person like me who has closed the gap, every single one, has two things in their life: home ownership and an education,” Grant said.

Owning a home to live in, and to be cared for in, has been crucial – not only for his parents’ ability to live at home in their old age and be around family and their community, but also to Grant’s own personal success.

“I could go to sleep at night [as a kid] and know I wasn’t going to be woken at midnight to pack up and move somewhere,” he said.

After he moved school 14 times before even entering high school, Grant said his parents getting their own home meant he finally got to play in the same football team, get a tutor and have friends for more than six months.

The home ownership rate among First Nations Australians was 42 per cent in 2021 compared with 67 per cent in the broader Australian population.

Research last year found that among the broader population, older Australians who rent their homes tend to live shorter lives and have fewer years of good health compared with home owners – even after accounting for factors such as income and education.

University of Wollongong lecturer in statistics and data science Dr Kim Kiely said the research highlighted the need for more policies aimed at making housing secure and affordable, allowing people to stay connected to their community as they age.

Home or community-based care is especially important for many First Nations people, said Andrea Kelly, the interim First Nations aged care commissioner.

“Aboriginal and Torres Strait Islander people are often disconnected from country as they age,” she said, preventing elders from passing down knowledge, providing leadership and care, and safeguarding family, community and intergenerational wellbeing.

Kelly also said many stolen-generations survivors avoided mainstream services, because of a shortfall in trauma-aware care and because these environments could often resemble institutions these people were placed in as children.

“The lack of cultural safety is the primary deterrent for older Aboriginal and Torres Strait Islander people not accessing aged care,” she said, also noting the interpersonal and structural racism reported by First Nations people when accessing standard aged care.

While many Australians take for granted a level of familiarity, ease and comfort with aged care systems, Grant pointed out these were often not aligned with how First Nations families and communities are structured.

“The government very generously provides an allowance for the primary carer,” he said. “But we don’t have a singular primary carer. We have primary carers.”

Grant said it was invaluable for his parents to have the choice of medical services that didn’t require linguistic or cultural translation.

“My parents were within an hour’s drive of an Aboriginal medical centre where they felt comfortable, respected, and cared for,” he said. When they could no longer drive, the nurses came out to visit them.

These Aboriginal Community Controlled Health Organisations – known as ACCHOs – are run by Aboriginal and Torres Strait Islander communities and show an “incredible amount of innovation and entrepreneurship” distinguished professor and health economist Jane Hall said.

Kelly said the government should support and encourage more partnerships between these organisations and mainstream service providers until they could be better funded.

The Productivity Commission, in its final report before the productivity roundtable next week, also backed this suggestion and said these organisations needed to be sufficiently resourced.

While data is important for measuring outcomes and progress, Grant also spoke about the need to look beyond overall statistics which could mask inequalities among First Nations people, and flagged the need for policies to account for differing circumstances.

“The first or second generation Aboriginal middle class, who may be more literate, have greater access and live in more affluent areas, enjoy very different lives from communities including such as the one I’m from,” he said, with some people requiring more support than others, but those with access to resources tending to be better placed to receive that support.

Grant also stressed the importance of leaning into the expertise and strengths of First Nations people in improving the aged care system.

“We need Aboriginal people who have experience, who can bring that nuance and knowledge, understanding and cultural knowledge to bring better outcomes,” he said.

“It’s such a shame that during the Voice referendum we never got to talk about love and care, about health and ageing. We frittered away so many opportunities talking about petty politics and culture wars. Imagine having an entity with Aboriginal input that understands the intricacy and changing needs of our community.”

There is also a strong sense of community, family and responsibility towards elders embedded in many First Nations cultures which may be difficult to quantify but is crucial to our understanding and development of aged care.

“There is no way my parents would have been able to stay in their own home, as hard as that has been, if it wasn’t for the love, resilience and strength of their community,” Grant said. “You go to an Aboriginal person’s home, you’ll never be turned away. There’s always somewhere to sleep, there’s always another seat at the table, there’s always going to be enough food.”

While there is plenty left to do to improve the aged care system – especially for First Nations people – Grant’s father, the oldest man in his family’s history, is a picture of hope.

Grant’s experience is also a reminder that we are – in many ways – all in this together, with an important opportunity to connect, empathise and learn from one another.

“After my dad had had his first brain surgery, I had to help my father to the bathroom, and I’d never held that level of vulnerability before,” Grant said. “My dad, who was always an incredibly strong, powerful, muscled man … I felt how his arms were soft, how his legs shook uncontrollably. This is what people are experiencing right across Australia: the intimacy of care that none of us are really prepared for.”

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