It’s encouraging to see the scepticism with which this week’s intergenerational report from Treasurer Josh Frydenberg has been greeted. Any attempt to peer 40 years into the economy’s future will prove close to the mark only by happy accident.
But it’s discouraging to see the way the usual suspects have seized on the report’s most glaring weakness to do no more than push their vested interests in the name of “reform”.
This fifth version of the five-yearly intergenerational report allows us to see how far astray the report’s earlier projections have been, even though we’re only halfway towards the first report’s picture of the economy in 2041.
In their projections of growth in the population, its authors have repeatedly overestimated the fertility rate (expected number of births per woman) and underestimated the growth in net overseas migration (foreigners arriving minus locals leaving).
They predicted that the retirement of the Baby Boomers would see a fall in the rate at which people of working age participate in the labour force, but this “participation rate” has recently been at record highs.
It would be nice to think that, since the object of all these projections has been to alert us to looming pressures on the budget – caused, in particular, by the ageing of the population – governments have responded accordingly, thus making the reports’ prophecies self-defeating. Nice, but not likely.
The pandemic, and the expected four years of weak net overseas migration in particular, is rightly blamed for our population “growing slower and ageing faster” than previously expected. And slower growth in the size of the population means slower growth in the size of the economy.
We’re told that, whereas real GDP grew at the average rate of 3 per cent a year over the past 40 years, it’s now projected to slow to an average rate of 2.6 per cent over the coming 40.
But the justification for our obsession with economic growth is our desire for faster improvement in our material standard of living. And here’s a point Frydenberg hasn’t highlighted: according to the report’s calculations, the projected marked slowing in the economy’s overall rate of growth is expected to affect growth in GDP per person – a crude measure of living standards - only a little.
GDP per person’s average annual growth is projected to fall only from 1.6 per cent over the past 40 years to 1.5 per cent over the coming 40.
It’s here, however, that business and its media cheer squad have read the fine print and are deeply sceptical: that projection of GDP growth per person rests heavily on the mere assumption that the productivity of labour (output of goods and services per hour worked) will improve at the same average annual rate in the coming 40 years as it did over the past 30 years.
And they’re right. Of all the many assumptions on which the report’s mechanical projections depend, this assumption is far the most critical. As Frydenberg rightly says, improving productivity is what explains almost all the improvement in our standard of living over the decades.
And the sceptics are right to doubt that productivity will improve over the next 40 years at anything like the rate of 1.5 per cent a year. For a start, that 30-year average includes the 1990s, a decade when productivity improved at a rate far higher than experienced before or since.
For another thing, productivity improvement in recent years has been much weaker than usual.
So, purely by omission, the latest intergenerational report reminds us of the second biggest threat to our living standards: a continuing slump in productivity. (The biggest threat is the world’s inadequate response to climate change – another thing the report omits to take into account.)
What’s discouraging, however, is the way the business lobby groups have used this inadvertent reminder to bang the same old self-serving drum. The productivity slump has been caused by this government and its predecessors’ failure to continue the economic reform program begun by Hawke, Keating and Howard, we’re assured.
And what reforms do they have in mind? A cut in the rate of company tax for big business and changes in the wage-fixing rules to make the labour market more flexible for employers.
This lobbying is objectionable on three grounds. First, it implies that productivity improvement depends on an unending stream of changes in government policies, which is absurd. The day “reform” stops, productivity stops.
Second, it shifts the blame for weak productivity improvement from the actions of the private sector – in whose farms, mines, factories, offices and shops productivity either gets better or worse – to the politicians in Canberra.
Third, it seeks to disguise blatant rent-seeking as economic “reform”. Productivity would improve if business owners and high income-earners paid less tax, leaving the punters to pay more, and if the balance of bargaining power between bosses and workers shifted further in favour of bosses.
What this self-serving bulldust ignores is that productivity improvement has slumped in all the rich countries, not just in Australia because our pollies are so defective.
Michael Brennan, chair of the Productivity Commission, says the world’s economists are still debating the causes of the productivity slowdown.
They’ve pointed to “mismeasurement issues, a shift towards lower productivity industries, population ageing, a slowdown in the pace of technological discovery, a slowdown in the pace of technological diffusion, a plateauing of improvements in human capital, reduced rates of firm entry and exit, increased concentration and market power, lower capital investment, a shift to intangible capital and the slowing growth in global trade”.
As Melinda Cilento of CEDA, the Committee for Economic Development of Australia, has noted, “research by federal Treasury . . . showed leading Australian firms were not keeping up with leading global firms on productivity”.
Treasury would be much better employed continuing to research the causes of our productivity slump than doing literally unbelievable projections of what’s unlikely to happen over the next 40 years.
