OPINION: Get cracking, Mr Albanese – the economy needs a major overhaul
The Albanese Government will confront a series of severe economic challenges as it sits down to frame its agenda for Australia in the years ahead.
The ‘good news’ is that, in broad terms, the economy is doing quite well. Economic growth is rolling along at a decent pace and the unemployment rate is below 4 per cent for the first time in almost 50 years.
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Challenge number one will be to set a policy structure that sees these macro trends continue and, if possible, move to get the unemployment rate even lower.
The list of what might be called ‘bad news’ is long and complex.
In no particular order, given that all of the tough areas of economic nurture are important, the Albanese Government has inherited a budget position of neverending massive deficits, which means government debt is on track to hit $1.2 trillion if nothing is done.
With the yield on government bonds rising, the problem is that there is a risk the Government will soon be spending more on paying interest on that debt than on school education.
This demands a series of major policy changes that, in time and without upsetting economic growth, will impact a combination of lower spending growth and higher revenue.
Reverse tax cuts
One big-ticket item that would help this and would be fair and doable, given the structure of the new Parliament, is to reverse or restructure the so-called stage 3 income tax cuts. These cost the budget around $140 billion over the medium term and make the tax structure more regressive.
It would be a tough decision to scale this back, to be sure, but sometimes good economic management means taking money out of people’s pockets, especially when the budget needs urgent repair.
Such policy action on the budget would take some heat off inflation, which is poised to spike towards 7 per cent in coming quarters – a 30-year high.
Encourage RBA's rate hikes
While the Reserve Bank of Australia (RBA) is independent of government to a large extent, it would be constructive if the Labor Government encouraged the RBA to hike interest rates early and aggressively, to help get the inflation rate - cost-of-living pressures – back under control as soon as possible.
Rate hikes over the next 18 months that got inflation back under control would raise the prospect of interest rate cuts in 2024 and 2025 - in time for the next election.
The RBA’s task would be made a little easier if the budget repair noted above, was also fast tracked. If the Government can dampen some of the overheating in the economy, inflation will be eased with fewer interest rate hikes from the RBA.
Increase public service wages
Real wages growth is a problem for workers. Lowering inflation will help to ease cost-of-living pressures, but the Government can ramp up pay rises in the public service and argue for elevated pay increases in discussions before the Fair Work Commission.
This can include pushing for above-average wage increases in female-dominated sectors – mainly health care, teaching and aged care - which would have the benefit of narrowing the gender pay gap.
Open borders to foreign workers
Businesses cannot find workers. This labour and skills shortage is broadly based and is holding back the rate of economic growth. It is a large and growing problem.
It can be addressed in the short term by opening the borders to foreign workers.
This is starting to happen after the COVID lockdowns, but there would need to be care that the inflow does not flood the market and work against the other strategies of boosting wages.
Reform early-education sector
A fast tracking of childcare and early-education reforms will also boost the supply of labour, as it encourages a jump in workforce participation - particularly for women - and it too will help in the long-run task of closing the gender pay gap.
Longer term, there needs to be a policy agenda to lift the skills, knowledge and education of the local workforce.
This involves investing in education and training and will take time to take effect, but this is a productivity-boosting policy change that adds to the supply of skilled labour, boosts incomes and lifts the speed limit for growth in the economy.
These are some of the big-ticket economic issues. Others relating to gender equality, superannuation and climate change, to name a few, are also vital and will be part of the all-important reform agenda.
Some tough decisions are needed to sustain the economy for the years ahead.
The Prime Minister, Treasurer Jim Chalmers, Finance Minister Katy Gallagher and the whole Government, have a lot to do and they need to get started today.
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