Phil Gaetjens has rebuffed claims that inequality is out of control in Australia.

Gaetjens flags productivity push

Tuesday, 4 September, 2018 - 20:27

Treasury secretary Phil Gaetjens has said policies to improve labour productivity would be critical if Australia was to continue its record run of growth, while hitting back at claims about growing inequality.

Speaking at the University of Western Australia for the annual Bateman economics lecture, Mr Gaetjens said Australia could not continue to rely on strong terms of trade as a long-term source of income growth.

Those terms of trade improved significantly during the mining boom years, adding about 1.5 per cent to national income annually from 2005-06 to 2010-11.

But he said the move in the most recent five years been rapidly in the other direction, while reduced labour utilisation was also a handbrake on growth.

Instead, stronger labour productivity, meaning enabling workers to do more for a given level of effort, would be key.

That meant capital deepening and improved technology.

Mr Gaetjens, who worked on a series of reforms in his career, including on road freight pricing and privatisations, said strengthening competition and modernising the tax system should be the two key policy targets to improve labour productivity.

He highlighted the Hilmer competition review of 1993 as an example, which recommended big changes to competition law, including expansion of the trade practices act and encouraging competition in provision of previously government controlled services.

The ultimate impact was to improve GDP by about 2.5 per cent to 2005, Mr Gaetjens said, and lower prices for commodities such as milk and power.

With regard to tax reform, he said it was increasingly difficult to protect the revenue base as the economy became increasingly digitised.

On inequality, Mr Gaetjens cited a recent report by the Productivity Commission, which showed the benefits of growth had been reasonably well distributed across the economy.

“Measuring on a disposable income basis, inequality in Australia is close to the OECD average,” Mr Gaetjens said.

“It rose slightly over the 30-year period (to 2016), but not as fast as others in the OECD, and has decreased since the GFC.

“Australia’s progressive income tax and targeted transfer system plays a significant role in reducing Australia’s inequality – the gini coefficient for disposable income is around 30 per cent lower than private income.

“Further adding Australia’s in-kind transfers to recognise consumption of services lowers the measure again in the order of 25 per cent.”

Other data from the Productivity Commission showed disposable income grew across all income deciles (groups of 10 per cent of population ranked by income) from 1988 to 2016.

For the lowest income earners, disposable income grew 2 per cent annually, or about the average across all incomes.

Among high income earners, it grew about 2.4 per cent.

Finally, the level of income mobility was good.

“People at the bottom tend to move up, and people at the top tend to move down,” Mr Gaetjens said.

“The commission found that fewer than one in a hundred Australians stayed in the same income decile over the 16 years and almost 90 per cent of Australians moved three income deciles or more.

“The number of people with significant mobility is high – compared with the United States the commission finds Australia’s mobility is higher and the top and bottom are less ‘sticky’.”