Productivity in Federal Budget
'Skills, competition, infrastructure': top economists tell Chalmers what belongs in his productivity package
Top economists want Treasurer Jim Chalmers to spend his 12 May Budget fixing the supply side of the Australian economy.
Offered a choice of nine measures identified as likely to lift productivity growth 30 leading economists polled by the Society's National Economic Panel backed three: expanding fee-free TAFE places, strengthening anti-trust enforcement, and bringing forward investment in freight and supply-chain infrastructure.
The economists chosen for the poll are from a panel of about 70 experts in fields including macroeconomics, labour markets, tax and competition policy who have been surveyed since 2015.
Chalmers has already promised the Budget will contain a productivity package and has said it will aim to "lift the speed limit" of the economy. Since the Covid-19 pandemic GDP per hour worked has stayed basically flat, an outcome the Productivity Commission describes as "continuing to disappoint".
More than half the panel, 17 of the 30 economists surveyed, picked "expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations" among their top three preferences. Running a close second, 15 of 30, picked "strengthen anti-trust laws and increase funding for the ACCC". Eight ranked it first, more than any other option on the list.
Jenny Gordon said reforms that "address the mismatch in job skills to needs, improve competitive pressures, and reduce transaction costs" have a direct productivity benefit. Lata Gangadharan tied skills and competition together: investment in education helps workers adopt new technologies, while policies that promote competition encourage firms to "become more efficient and develop new products and processes".
David Johnston said he had deliberately chosen policies with "short- to medium-term effects". Strengthening competition should "help reallocate inputs toward more productive firms" and expanding TAFE could "ease skill shortages and improve job matching". Infrastructure was important, he said, but he had ranked it lower "due to implementation lags being common and the difficulty of doing it well".
Corporate tax cut divides the panel
Cutting the corporate tax rate polarised the panel. Five economists ranked it first — more first-place votes than childcare, PRRT reform, or freight infrastructure received — but only two more mentioned it anywhere else in their top three.
Michael Knox argued that the gap between US labour productivity growth of 1.7% and Australia's 0.7% reflected "an investment boom in factory building" underwritten by the US reducing its average corporate tax rate to 25.6%. David Byrne said Australia had "some of the highest corporate income taxes in the developed world" and proposed offsetting the revenue loss with "super-profit taxes on energy-related exports" such as LNG.
Beth Webster disagreed strongly replying: "There is no clear evidence that reducing corporate tax will increase investment spending… because of the levels of foreign ownership and franked dividends." Her preferred measure — reforming the Petroleum Resource Rent Tax to increase revenue from LNG exports — was explicitly about raising money "that will cascade down to the other objectives" of skills, infrastructure and childcare.
Saul Eslake agreed the PRRT should be reformed, but cautioned "I don't think it would do anything to improve productivity" — a useful reminder that good tax policy and good productivity policy are not always the same thing.
Leonora Risse, who picked TAFE first, said reducing financial barriers to universities and TAFE "expands our country's productive capacity through increased workforce skills", while cracking down on anti-competitive practices "flushes out inefficiencies in the economy, and incentivises more innovation". On personal tax, she suggested reducing the thresholds at which higher marginal rates take effect — countering bracket creep — was a more targeted way to lift workforce participation than cutting headline rates.
Several panellists used the poll's "blue sky" section to flag an option missing from the menu: research and development.
Australia spends around 1.9% of GDP on R&D, against an OECD average close to 3%. Joaquin Vespignani said lifting R&D investment across schools, TAFE, universities and business "would strengthen human capital, accelerate innovation, and support stronger long-run productivity growth". Michael Keating, Jeffrey Sheen, Mala Raghavan and Risse independently flagged the same gap.
John Quiggin nominated support for "an Australian open-weight large language model, similar to European Mistral". Alison Booth proposed removing negative gearing. John Freebairn called for the re-establishment of enterprise bargaining, simpler regulation, and a review of Commonwealth-State financial arrangements.
First do no harm
Not every panellist was convinced the exercise was coherent. Gigi Foster said she did not think any of the options on the list would "move the dial much" and had simply picked the three she viewed as "least likely to reduce measured productivity".
The Treasurer has a month to go until budget night. The panel's shortlist should provide a guide as to what we might expect to see announced.
Responses (42)
Nicole Black.
1. Introduce universal free access to three days per week of subsidised childcare
Harry BlochThe notion that lifting average productivity should be a target in the Commonwealth budget deliberations is intuitively appealing, especially if the focus is on labour productivity rather than the more esoteric measure of total factor productivity. Average labour productivity is measured as real GDP divided by total hours worked, where real GDP measures the total value of goods and services produced in the economy adjusted to remove the effects of inflation. What could be more straightforward? Well maybe not. A couple of examples illustrate the depth of the difficulties that undermine the use of the measure. I start with the example of productivity in the mining industry. Research I carried out with the Productivity Commission showed the boom in mineral prices at the start of this century was associated with sharply falling productivity. When prices are high, it's profitable to mine low-quality deposits of minerals even though output per hour worked is low. The material standard of living is nonetheless higher with workers getting higher wages, governments higher royalties, and companies higher profits. Why, because they are producing more valuable output, even though the quantity of output per worker is lower. In this case, it's the value of the output that matters as most of the output is exported so the higher price is a gain to Australia. A second example involves the expansion of the scope of the market, particularly into service areas that provide low-wage employment as with the gig economy and early childhood day care. Low wages mean companies can make a profit providing these services even when the output per hour worked is low. The average output per worker for the whole economy is dragged down by expanding the share of these services in aggregate GDP. There are further issues involved in how you measure output of these services. The number of children cared for ignores the quality of care, while the number of kilometres travelled in delivering a restaurant meal ignores the possibility of using a closer provider. Expansion of market activity shows up in a higher workforce participation rate, increased employment, and higher aggregate real GDP, but the impact on real GDP per hour worked is ambiguous. Even if the expansion of market activity leads to an increase in real GDP per hour worked, the impact on the quality of life is unclear. Replacing a public park with a housing estate increased aggregate GDP but may not increase the average quality of life across society. The market undervalues many things, including public amenity, social cohesion, art, culture, diversity, and the natural world. My basic point is that focussing on productivity as measured by average real GDP per hour worked is a fool's errand. There are technical problems with aggregating market values to reach a meaningful summary measure of real GDP per hour worked, as well as the more basic problem with valuing output solely by market prices. I have ticked boxes for increasing funding for TAFE places, bringing forward investment in transport infrastructure and moving to a four-day work week. access to capabilities' as policies that would lead to improved productivity as these are desirable policies for improving the functioning of the economy regardless of their impact on GDP per capita. Shortages of critical skills and bottlenecks in transport hold back the expansion of valuable economic activity, while moving towards a four-day work week would help convert the expansion of activity to a better quality of life.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
3. Introduce a 4-day work week, under the 100-80-100 rule
Alison BoothMore Comments
Remove Negative Gearing.
1. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
2. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
3. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
Robert BreunigReduce regulation
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Anything that reduces the tax burden on those that actually do the work in Australia would be most welcome.
1. Reduce income tax
2. Reduce corporate tax
3. Reduce income tax
David ByrneActively redesigning markets to promote competition between suppliers. Redesigns are viable in major areas like healthcare and energy markets, which can yield cost-of-living relief while promoting competition and dynamism.
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We have some of the highest corporate income taxes in the developed world which stifle incentives for international companies to invest in the country and startups to innovate and enter markets. We could offset these tax cuts through, e.g., super-profit taxes on energy-related exports.
1. Reduce corporate tax
2. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
3. Reduce income tax
Ken Clements.
1. Reduce income tax
Deborah Cobb-Clark.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
3. Introduce universal free access to three days per week of subsidised childcare
Craig EmersonThe use of AI and at-home care in health and aged care
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Introduce universal free access to three days per week of subsidised childcare
3. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
Saul Eslake(1) Be far more aware of the trade-offs between 'security' and productivity when making decisions about [all forms of] 'security'. (2) Abandon policies which explicitly seek to, or otherwise have the effect of, inducing factors of production to move into manufacturing (since, in Australia, unlike most other 'advanced' economies, manufacturing is a low-productivity industry). (3) More actively promote policies intended to lift productivity in intrinsically low-productivity (at least, as currently measured) sectors (the so-called 'care' economy, but also tourism and retail).
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I'm much in favour of reforming the PRRT to increase revenue from LNG exports but I don't think it would do anything to improve productivity
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Gigi FosterGet the government out of the way in as many sectors as posible - reduce red tape, reduce regulation, reduce compliance costs for businesses an would-be entrepreneurs.
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I don't think any of the above things will move the dial much in the desired direction, but i've picked the ones that in my view are least likely to reduce measured productivity.
1. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Introduce a 4-day work week, under the 100-80-100 rule
john FreebairnRe-establish enterprise bargaining to provide incentives and rewards for different business units in each industry to find and then implement improvements in productivity to fund higher wages and lower product prices.
Reconsider the objectives of regulations and then simplify their implementation to reduce transaction costs and to reduce barriers of for the entry of new entrant firms. Re-evaluate Commonwealth-State financial arrangements to reduce duplication, blame-shifting and overall government costs.
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Reform of PRRT with extra funds to reduce income tax are only components of a much larger and more comprehensive tax reform package.
1. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
2. Reduce income tax
3. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
Lata GangadharanSafe and responsible use of AI
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Policies to improve productivity in Australia could focus on strengthening skills and education, increasing competition and innovation, and expanding workforce participation. Investing in education and training helps workers acquire the skills needed to adopt new technologies and adapt to changing labour market demands. Policies that promote competition and innovation, such as reducing barriers to entry for firms and supporting research and development, encourage businesses to become more efficient and develop new products and processes. In addition, measures that increase workforce participation, including improved access to childcare, flexible work arrangements, and policies that support the inclusion of underrepresented groups in the labour market, can help ensure that more people contribute productively to the economy.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
3. Introduce universal free access to three days per week of subsidised childcare
Jenny GordonReform the capital gains tax so that it encourages productive investment, reduce/remove the discount for passive investment (allow for income averaging over the asset holding period to deal with the lump sum problem pushing into the top tax bracket in the year of realisation).
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The question is about productivity so reforms that address the mismatch in job skills to needs, improve competitive pressures, and reduce transaction costs have a positive benefit. But right now I would say changing the PPRT to capture the windfall gains from gas suppliers should be a priority. It has no productivity cost and will help fund the investments needed to skills and infrastructure that do have productivity benefits.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Richard Holden.
1. Reduce corporate tax
2. Reduce income tax
3. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
David JohnstonMore Comments
I've chosen policies that, if well implemented, could have short- to medium-term effects on productivity. Strengthening competition policy should help reallocate inputs toward more productive firms. Expanding targeted TAFE places could ease skill shortages and improve job matching. Infrastructure investment is also important, but I ranked it lower due to implementation lags being common and the difficulty of doing it well.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Guyonne KalbEncourage large employers (such as major hospitals, universities, large head offices of firms/companies) to set up on-site childcare for their employees. Develop policies to encourage a more equal distribution of paid and unpaid work, with more people participating in the labour force at a lower average number of hours. This would be particularly relevant to couple families where work and care could be divided more equally, while keeping total income similar to before. Unlike the 100 80 100 rule its success doesn't depend on people being equally productive at 80% of their work time as at 100% work time, but if there is a productivity dividend as a result of lower market work hours per person then that is a bonus that can be shared between employer and employee.
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The three options chosen are each important and work best when combined to ensure there are no unnecessary impediments to economic growth in Australia. I do not necessarily see a ranking in these three options. I also believe that the Job Ready Graduates funding arrangements would need to be removed at the same time as it does nothing to encourage economic growth and it is not clear that it targets areas of labour shortage particularly well (if at all).
Although reliable and affordable childcare is crucial for strong economic growth, I do not believe that the approach proposed under the options above is the best way to do it. It seems that whenever further/higher subsidies are introduced, the childcare fees increase shortly after that while childcare workers (who are underpaid relative to their qualifications and relative to the large responsibilities that they have) do not seem to be paid any better as a result. What childcare needs is more regulation to ensure children are safe and receive high-quality care and ideally also early education while staff are properly remunerated for their skills and the responsibility they have; childcare should not be treated like a profit-making business but more like schools.
1. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
Michael KeatingImproving R&D, including in universities and CSIRO
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The highest priority is to raise more revenue so that government services can be funded without continuing the budget deficit.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
3. Introduce universal free access to three days per week of subsidised childcare
Geoffrey Kingston.
1. Reduce corporate tax
2. Reduce income tax
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Michael KnoxThe US also also acted to reduce corporate regulation . Australia has also got itself bogged down into a high priced scheme for renewable electricity . The US is actually achieving a reduction in greenhouse gas emissions by concentrating on generating electricity through the use of Natural Gas and Nuclear. It is time we concentrated on what works rather than Naive Party Politics.
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Standard and Poors say that US Labour productivity is running at 1.7%.
The RBA say that Australian Labour productivity is running at 0.7% .
What is the difference in policy ??
The US is enjoying an investment boom in factory building .
We are not. The US has reduced its corporate tax rate to an average rate of 25.6% . The US also has lower personal Income taxes than we do .
1. Reduce corporate tax
2. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
3. Reduce income tax
Guay Lim.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
James Morley.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Reduce income tax
3. Reduce corporate tax
Margaret Nowak.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
3. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
Alison PrestonWe should embrace new approaches to measuring productivity. Current frameworks do a poor job of capturing productivity in non-market sectors such as care, where outputs are difficult to quantify and quality is central. As a result, measured productivity growth in these sectors often appears weak or stagnant, even where outcomes and societal value are improving. This risks distorting public debate, with some commentators characterising the care economy as a drag on productivity, when in fact it underpins labour supply, supports human capital formation, and generates significant economy-wide benefits.
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1. Access to affordable and quality Early childhood education and care (ECEC) plays a central role in driving national labour force participation (particularly female) and productivity. Recent changes in ECEC policy guarantees a minimum of three days of subsidised care per week -meaning we do not yet have a universal free ECEC system. When care is unavailable or unaffordable hours are reduced, careers are interrupted and human capital is underutilised. ECEC also contributes to child-development and long-term productivity.
2. The Universities Accord recommends: "The Review recommends that the Australian Government reduce student contributions for those affected by JRG and moves towards a student contribution system based on potential lifetime earnings." The Review goes on to correctly state: "...some features of HELP are now outdated. Higher student contribution amounts, particularly those imposed through the JRG package, have significantly and unfairly increased what students pay. While the HELP system protects students by ensuring that the day-to-day financial impacts scale with their income, cost of living pressures and higher than usual inflation rates have increased concerns about the HELP system. Higher levels of HELP indebtedness, and the public debate about these developments, risk deterring some people from seeking higher education at exactly the time we need growth in participation. The Review therefore believes the HELP system needs to be modernised to make it fairer and simpler. Detailed changes have been recommended to reduce the financial burden of repayment on low-income earners, particularly women and those just starting out in their careers, limit disincentives to do additional work, change the timing of indexation to deduct compulsory repayments first, and ensure that HELP liabilities do not grow faster than wages. " (P.4). These recommendations should be urgently adopted.
1. Introduce universal free access to three days per week of subsidised childcare
2. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
3. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
John QuigginSupport an Australian open-weight LLM, similar to European Mistral
1. Introduce a 4-day work week, under the 100-80-100 rule
2. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
3. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
Mala RaghavanBoosting research and development, fostering university?industry collaboration, and enhancing digital capability (AI?enabling investment and technology adoption) programs will accelerate innovation and technology diffusion, particularly among small and medium-sized enterprises (SMEs) and in public services, supporting sustained productivity growth.
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Australia?s long-term productivity growth necessitates targeted federal investment in human capital, infrastructure, competition, and innovation. (i) Expanding education and vocational training to align with industry needs will enhance workforce capabilities and facilitate technology adoption. (ii) Strategic investments in infrastructure, including transport, clean energy systems (which are critical in the current energy-constrained environment), and digital connectivity, will help reduce bottlenecks and increase efficiency. (iii) Enhancing market competition, particularly by strengthening the ACCC, will encourage innovation, the adoption of new technologies, and better resource allocation.
1. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
2. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
3. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
Jeffrey Sheen> Planning and zoning reform to increase housing supply making it more affordable. > Expand R&D tax incentives > Fund applied research and commercialisation > Subsidise investment in applied AI and advanced manufacturing
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While all of these options have some merit, the ones I haven?t selected better serve other objectives and face tradeoffs.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Julie Toth.
1. Strengthen anti-trust laws and increase funding for the ACCC to more actively prevent (and dismantle) anti-competitive consolidation in highly concentrated sectors
2. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations
3. Remove the Job Ready Graduates funding arrangements in line with the Universities Accord recommendation
Joaquin VespignaniInvestment in education at all levels is still one of the most effective ways to improve productivity. Australia?s investment in research and development remains low by OECD standards, at around 1.9% of GDP compared with an OECD average of around 3.0%. Lifting investment across schools, TAFE, universities, and R&D would strengthen human capital, accelerate innovation, and support stronger long-run productivity growth.
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There can be an important economic synergy between lower corporate and income taxes and higher infrastructure investment. Tax reductions can improve incentives to invest, work, and take risk, while infrastructure investment lifts the economy?s productive capacity by reducing transport, energy, logistics, and connectivity bottlenecks. Together, they can generate stronger productivity gains than either policy in isolation, provided the tax cuts are fiscally sustainable and the infrastructure spending is well targeted toward high-return projects.
1. Reduce corporate tax
2. Reduce income tax
3. Bring forward and expand investment in freight and supply chain infrastructure to reduce business transport costs
Beth WebsterAustralia needs to reinforce innovation clusters to give business the confidence to invest in risky but ultimately high reward new industries.
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Intruducing a monopoly rent tax will provide the revenue to government that will cascade down to the other objectives. Hence it should be the prime objective. There is no clear evidence that reducing corporate tax will increase investment spending . This is because of the levels of foreign ownership and franked dividends.
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Intruducing a monopoly rent tax will provide the revenue to government that will cascade down to the other objectives. Hence it should be the prime objective. There is no clear evidence that reducing corporate tax will increase investment spending . This is because of the levels of foreign ownership and franked dividends.
1. Reform the Petroleum Resource Rent Tax to increase revenue from LNG exports
2. Introduce universal free access to three days per week of subsidised childcare
3. Expand the National Skills Agreement to fund additional fee-free TAFE places in priority shortage occupations