How much does economic reform matter?

For what it’s worth, I regularly disagree with material that the Grattan Institute puts out, but it does perform a valuable service in its analyses. Alan Davies has noted their latest one on “economic reform priorities for Australia”. Their goal? Ignoring political feasibility and other costs and benefits (such as social, environmental, or distributional), to identify economic reforms that are likely to provide a substantial increase in incomes within the next decade.

Starting with something of a random grab-bag of ideas, they reject a large number popular in present political debate as not meeting their stated criteria such as massive increases in transport infrastructure, IR reform, foreign investment liberalization, and so on, for any number of reasons, and come up with three which they think will make a substantial difference to Australia’s net national income: changing the tax mix (notably by putting food, education, and health services into the GST), increasing women’s participation rate in the formal labour market, and increasing older Australians’ participation in the formal labour market.

I have considerable sympathy with report author John Daley’s rationale for focusing on the economic. But in his very first paragraph he makes what I’ll charitably describe as a gross simplification:

Economic reform matters. Done well, it is the only way to sustainably improve the well-being of citizens in the long run. Greater economic growth both increases individuals’ material living standards, and enables societies to invest in many of the non-material factors that improve people’s lives.

Well, no. It might the the only thing that governments can do, but time and capitalism does a pretty does a pretty effective job on its own. Absent the three proposed economic reforms here, Australians are still likely to be better off in 2022 than in 2012.

Were we to maintain our long-term trend growth (for the purposes of argument, the average growth in the period 1973-2011), Australia’s GDP per capita would be expected to increase by about 18% over the next decade. The Grattan Institute estimates that, were reforms in the three areas along the lines they propose to be implemented, Australia’s GDP in 2022 would be $75 billion higher than it would be otherwise. Spread across 26 million Australians, this equates to a GDP per capita an additional 4% higher than it would otherwise have been.

OK, you might argue that our long-term trend growth over that period is in substantial part due to the economic reforms of the 1980s and 1990s. But even if you take the average over the 1973-83 decade of horrors, Australia’s per-capita GDP increased roughly 8%. Still double what these reforms can deliver.

Still, an extra 4% per capita over the next decade is nothing to sneeze at. ver the next decade would pay for all sorts of nice things including the NDIS, a beefed-up global warming mitigation package, Denticare, a big rise in NewStart – and leave plenty left over for the the next few generations of iPads and the occasional overseas trip.

But at this point a lack of goods and services is, arguably, not our most pressing national concern. So we’d want to think long and hard about the downsides of any GDP-enhancing reforms.

Anyway, in future posts I’ll do my best to pick apart the Grattan Institute proposals and see whether they actually stack up in a wholistic sense.

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