Ross Stitt bemoans the state of Australian politics when it comes to economic development

The last couple of weeks have been a reminder of the depressing nature of Australian politics. And Australian politicians.

On 18 January, the International Monetary Fund published its latest Country Report on Australia. In addition to providing copious statistics about the Australian economy, the report identifies the key challenges facing the country and makes a range of policy recommendations to address those challenges.

Many of these recommendations are not new and have been advanced by other institutions, in some cases for years. The tragedy is that Australian governments continue to ignore most of them.

Perhaps the worst example is the issue of tax reform. The IMF report states that; ‘comprehensive tax reforms remain indispensable to long-term fiscal sustainability and productivity’.

The report specifically highlights Australia’s excessive reliance on direct income tax and its underutilisation of indirect taxes.

This outlier status reflects Australia’s relatively high income tax rates and modest GST regime. The rate of GST is just 10% and many goods and services are excluded from the regime, including food, health, and education. A poor imitation of the NZ regime.

The IMF recommends greater use of indirect taxation, albeit with appropriate support for vulnerable households. It warns that without such a rebalancing, there will be ‘growing dependence on bracket creep’. This is inevitable as the population ages and the ratio of workers
to non-workers declines.

Just last October, the Economic Survey of Australia from the Organisation for Economic Co-operation and Development expressed the same view of Australia’s tax system and made the same recommendation. Indeed, a range of experts and organisations have been saying the
same thing for years.

But nothing happens.

Increasing the rate or expanding the scope of GST is off the table for both major parties. Not because it’s a bad idea but because both sides view it as politically risky. As is so often the case in Australia, political expediency trumps good policy.

There was little political comment when the IMF’s report was released. However, the government and the opposition have spent the last week fighting about tax. Unfortunately, the fight is about income tax rates and thresholds, not comprehensive structural reform of the type seen as indispensable by the IMF.

Even then, the focus of the fight is a broken election promise by the government rather than the underlying tax issues. Politicians on both sides are more concerned about the political implications for the next election than the economic consequences.

Another substantive topic in the IMF’s report is Australia’s productivity crisis. One graph in the report stands out.

The picture is striking – a decade of stagnation in the manufacturing sector. This is not what you want in a sophisticated modern economy.

The IMF calls for structural policies to address this significant problem, including more investment in digital infrastructure, a more open foreign direct investment regime, and appropriate labour market and tax reforms.

Again, this is not new and other institutions like the OECD (and Australia’s own Productivity Commission) have been making similar calls for a long time. But again, governments seem unable to listen and act.

Why? There are many reasons but prominent among them are the fact that Australia’s major political parties protect vested interests, avoid political risk, cling to party ideology, and all too often, lack the competence to identify and implement good policy.

Australia is a wealthy country with a relatively buoyant economy despite its politicians, not because of them. Its enormous mineral wealth masks its poor governance and facilitates complacency.

The latest Annual Global CEO Survey from PwC suggests that complacency may not be limited to the political class in Australia.

In spite of multiple challenges like rapid technological change and a constantly shifting regulatory environment, most Australian CEOs appear comfortable with business as usual. 85% say that if their company continues running on its current path, it will remain economically
viable for the next decade and beyond. The figure is just 53% among global CEOs.

This position is reflected in where businesses derive their revenue. Over the last three years new products have contributed significantly less to company sales in Australia than in other regions.

These figures suggest Australian companies may be less innovative and more inflexible than their international peers. That can’t be good news.

PwC Transformation Lead Partner Rohit Antao puts it in the following terms –

From PwC’s perspective, the data indicates that CEOs in Australia are not moving fast enough to adjust their business models – and the operational resources that support them – to adapt to the reinvention imperative.

Not moving fast enough? The IMF, the OECD, and many others rightly make the same criticism of the Australian government.

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.