Blame bigger government for falling living standards

Across the West, incumbent governments have been falling, from New Zealand and the UK to the US — and most likely Canada later this year. While each government had its own flaws, common to all was broad public dissatisfaction with declining living standards amidst sustained inflation. Similar pressures face Australian governments.

Understanding why this is happening is important. The fact is the current cost-of-living malaise in Australia is the result of years of well-intended bipartisan policies that have expanded the role of government at the cost of long-term productivity.

Many people roll their eyes at the mention of the word, but productivity matters. Simply put, productivity means output per hour worked; and without growth in productivity, our living standards deteriorate.

Australia has been here before. Indeed, a combination of sluggish productivity, inflation and economic stagnation was the norm almost 50 years ago. That crisis prompted a group of thinkers, including newspapers (such as the AFR) and think tanks (such as the Centre for Independent Studies), to promote a reform agenda of deregulation, privatisation, fiscal prudence and economic liberalisation. Political leaders on both sides took note.

The result was about three decades of growth with low inflation, low unemployment and, according to the Productivity Commission, no great widening in inequality. In real terms, national income per capita from the early 1990s to the early 2010s increased by two thirds. Since then, however, Australia has experienced stagnant real wages and a productivity drought.

So what can be done?

Substantial productivity improvements are still possible, but the regulation of our economy is extraordinary and its impact is colossal.

Take the housing affordability crisis. Housing is Australia’s largest asset class at $11 trillion, and the average household’s single largest expenditure. By way of comparison, our installed electricity system is worth a few hundred billion dollars and the energy transition may double that amount.

Yet work by our researchers has shown that in our major cities, approximately half the cost of our housing (either buying or renting) comes from government taxes and regulations. In particular, planning approvals restrict supply, driving up the price.

As is often the case, the ones who suffer most from these barriers to entry are the most disadvantaged, the poor and the young.

Planning approval seeks to address real issues, but the level of harm caused by restrictions on housing supply dwarfs any real or imagined benefits delivered by our current planning process.

The solution to our housing problem is straightforward, though it has proven a hard nut to crack in practice. The NSW and Victorian governments are showing the way by recognising the cost to the broader public and reducing planning controls and the role of local councils — which only consider their own narrow geographic interest.

Then there is education. When the Gonski recommendations were presented to the government in 2011, hardly anyone in Canberra argued seriously against the extra billions of dollars dedicated to improving schools’ outcomes.

And yet, despite the hard work of our dedicated educators, the outcomes not only continue to be poor but have made, at best, no measurable improvement and, at worst, have gone backwards. According to domestic and international testing, almost 40 per cent of our children are on track to leave school without basic skills essential for higher learning, especially in literacy and numeracy.

When two out of five future workers can’t read properly or do simple maths, it’s no wonder productivity is declining. And it’s especially tragic that children from disadvantaged backgrounds make up a disproportional number of the struggling 40 per cent.

CIS research has proven the best ways for teachers to maximise students’ learning of reading, maths, and managing classrooms. This is all about focusing on the fundamentals and teaching in ways that are explicit, with high expectations, and doing away with fashionable but ineffective educational fads.

It’s encouraging to see government and non-government schools beginning to abandon those fads. But the rate of change feels glacial.

Housing and schools are far from the only areas of concern. A lack of action — or, indeed, the wrong actions — in key policy areas such as energy, infrastructure, industrial relations and taxation have all contributed to our productivity drought. In these areas, Australia’s policy choices have made things worse.

Indeed, given the cost-of-living problems, there are increasing calls for state action that will further wind back the success of past reforms. In the US, for instance, the new administration will hurt the economy with import and immigration restrictions. More restrictions on Australian commerce, such as housing and rental controls, would also be counterproductive.

Finally, budget responsibility still matters. Deficit spending in excess of revenue at a time of record terms of trade and full employment must lead to inflation and increased debt.

And with high interest rates, our heavy debt burden will seriously impinge on our government’s ability to protect our people and support our disadvantaged citizens.

In any event, increasing debt can only be paid for by productivity growth; so once again we come back to the same problem. Our future prosperity depends on getting productivity back on track.

Some problems in life seem impossible to solve, but our productivity problems are of our own making and our history shows that we can resolve them.

The longer we wait to solve these problems, the greater the cost to all Australians, especially our young and disadvantaged.

Nicholas Moore is chairman and Tom Switzer is executive director of the Centre for Independent Studies in Sydney.