Productivity Commission chair urges government to avoid dismantling good policy architecture

By Shannon Jenkins

June 9, 2021

dark clouds
(Image: Adobe/peangdao)

Productivity Commission chair Michael Brennan has raised concerns over what he believes to be ‘dark clouds’ in the public debate, urging policymakers not to forget the measures which have benefited Australia in the past.

In a speech to an event hosted by the Committee for Economic Development of Australia on Tuesday, Brennan prompted Australians to ask themselves whether public debate on economic policy is helping to foster a pro-productivity or pro-flexibility mindset.

He warned of two ‘dark clouds’ on the horizon in the public debate space, with the first being the renewed promotion of national self-sufficiency in local production. The second, Brennan warned, is the ‘overly sanguine’ view on debt and deficit as an ongoing approach to fiscal policy — that government ‘can and should go yet further with fiscal expansion in more normal economic times at no effective cost’.

“If you are in either of those two camps, my advice is: be careful what you wish for,” he said.

On self-sufficiency, he noted that Australia’s experience with the protection of domestic manufacturing, through an 80-year experiment, was ‘not an overly happy one’. Further, trade has been a big part of Australia’s recovery in economic crises.

“That is not to say vulnerabilities will never arise, and that policy should not respond. But as always it should be determined on the evidence and the particulars of the case, rather than a general claim that we can no longer rely on trade and have to make things here,” he said.

“We can’t make everything here, but we could certainly make ourselves poorer in the attempt. Our first best policy is to keep up our international efforts to strengthen the global trading system — to update its rules and shore up the dispute resolution process.”

On fiscal debate, Brennan noted that active fiscal policy was necessary in the recession and remains important in the early stages of recovery. The government’s policy, as the economy recovers, is to ‘return to a stable debt to GDP ratio’.

He said that while the imposition of fiscal limits — as per current policy and as per the budget’s medium-term projections — fits with a precautionary approach, ‘the view that debt and deficit no longer matter does not’.

“And luckily for Australia, our fiscal frameworks and adherence to budgetary rules has served us well.They have been backed by a public consensus around fiscal restraint, and that consensus has been a significant intangible asset for Australia over recent decades,” he said.

“If that public consensus fragments, or is undermined by ‘expert’ opinion, or the nature of the debate, then gross debt is unlikely to stabilise at 51% of GDP.”

Public debate is crucial in shaping future policy ‘for good or ill’, Brennan said.

“We should have an open debate about our productivity challenge, but my plea today is that that debate should include an honest appraisal of the things we had right before the pandemic, and from which any departure would come at great cost to current and future generations.”

Economic policy framework not broken

Brennan noted that, while Melbourne’s lockdown is a ‘sobering check on triumphalism’, Australia has in the past 12 years dealt with two global economic crises better than most economies.

This is partly because Australia went into those crises with strong fiscal buffers, a reasonably flexible labour market, openness to trade, well capitalised banks, independent monetary policy, credible public sector institutions and a targeted, but redistributive tax-transfer system, he said.

“Those are among the key planks of Australia’s economic policy framework, much of which was developed and bedded down over the last 40 years. A key lesson from COVID and a message for today is that that framework is not broken,” he said.

“The worst possible response to the pandemic and the recession would be to dismantle, or walk away from, the very policy architecture that has supported our relative success thus far.”

However, productivity policy is not a mechanical process, rather it involves having policy settings that ‘at least stack the odds in your favour’.

“In broad terms, that comes through fostering flexibility so that labour and capital can move easily across industries and firms, by having even-handed policy settings that avoid locking in an inefficient or just a rigid allocation of resources, having strong credible public institutions to set the rules of the game and deliver public goods efficiently, creating the right incentives for innovation and risk taking and boosting the capability of the workforce through general education and targeted skill formation as well as physical and mental health,” Brennan said.


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