Economics
The productivity story
Our labour productivity is poor; our capital productivity is even worse.
From national accounts we get a first-order estimate of trends in labour productivity, which we know has been disappointingly slow to rise. (The December quarter release is due next week, on Wednesday 4 March.)
More carefully-calculated and more detailed estimates of productivity are produced annually by the Productivity Commission, in its Annual productivity bulletin, which publishes changes in labour productivity, and in multifactor productivity, the latter being an indicator of how well we combine labour and capital inputs to produce outputs.
As can be seen on this graph, both were down over 2025 – labour productivity by 0.2 percent and multifactor productivity by 0.5 percent. Not big declines, but they were in the wrong direction.
It should be noted that these are indicators for the market sector. They are not influenced by statistical artefacts caused by growth in the government-funded care sector – artefacts that have led lying or ignorant Coalition spokespeople to blame the public sector for poor productivity.
The Covid pandemic did strange things to productivity figures. That’s because when not many people are working the people still working are those whose measured productivity is the highest. It’s best to ignore this effect that shows up a blip on the labour productivity line. Comparing the indexes in 2024-25 with those in 2018-19, the last year before there was any hint of Covid, the growth in productivity over those six years has been low – 2.8 percent for labour productivity, 1.7 percent for multifactor productivity. That’s less than 0.5 percent a year.
The report analyses the difference between the two productivity indicators, which suggests our capital productivity has been poor. If these were reports on a company or an industry one would say the business is overcapitalised. In the case of the Australian economy this has come about because of large investment in the mining industry, which is subject to normal diminishing returns to investment.
The authors note that Australian firms have been slow to make the best of their assets by investing in new technologies. They refer to earlier Commission recommendations that tax and regulatory systems should be improved to encourage innovation and the diffusion of ideas. Their conclusion reads:
It is also vital that we use existing capital as effectively as possible. Evidence suggests that capital reallocation from less to more productive firms in Australia has become slower and less efficient over time. Although most of the capital stock in Australia is privately owned, governments can improve the ways that firms allocate and manage capital resources, including by strengthening competition and increasing access to finance. Further research into firm practices and economic conditions in countries like the Netherlands and the United States could show how Australia can better use its capital to increase productivity and improve living standards.
Tax the rich?
We need to change our taxes to collect more revenue, and to shift the incidence from wage earners to those living off speculative investment, but tax reforms on their own won’t undo the damage wrought by “small government” policies.
Most Australians would like to see our taxation system play a strong part in redistributing income.
The most recent Essential survey found that 67 percent of respondents agreed with the statement “change tax laws so those who are well-off contribute a greater share”, while only 10 percent disagreed. There was no discernible difference between Coalition, Labor and One Nation supporters.
Surprisingly however, older Australians, who have enjoyed tax breaks not available to the young, were strongly in favour of redistribution.
While right-wing populists, like the Coalition’s treasury spokesperson Tim Wilson, talk about cutting taxes as a way to achieve intergenerational equity, the reality is that any redistribution has to be through raising some taxes. Our governments are trying to provide labour-intensive services for an ageing population, and to make public investments to compensate for decades of neglect, with close to the lowest taxes of all prosperous countries. And there are strong calls for a substantial lift in defence expenditure.
There is mounting pressure on the government to do away with the capital gains tax breaks that were introduced in 1999 by the Howard government under pressure from the finance sector. The effect was to replace a tax system that was neutral between taxing wages and profits, with one that privileged profits, particularly short-term speculative profits. Along with tax breaks for negative gearing, the CGT break encourages small investors to pile into housing speculation, pushing up housing prices.
Reduce the CGT discount?
Many are calling for the Howard government’s 50 percent tax break for capital gains to be cut back, say to 15 percent, but these calls are poorly considered, because the closer the break gets to zero, the more likely it is that CGT will tax illusionary gains resulting from inflation. The virtue of the pre-Howard changes is that there was indexation to compensate for inflation. If the rate is simply cut without restoration of compensation for inflation, the tax system will be even more biased to favour short-term speculation over long-term patient investment. I explain the general mathematics of the relation between capital gains taxes and inflation in a 2009 paper for Taxwatch, and Alan Kohler explains it with simple examples in a post: Reducing inequality means taxing capital more – including inheritances.
Most of the present argument for changing CGT is in the context of its effects on housing prices. It has evoked some stupid statements, such as Taylor’s “if you tax something more, you get less of it”. The consensus among economists is that moving back to the pre-1999 system will have only a small effect on house prices, but as a means to raise revenue it should help balance the budget. If it results in less speculative investment in housing it should also help make housing more affordable for first-home buyers – who used to have a Liberal Party arguing for their interests, rather than against them as Wilson is now doing.
That leaves the question about making the tax system fairer. Should we tax the rich?
The Economist has a short videoclip How much tax should the rich pay?, in which the magazine’s business affairs editor Rachana Shanbhogue interviews economics editor Henry Curr.
In what might come as a surprise to many, Curr explains that the tax and transfer system in the US and the UK – and by extension other high-income countries – has become more progressive in the neoliberal era.
At first sight this goes against the commonly-held idea among the left that the Hayekian “small government” dogma that drove the policies of Reagan, Thatcher and others were regressive, and were savage on the most vulnerable.
The real story is a little more complex, and is revealed in part in Curr’s graphs. In those societies the distribution of income before taxes and transfers became much more unequal. That put a load on the tax and welfare system to compensate for this widening inequality.
This is consistent with a broader analysis of the effects of neoliberalism, that finds that the “small government” movement, the sine qua non of neoliberalism, inflicted severe damage on economies, manifest in rapidly widening inequality. Cuts in education, infrastructure, public health and other public expenditure that supports the state’s capacity to develop people’s capabilities resulted in a loss in economic output and contributed to the rise of an impoverished underclass. That is the same class now turning to right-wing populists.
The cycle has its own destructive cycle of positive feedback. As spending on transfers crowds out public spending on economic services, inequality widens further, making further demands on the tax and transfer system, and driving further cuts on economic services – and so on. As with all positive feedback systems, the end is some form of collapse.
On his site Crispin Hull describes how this dynamic played out in Australia: 30 years on, the changed nation. He describes the way the Howard government systematically weakened the capacity of government to provide public services. “Virtually every social and economic ill in Australia today has it genesis in the policies of the Howard Government”. He goes on to list them and concludes:
Wherever and whenever you go in Australia today, the individual stories tell the national story. Gap fees. Wait times. Inequality. Can’t get a house. Big student debt. Poorer public schools. Stagnant wages. Growing inequality. These things were not the case before March 1996. Since then, the nation’s total wealth has certainly gone up, but that is because of the much greater wealth of a few. Whereas because of the policies Howard set in train, the majority are relatively much poorer, more divided, more unequal, and more resentful.
Everything you wanted to know about central banks
Three experts give a clear description of how central banking has come to occupy such an important function in public policy.
It has a history
If you’re old enough, imagine it’s 1990, and you predict that in 2026 the Reserve Bank interest rate will be below 4 percent: in fact you predict that it will have been below 4 percent for ten years.
Maybe one or two economists would have inquired about your recreational drug use, and a Marxist would have noted that lower returns are a feature of late-stage capitalism, but for the most part people would not have cared any more than if you were forecasting soy bean futures on the Tokyo Stock Exchange.
It was of little concern even though official interest rates were 17 percent at the time. Rates had been pushed up to dampen an overheated economy, bringing on Keating’s “recession we had to have”. It didn’t matter politically: Keating’s Labor government was re-elected in 1993. Even before that inflation-busting rise, the base interest rate had been well above 11 percent for some years.
There were two reasons people didn’t care. First, because housing was much more affordable, mortgage repayments as a proportion of income were lower. Second, real and nominal incomes were rising, while mortgages were set in nominal terms. Inflation, if compensated for in nominal incomes, does wonderful things for borrowers.
The ABC’s Rear Vision has a session Central bank independence − a tradition under threat, that explains why central banks have become so important. In fact until the middle of last century they hardly existed as separate institutions.
Three experts explain why and how central banks have become independent, how their decisions influence currency exchange rates and inflation, and why there are tensions between governments and central banks. They explain the ideas that guided the architects of the international order who came together at Bretton Woods in 1944, and the role of the Bank for International Settlements in Basel. What we take for granted about monetary policy has come about as a result of decisions in response to circumstances at the time.
They illustrate this history mainly by reference to our own central bank, but they dedicate the last third of the program to the conflicts between Donald Trump and Federal Reserve Chair Jerome Powell.
The January Consumer Price Index
The January CPI comes in at 3.8 percent according to official figures. That possibly understates the current rate of rise of consumer prices.
Before there was the Internet, on the days the CPI was to be announced, around the entrance to the ABS building at Belconnen would assemble a crowd of journalists, desperate to be the first with the news. Using their clunky brick-like phones they would dictate the front page of the ABS bulletin to someone in the office, leaving a mess of paper on the trampled lawn.
As technologies change the excitement doesn’t change. For the last four years the CPI has eclipsed other economic indicators, as if employment and growth, the other two members of the trifecta, are just supplementary.
But on Wednesday the ABS published its CPI for the month of January, and hardly any media picked it up before lunchtime. The year-on year headline figure was 3.8 percent, the same as in December, and the seasonally-adjusted figure was also 3.8 percent.
The CPI index jumped from 100.97 to 101.33 – that would indicate an annual figure of 4.4 percent. My own estimate, a 3-month moving average, suggests a headline annual rate of 5.5 percent. That’s broadly consistent with the RBA’s belief that CPI inflation may rise a little before it falls.
The Coalition jumped on the statement that electricity prices rose by 32 percent between January 2025 and January 2026. This relates to the timing of withdrawal of government rebates. The pre-rebate index for electricity has actually fallen by 1 percent since July last year.
Ian Verrender has suggested that the rise in our exchange rate may help bring down CPI inflation in following months. That view is based on solid economic logic, but Verrender expressed it before the US Supreme Court declared Trump’s tariffs to be illegal. Iti is possible, for example, that if the Chinese find the US market is once again open to their cars and other goods, they will not be selling them to us at a low price. (But what would the Americans do with thousands of right-hand-drive BYDs?)
The main point that Verrender makes is that the RBA’s economists, some of the smartest in the country, have a hard job predicting inflation, or even identifying its drivers, confirming the wisdom of Niels Bohr who warned “Never make forecasts especially about the future”.