Australia’s economic reform roundtable: Key takeaways

Garreth Hanley:
This is With Interest, a business finance and accounting news podcast brought to you by CPA Australia.

Adrienne Biscontin:
Welcome to CPA Australia's with interest. I'm Adrienne Biscontin from external affairs at CPA Australia, and today we are discussing the outcomes of the government's three-day productivity summit that wrapped up in Canberra last week. Joining me is Dr. Brendan Rynne, chief economist with KPMG.

He's been at KPMG nearly 30 years, 22 years as a partner, and worked on major policy reforms including the Henry Tax Review and the Tax White paper. Alongside Brendan is CPA Australia's business investment and international lead, Gavan Ord. Welcome, Brendan.

Brendan Rynne:
Hi.

Adrienne Biscontin:
Welcome, Gavan.

Gavan Ord:
Morning, Adrienne.

Adrienne Biscontin:
There was no surprising outbreak of agreement on major issues such as tax reform, but there was consensus on progressing a few short-term actions, some of which were already on the government's work programme. Gavan, could you first give us a quick overview of the outcomes from the Roundtable?

Gavan Ord:
Yeah. Thanks, Adrienne. I think before I do that, I'll say that CPA Australia wasn't in the room, but we were heavily involved in influencing the business groups that were in the room. So we did engage a lot with the business council, Australian Chamber of Commerce in industry and the small business association, COSBOA. So we regularly engaged with them and member views were tabled at the forum.

Just in terms of what were the outcomes, I'll need to read from a list not because it's long, just so I'm sure it's accurate. So there were sort of three categories of reform highlights, then short-term actions as you mentioned, and then sort of areas that need other work or code for too hard to get done.

In terms of the reform direction, so the high-level areas, there was consensus there needed to be a single national market, which I think has been consensus now for quite a few decades, simplifying trade and tariff reform or further simplifying trade and tariff reform, better regulation, speeding up approvals, building more houses quickly, making AI a national priority, attracting capital and deploying investments, building a skilled workforce, building a better tax system and modernising government services.

They're the high level. And in terms of the short-term actions; removing more nuisance tariffs, pausing the national construction code, accelerating environmental protection and biodiversity law, speeding up approvals of homes including a backlog of home approvals, getting the regulators to provide ideas to government on how to improve regulation, and that'll be coordinated by what's called the Council of Financial Regulators, which is made up of APRA, ASIC, Treasury.

There's also a proposal for a Tell Us Once bill, which would mean that you would tell government information once and then different agencies would take that information. There would be an AI plan for the Australian Public Service, a national AI capability plan, a single front door pilot for investment, and finally a road user charging.

Adrienne Biscontin:
Brendan, what are your thoughts on those outcomes? Did the Roundtable meet your expectations and do you think it could lead to meaningful reforms that improve productivity?

Brendan Rynne:
It did in fact meet my expectations. But the thing, I suppose, I've been most positive about the Roundtable, I know there's been quite a lot of criticism about whether there's going to be meaningful and practical outcomes as a consequence of it, the point to note though is that you need to start somewhere when you are really looking to bring diverse people along for change. And at least the Roundtable signalled to me that the government was open for change and that it recognises that the status quo is not sustainable.

So to me, more than anything, that was the key message I've taken away from the fact that they've held the Roundtable. In fact, having that message out there, if you were being critical, you could actually say that you didn't even need the Roundtable to get that message out there. But the fact that they did get everyone in a room, there was general consensus on short-term reforms that needed to happen. There's consensus around what the longer-term reforms are.

There's not consensus about how to enact them and what those reforms are, but nonetheless, I think there is a recognition that from a whole-of-economy perspective, we're not really doing as well as we need to. One of the fundamental problems with getting our economic potential back up to where it needs to is around productivity. We've been lagging in productivity growth for some time now.

We aren't the only economy that's had that problem, but there's also no one silver bullet that's going to fix that. It is going to be a combination of policy reforms. Some of them are going to be easier, some of them are going to be much more difficult. And the fact that the government's laid them all out on the table I see as only a good thing.

Adrienne Biscontin:
A double-barrelled question now for you. You talk about reform. It seems like incremental tax reform may be the government's way forward. What could this look like and how do you deal with the distribution effects?

Brendan Rynne:
Maybe I'll answer the second part of that question first. Distribution effects always going to be dealt with through the transfer system. The thing to understand, and very few people talk about it, but Rob Bruning was in the room and he talks about it, which gives me comfort, is the fact that we need to talk about the tax and transfer system, otherwise we only just talk about the tax system.

So we run a tax and transfer system. So the transfers are going to be the thing that's going to be the important mechanism. I suppose the point that we've made at KPMG is that not only do we need tax reform, we need transfer reform as well because what we've seen over the last decades is a creeping up of transfer payments well into the income continuum for households that simply, if you're being brutal about it, don't need it or shouldn't get it.

What that's done is built a cost base into the Australian budget that we believe is unsustainable. And so the problem of course is that once you give people a transfer or you give them something, they attach a property right to it, they own it. And so not only achieving a tax reform but also transfer reform is going to be really difficult because it's about taking something off people that they've already been given.

So that's going to be a real challenge. In terms of tax reform, our message at KPMG has been pretty simple but very consistent for a long time now. We've got too heavy reliance on income taxes in this country. So we need to bring back personal income tax and company income tax. We need to increase our reliance on consumption based taxes, so broaden the base and increase the rate and GST.

All of this is politically challenging. We know that, which is why it hasn't happened overnight. We do need to ensure that all of those tax settings are fit for purpose and competitive because fundamentally, part of the company tax reform and all of these tax reforms is that we need our tax settings to be pro-investment. Where we've got a fall down in our productivity, if someone asked me What are your top three issues that need to come out of the productivity round table or the economic round table to improve productivity, it's capital investment, capital investment, capital investment.

What we've seen is very little net increase in our capital stock. In fact, when you look at mining, by my calculations, we've actually had, over the last decade, our net capital stock in mining actually going negative. So CapEx hasn't been enough to cover depreciation. And it's only been barely positive in the non-mining sector. And simply we need more capital deepening in this country and an improvement in our capital labour ratio to get those productive outcomes that we need.

Adrienne Biscontin:
Brendan, we've heard phrases such as constructive outcomes following the round table. What do you see as the positives coming out of the process and what are the missed opportunities? Is the government right to focus on generational inequality?

Brendan Rynne:
Yes, they are, but I don't think it's something that should be part of the optimal tax setting process anyway. And again, when you have a look at... And this is something that the Productivity Commission did probably a bit more than 10 years ago, and I suspect the profile of this is still very similar, that when you look at the cost an individual has on the government through different programmes through your life cycle, so from about zero to 15, you cost a bit to the government in terms of education and healthcare, from about 15 to 55, you cost very little.

You are in the workforce, you are doing things. It's still a cost for some people that are unemployed and health costs and those sorts of things, but you do cost very little. From 55 upwards, the cost escalates through healthcare costs, aged care costs, and age pension. Now admittedly, as superannuation takes hold, likely age pension's going to come down, but I don't expect that cost profile to change because I think any savings we have in age pension are going to be more than eaten up by healthcare as we go up.

But if you then look at that, and Rob Bruning just released a paper only last week that was looking at tax and transfers paid by age cohort. The taxes paid on post-55 is very, very little. The transfers paid are very, very high. And so those transfers and cost to government in that age cohort are quite significant. You can argue that, well, it's fair and reasonable because you've paid taxes through your whole life that you now should be looked after in your age, but simply not everyone's paid taxes in their whole life sufficient to pay for that.

And so I know this is probably going to upset our older listeners, but simply we need to have more paid by people as you consume those services as you get older. And so, one way to do that is through GST and the broadening of the base. I know that there's a very heavy focus on superannuation, but that's not going to be enough to cover these costs as well. So yes, there does need to be an intergenerational lens put on this, but part of that can be through quite reasonable tax reform that is already on the table.

Gavan Ord:
And what about missed opportunities? Any missed opportunities from the round table? Big missed opportunities?

Brendan Rynne:
I don't think so. I think it's going to be how they take this forward. And if they leave things off the table that they've spoken about now because it falls into the politically too hard basket, that'll be where the missed opportunities are. But there are some big challenges facing this country quite apart from tax reform. Our economy is pretty much at full employment at the moment.

We know it's at full employment at the moment, yet we've got real investment challenges about changing our energy infrastructure to meet our CO₂ emissions net-zero targets. We simply have to keep building houses. But the people that are going to do both of those things are in fact the same people. So where are we going to get them from? I've done some analysis we haven't published, but I think in the last 10 years we've had 2.3 million people join Australia's workforce. 2.1 million of those people had a tertiary degree.

Smart people, but do we need that larger proportion of our new workforce entering, having that mix of skills when we just simply don't have enough tradies? So having that large investment balloon coming forward, having the right skilled workforce to do that, I still think are really incredibly major issues that we're facing that lead to productivity gains and productivity challenges. And so having tax reform and regulatory reform around that are important, but are we going to have enough people to do the work we need?

Adrienne Biscontin:
Good point. Gavan, how was CPA Australia involved in the Roundtable and how has the organisation reacted to the outcomes? We know it only finished a couple of days ago in Canberra, but what's the reaction so far?

Gavan Ord:
So in terms of our involvement, like I said at the start, we were heavily involved in briefing the business group representative. So we spoke regularly to COSBOA, to the business council, to the Australian Chamber. We also made our own submissions obviously. And where we could, we also did some media on that as well. In terms of our reactions, very much like what Brendan said, I think we're overall positive.

I think it was a positive outcome in terms of they had the conversation. So there's a recognition from within government that it is an important issue. And I think that when you deal with public servants, if the ministers are saying this is important, they tend to pick up those signals as well. So I think it's positive, but we wait to see what actually happens. And often this falls down in the next stage of when we start to see the details.

And then as Brendan was talking about, the winners and losers start to come through and the losers often get the loudest voice. And the transfer system is, as you said, the way to deal with that. But it's positive that it's happened. Like someone told me who was at the Roundtable said we're in a better place now than we were before the Roundtable, but it is the next stage where the hard work really begins and we get to see the detail of the reform.

Adrienne Biscontin:
Just on that, Brendan, we're to now for the productivity discussion in Australia, what should listeners be positive about and what do you think listeners should be worried about?

Brendan Rynne:
Well, firstly, I think listeners just should be positive the fact that this is on the table. I've always recognised and being told this by journalists and also politicians, that the term productivity when it's spoken publicly just is a vote killer and a media killer as well because people automatically associate the conversation around productivity with losing their job or working harder without getting any more compensation for it.

And that's just not the case. Journalists tell me that if they have the term productivity in the headline article, it gets less clicks by readers than if they have the same story with a different byline in it. Because quite rightly, it's a conceptually difficult idea with people's interpretation of it varying.

Adrienne Biscontin:
They have a negative connotation.

Brendan Rynne:
There's a negative connotation to it. So the fact that we're actually escalating it up as an issue to the national agenda, despite the fact that everyone has this negative connotation to it, tells me that the government's being serious about it at least. So that's a very good thing. In terms of next steps going forward, the thing about productivity is understanding its importance isn't going to be around what GDP per hour work looks like next quarter.

We look at productivity in a long-term trend cycle. So I look at productivity over... I average GDP per hour work growth over 10 to 15 years. And so understanding it from that cyclical perspective. So anything that the government does now that's going to have a positive effect on GDP, I want to see the trend moving upwards over that longer time period. And to me, that's going to be around what can we do around our capital stock? So how are we improving our capital stock and what are we doing around labour? So it all comes back to that capital labour ratio as far as I'm concerned.

And so around tax reform, for example, Richard Holden I think has made good examples, good proposal around having instant asset write-offs for at least an interim measure until you bring company tax rate down across the board. So I think that if we can see things like that that are going to be encouraging for all businesses to adopt more capital and more investment in the short term are things that I'd be looking at as quick wins and good outcomes.

Adrienne Biscontin:
Do you share Gavan's view that the devil will be in the detail? Is that what people should be...?

Brendan Rynne:
Always. It's going to be in the detail. But the other thing too though is it's not only the detail about our individual issues, it's going to be the detail in the overall concept of reforms. And so as I think I pointed out or mentioned earlier, that there's no silver bullet here.

And the other thing that you need to really think about this stuff is understanding policy perversity. So if they make one positive policy change or a couple of positive changes, what else is happening over there that may in fact detract from those policy changes? So there does need to be a bigger picture lens put on the total policy perspective here.

Gavan Ord:
Just to that last point, there was a famous quote from the Luxembourg Prime Minister is, "Politicians know what they need to do, but they don't know how to get re-elected if they do it." And I think that encapsulates the issue that you just said there.

Brendan Rynne:
Yeah. And a lot of the reforms that need to happen would necessarily react or get the reaction from Sir Humphrey Appleby of that's very courageous minister, but we do need to be courageous. We've seen our living standards dropping and the risk is that they'll continue to drop unless we don't have courageous decisions by ministers going forward.

Adrienne Biscontin:
And with the generational change that we're about to see, the amount of people paying tax in the next 20 years is going to rapidly reduce. So now is the time, is it not?

Brendan Rynne:
Absolutely. I need to update this. I just haven't had a chance to do it. But in similar, the same way that Rob Bruning used HILDA data to look at the tax and transfer benefits by age group, I've used that same data. And if you think about net tax paid, which is tax paid less transfers, in Australia, historically it's only been about 40% of taxpayers have paid net tax. And what we've seen the last time I calculated that, it started to slip down to 38%.

I suspect that's even less than that when you take into consideration some of the more recent transfers we've had in terms of cost of living support. And so we're getting really a higher concentration of dependency around tax payments in this country. And certainly I think that, I know there's lots of conversations and you hear the unions and also social groups talking about a fairer tax system.

I don't know what that is. I'd like someone to explain to me what is a fairer tax system when you have something less than 40% of households paying for the remaining 60% of households? Look, I'm not trying to be cute here, and I actually just don't know where is that threshold and what does represent a fair tax system. But again, tax is important, but it's not the only thing. And it's really important to get that message across. Yes, it is important and yes, I pay a lot of attention to it, but it's not the only thing.

Gavan Ord:
The concept of what's fair depends on who you're speaking to, so-

Adrienne Biscontin:
It's relative. Yeah.

Gavan Ord:
Yeah, it's relative.

Adrienne Biscontin:
So back to my earlier question, Brendan, what do you think listeners should be worried about it's probably inaction.

Brendan Rynne:
Oh, of course. But that's, policy paralysis has always been the case. I don't know if you recall, but KPMG in conjunction with the Australian and the Fin Review did a policy roundtable ourselves in our Sydney office in, it might've been early 2016. And I wrote a paper on it for that contribution around capital and labour and productivity growth and all those sorts of things.

And we had a 10 point plan of what the key reforms needed to be. Many of that 10 point plan are in the same reform list that's coming out of the Roundtable. That's nearly 10 years ago. But that's also to say that those issues around reform are obviously universal and timeless. And so no matter where you are in the cycle, it's about ensuring optimal policy settings, whatever they are.

Adrienne Biscontin:
Thank you so much, Brendan, for joining us today and for sharing your insights. And Gavan, thank you for your guidance to businesses and their advisors. We'll continue to watch this space ‘with interest’ in the coming weeks and months.

For our listeners eager to learn more, please check out the show notes for links to additional resources from CPA Australia. And don't forget to subscribe to With Interest and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news.

To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.