Chief Economist's update: The Federal Budget must help solve our productivity puzzle

This year’s Federal Budget will be another balancing act. The Albanese Government needs to address ongoing community concerns about the cost of living, while also ensuring spending measures do not stoke inflation. While price pressures are starting to head in the right direction, the Government should not use this Budget as an opportunity for a pre-election cash splash.  

Current conditions present a more sobering economic and fiscal outlook than in last year’s Budget. Economic growth is softening considerably, both in Australia and globally. While there may be another surplus, due to low unemployment and higher than forecast commodity prices, this is very short-term in nature.  

In the longer term, the outlook for the budget balance remains dire. We risk being unable to provide the services the community expects and demands.  

With a federal election looming, the community will expect action on key areas such as cost-of-living relief and housing. We need to address these short-to-medium-term issues, but we can’t take our eyes off the longer term.  

Fiscal outlook  

While the short-term fiscal position is looking fairly solid, longer-term structural deficits loom, with a growing imbalance between revenue and expenditure. 

The tax system is not well placed to serve Australia into the future. The incremental approach to tax reform, such as the recent changes to the stage 3 tax cuts are insufficient to address the growing fiscal and economic challenges that Australia faces. We need to see momentum on broader-based tax reform, particularly on the balance between taxing incomes and capital. The discussion on tax reform must start by asking what Australia is seeking to achieve through its fiscal settings in the context of the challenges we will confront over the coming decades. 

We can’t forget the spending side of the equation and we must ensure we improve the efficiency, quality and sustainability of government spending. Core to this is the need for proper evaluation of any government policy or program to ensure its effectiveness and value for money.  

Previous CEDA research found 95 per cent of Federal Government programs over the past decade had not been properly evaluated. The Government should use the Australian Centre for Evaluation, introduced in last year’s Budget, to establish a rolling schedule of program evaluations and prioritise evaluating the largest spending programs that are growing faster than the economy. 

Productivity lens 

CEDA is calling for the Federal Government to place a long-run productivity lens over any new policy, strategy or reform introduced in the 2024-25 Federal Budget. It should consider the likely impact of every policy decision on productivity, business investment and innovation.  

Productivity growth is the best way of delivering sustainable increases in the standard of living to Australian households, without stoking further inflation. Not acting now means accepting a sustained lower rate of productivity growth and with it, lower growth in living standards. This is not an acceptable outcome for business or the community.  

Our productivity puzzle cannot be solved through a single policy change and is not a problem for governments to solve alone. But the Government should ensure policy settings encourage investment, innovation and business dynamism, and don’t work against productivity growth by stifling business with heavy regulation.  

Long-term thinking 

Many of the challenges we now face have arisen because we didn’t take a long-term view in the past. CEDA members consistently tell us that long-term issues require far more attention from government. Your top priorities include:  

• Improving our productivity and investment performance, particularly through innovation;  
• Ramping up the energy transition and decarbonisation agenda;
• Ensuring more Australians benefit from economic development; and 
• Enabling these outcomes through an engaged and productive workforce and sustainable national finances.  

To address the long-term critical issues facing Australia, CEDA is calling on the Federal Government to use this year’s Budget to introduce policy changes across four areas of critical need. The challenges we are now facing across housing, aged care and the energy transition, amongst others, are all due to a tepid reform agenda over many decades, a lack of long-term thinking and a desire to kick the can down the road. You can expect to hear more from CEDA about whether this year’s Budget sets us on a path towards these goals.  

Energy  

As highlighted in our Economic and Policy Outlook 2024, Australia is not on track to meet its net-zero targets. We must accelerate progress on the transition – both in the energy sector and across the broader economy.  

The Federal Government will announce further detail of its new “Future Made in Australia” clean-energy industry policy in this Budget. The policy brings together several existing measures including the $1 billion Solar Sunshot program for solar panel manufacturing and Hydrogen Headstart as well as new programs yet to be announced. 

The Treasurer says these plans are about incentivising private investment rather than replacing it, and they include “strict frameworks”, “exit strategies” and “off ramps”. We can only hope this is the case, as we wait for more detail on the policy. 

The Government should support projects with the greatest potential to have a comparative advantage and compete internationally. That means we must conduct rigorous analysis to identify where we can best compete. And where governments invest in projects that do not stack up, they must be able to end that support where necessary.  

Our upcoming report, Clean energy precincts: How to seize the green export opportunity, proposes a framework to guide government intervention and spending in clean energy precincts. The general principles of this framework also apply to green industry policy more broadly. 

Priorities for the 2024-25 Budget:  

• Introducing a framework to guide government support for clean energy precincts, with deeper analysis where specific projects are funded; 
• Investment to enable timely and thorough engagement with affected communities;  
• Updating and simplifying regulatory approval processes for clean energy projects; and 
• Supporting the development of green-energy workforce skills and encouraging workers to move jobs and retrain. 

Migration 

The Federal Government’s Migration Strategy released in late 2023 sets out a clear direction for Australia’s migration system. But there is still more to be done to ensure the system is fit for purpose and that we are making the most of the migrants that come to Australia.  

Recent CEDA research reveals Australia is still failing to make the most of migrants’ skills, hampering our productive capacity. Weaker English skills and lack of skills recognition are preventing Australia from fully leveraging migrants’ skills and experience, with many still holding jobs beneath their skill level.  

Addressing these issues will help us build the productive and engaged workforce we need for future success while also tackling persistent skills shortages.  

Priorities for the 2024-25 Budget: 

• Expanding access to English language training for skilled migrants; and 
• Improving the recognition of foreign qualifications by directly assessing a worker’s skills and professional capacity.

Aged Care 

The crisis in aged care shows the consequences of repeatedly ignoring long-term challenges. As worker shortages remain dire, we must take action to improve the financial sustainability of the sector.

Some providers are operating at just 50 per cent capacity and some have closed down altogether due to these workforce and financial challenges. There are also very few new aged-care homes in the pipeline to be built. This means there is unlikely to be significant change on the horizon.  

The Aged Care Taskforce released its final report in March. We believe the Federal Government should accept its recommendation to move towards user-based funding for daily living expenses in aged care as a priority.  

Australia won’t be able to provide quality care for older people without a financially sustainable system that can attract the additional investment required. The taskforce’s recommendations offer a sensible and equitable framework to develop such a system.  

Priorities for the 2024-25 Budget: 

• Introducing an essential skills visa with long-term residency opportunities to attract workers to industries with critical workforce shortages such as aged care and childcare. 
• Adopting the recommendations of the Aged Care Taskforce report, prioritising a userpays system for aged care, with income or asset thresholds. 

Housing  

Housing construction is not at the level needed. The Government must encourage people to downsize and to repurpose existing buildings. Urgently tackling housing shortages will be crucial to address growing intergenerational inequality and concerns about wealth distribution and allow more Australians to feel part of our economic future. 

The Housing Accord, released in the October 2022 Budget, has good intentions but has had no noticeable impact. Housing affordability has continued to worsen. Meaningful progress is needed on the reforms, particularly to planning and zoning regulations, and more investment needs to be made to increase the social housing stock over time.  

Priorities for the 2024-25 Budget: 

• Show meaningful progress on initiatives under the Housing Accord; 
• Introduce federal incentive payments to encourage states and territories to remove stamp duties and shift to land taxes; 
• Address shorter-term pressures in the housing market through another increase to the rate of Commonwealth Rent Assistance and reinstating the National Rental Affordability Scheme.