How Chalmers can square the budget circle despite stagnant productivity
Some of the measures he'd like to take to get the economy's productivity improving could involve reducing certain taxes but, with the budget already overextended, he can't afford them. He's had to stipulate that all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.
This suggests productivity improvement and budget repair will need to be kept in two separate buckets. If so, Chalmers will probably end up avoiding tax changes and sticking to reforming the regulation of certain industries, which would have little cost to the budget.
But some measures to improve productivity may lead to increased tax collections. If so, it may be better to put together a big package of interlocking measures that together would help improve both problems.
The successful reforms of the 1980s involved big packages, with their size actually helping to reduce opposition to them. When you propose reforms one at a time, those who lose from the measure can make such a fuss that the government decides it's not worth insisting.
But you can put together a package so big that most industries and individual taxpayers would gain something as well lose something. So if I oppose the package because of my loss, I put my gain at risk. And not only that; I get a lot more pushback from the many groups and individuals who see themselves as net winners from the package.
Even so, if I were Chalmers and cuts in government spending were needed, I'd tread carefully. The independent economist Saul Eslake sees government spending likely to be about 2 percentage points of gross domestic product higher in coming years than it averaged over the 40 years before COVID.
In contrast, the former top econocrat Dr Mike Keating thinks that to balance the budget while making adequate provision of government services will leave a gap to be filled of about 4 per cent of GDP.
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