Tuesday’s Federal Budget rightly focused on the path to economic recovery from the COVID-19 recession. It is critical to get as many people – particularly young Australians – back into work as quickly as possible and to boost incentives for business to invest in the near term. While it may seem churlish to ask “what next?” just days after such an historic Budget, that is where our focus must now be.
The Budget papers set out the stark reality of our future economic prospects. With borders largely closed to immigration, population growth will fall to the lowest level recorded in more than 100 years, and migration will take years to recover. Without strong population growth, and with weak labour market participation caused by the soft jobs market and an ageing population, Australia’s potential economic growth rate will take a real hit.
That means productivity growth, more than ever, will have to do the heavy lifting. We need an economy where business is investing and innovating, where people can and do easily move to find new opportunities, where less productive businesses lift their game or shut-up shop and where our best-performing businesses keep up with their international peers.
The pre-crisis ledger on these scores is sobering. Non-mining investment performance has been anaemic for a decade. We now invest much less in research and development (R&D) compared with our international peers. The rate of business formation among firms that actually employ people is falling. Even before the pandemic, just 8.4 per cent of people changed employers in 2020, down almost a third since 2008.
Treasury analysis for the 2019 OECD Global Forum on Productivity in Sydney concluded that few of Australia’s best performing firms were keeping pace with the best of the rest of the world, while our lagging firms were hardly improving at all. Reserve Bank of Australia Governor Philip Lowe has also expressed concerns that the economy is becoming less dynamic – at a time when the global pace of technical change is accelerating.
And lost in the last week of Budget excitement was further confirmation of Australia’s relatively weak performance on this front. The 2020 IMD World Digital Competitiveness Ranking showed Australia continued to perform poorly on “future readiness”, including the agility of our companies, their preparedness for opportunities and threats and entrepreneurial fear of failure.
Australian business also suffers from a culture of risk aversion, an issue raised by Treasury, the IMD rankings and the Australian Institute of Company Directors. COVID-19 has forced business and government to crack through that risk aversion. Australia’s rapid move to work from home, workplace digitisation, the rise of telehealth and other innovations show we can rise to the challenge. But it remains to be seen whether this shock has triggered a broader shift in attitudes and risk appetite.
The Budget does include some measures that will help reverse some of these trends: support for short-term business investment, a lift in R&D tax credit coverage and changes that will make it easier for failing businesses to close. Even with these measures, the expected bounce in business investment is modest and might not be enough to reverse the capital shallowing of recent years. But the Budget lacked an agenda for a digital recovery that will drive sustained activity and jobs into the future.
Australia’s supply-side agenda must embrace the era of digital globalisation. We need a workplace relations framework that supports the rapid adoption of new technologies and new business models, including “work from anywhere”. We need permanent tax structures that support a lasting lift in investment in our productive capacity. We need more agile approaches to skill development, recognition and accreditation, and the ongoing evolution of more agile regulatory frameworks and approaches, including further support for regtech to reduce compliance burdens. We must be bolder in our support for R&D, commercialisation and digital delivery of human services, and of innovative digital approaches to health management and disease prevention.
In other words, the government must set out what it really means to be a leading digital nation by 2030 and how we will get there. It must move beyond recovery and define a program to unlock the dynamism that will underpin our future prosperity.