Talking Reform

After our last bumper edition, it’s a much shorter offering this week. With little domestic news on the data front, the Economic Reform Roundtable that has just concluded in Canberra has been the focus of attention.

Over three days, participants have discussed Resilience, Productivity and Budget Sustainability and tax reform. At the time of writing, the ultimate outcomes from this week were still unclear. Before kick-off Productivity Commission Chair Danielle Wood had declared that she was ‘thrilled by the new appetite for reform that the roundtable has created over the past two months.’  It is fair to say that agenda-setting is a potentially important payoff from this week’s deliberations.

Certainly, the opportunity provided by the Roundtable has focused minds and encouraged a range of suggestions and proposals. AICD’s own submission, for example, calls for an economy-wide regulatory stocktake and simplification; an acceleration of AI capabilities; better processes around regulation; boosting investment; a reset on education and skills and measures to secure fiscal sustainability. The Productivity Commission has already provided its own ideas in the form of interim reports under its Five pillars of productivity inquiries. And a look at the pre-Roundtable briefing provided by Treasury offers a degree of guidance as to some of the issues front of mind at Langton Crescent. These range from waves of disruption hitting the Australian economy (including economic, geopolitical, demographic, technological and climate shocks), through to the need to boost investment in both human and physical capital, and on to concerns over competition and dynamism, structural pressures on our tax system and apprehensions around intergenerational equity.

Arguably the most noteworthy result to date has been the emergence of at least a degree of consensus on the need for a revised approach to regulation, nicely summarised by Danielle Wood in the form of her recommendation to ‘regulate with growth in mind’. Even if the Roundtable produces nothing else, meaningful progress on a pro-growth regulatory agenda would be a significant achievement - if the government can deliver it.

At the end of the three days, the Treasurer’s closing remarks highlighted a mix of reform ‘quick wins’ and 10 longer term reform priorities as well as a list of areas for further work. The announced quick wins included pledges to abolish ‘hundreds’ more nuisance tariffs, to reduce complexity and the regulatory burden in the National Construction Code, to clear some of the backlog of environmental approvals, speed up the passage of Environmental Protection and Biodiversity Conservation (EPBC) legislation, and to progress a ‘tell us once’ bill. Longer-term priorities include progress on the single national market, delivering better regulation, building homes more quickly, constructing a better tax system and accelerating approvals in national priority areas.

Below we cast a cautious eye over some of the constraints that apply to the ‘drive growth through economic reform’ approach, we summarise this week’s modest set of data releases and deliver our usual linkage roundup.

After the Roundtable

As already noted, there are good reasons to welcome this week’s discussion on Economic Reform and the wave of proposals and suggestions it has generated. Those reasons include the way the pre-Roundtable debate has concentrated minds on structural challenges facing the Australian economy and the impetus that this debate appears to have given to fostering a more pro-growth attitude around regulation and the regulatory process. But as the Government begins to digest various recommendations and requests it has heard (while also, of course, considering associated political calculus), it’s useful to keep in mind constraints and limitations that apply to efforts to deliver growth – particularly productivity-led growth – through reform. Here are five points to keep in mind.

First, there are significant questions over the extent to which governments can influence the deep drivers of productivity. The key piece of evidence here is the way in which trends in productivity growth across advanced economies have tended to be similar over time. Right now, for example, Australia is one of many rich countries suffering from a longstanding run of lacklustre productivity growth. Step back from the current conjuncture and the big picture story involves a widespread productivity slowdown across much of the developed world that began in the 1970s, that was followed a temporary acceleration in the 1990s. That then saw another slowdown in the early 2000s, followed by a further step down in performance in the aftermath of the GFC. Granted, there are differences in timing across individual countries. Even so, that broad picture is reasonably coherent. This suggests that big, cross-country shocks and trends such as the 1970s oil price shocks and the ICT revolution could explain a significant share of productivity growth. That is not to say that policy has no influence. It does. But it should serve to caution that this influence might be quite limited. (Note that this story could have an upside, too. For example, an optimistic take could be that the next productivity wave is already incoming, provided AI lives up to its declared potential.)

Second and related, there is an issue around the likely scale of any productivity pay off arising from any single change in policy. On most estimates, the impact of any individual policy initiative is likely to be small. Take for example the Productivity Commission’s proposed changes to the Corporate Tax system. The Commission cites modelling which suggests that the payoff to these changes would deliver about $14.6 billion in terms of higher GDP over the medium term. That’s not nothing, but it is only equivalent to about 0.5 per cent of one year’s GDP with that payoff stretched out across multiple years. Chances are, it just wouldn’t be very noticeable. The same is true for most realistic reform proposals. To be clear, this is why reformers – including the Commission – talk about the need for a package of reforms, rather than looking to a single ‘silver bullet.’ The cumulative impact could prove to be considerably larger. Even then, however, those reforms will unfold against a backdrop of other contemporary forces (geoeconomic fragmentation and protectionism, population ageing, climate change) that are likely to generate offsetting productivity headwinds. That will further work to limit the size of any net payoff.

Third, there are ongoing disagreements as to the diagnosis of some of the causes of the productivity slowdown. This complicates the policy approach and therefore represents another uncertainty as to the impact of any policy response. For example, one argument that appears in the Treasury pre-Roundtable briefing is that Australia is suffering from declining competition and economic dynamism, and that returning competition to its early 2000s levels could boost GDP. But others have challenged that diagnosis. See, for example, this piece by Productivity Commissioner Stephen King, which argues that ‘the evidence, at best, is ambiguous’. So, would boosting competition deliver a significant boost to productivity? It might well do so. But it might not.

Fourth, there are likely to be trade-offs between productivity growth and one of the other targets of the Economic Reform roundtable - resilience. At one level, this seems counter-intuitive. After all, making the economy more productive – more efficient in its use and allocation of resources – should also serve to boost economic resilience. More flexible and productive economies are more likely to be able to absorb external shocks and to reallocate capital and labour in a way that speeds up any post-crisis recovery. But while that is the case for shock absorption and recovery, it is not necessarily true when it comes to vulnerability to shocks in the first place. Consider the case of international trade. Specialisation in line with comparative advantage might well serve to maximise growth and productivity in the near-term. But it might do so at the expense of increased export market/product concentration and hence a greater vulnerability to adverse shocks in the future. Alternatively, a government-led policy of deliberate export diversification might reduce that vulnerability, but at the cost of moving away from comparative advantage and the most efficient allocation of resources and thereby accepting a slower pace of productivity growth. Contemporary debates around the case for supply chain diversification, the retention of domestic capabilities in ‘critical’ industries, restrictions on foreign investment, controls on the use of foreign technology and the accumulation of strategic ‘buffer stocks,’ and more all involve at least some elements of this kind of trade-off.

Finally, there are constraints imposed by broader societal attitudes. We argued above that one apparent success of the roundtable process has been to advance the case for pro-growth regulation. For Canberra to sustain any such shift, however, the new regulatory regime will ultimately have be compatible with society’s overall risk-tolerance. If it is not, political pressure will eventually force governments to reverse course. The complication here is that there appear to be forces driving more risk aversion over time, including an older and wealthier population as well as shifts in the media ecosystem.

None of this is to suggest that there is no case to pursue productivity-minded reform, or to hope for positive payoffs from the same. Rather, it is to temper expectations about what might be achievable in the aftermath of this week’s discussions. There is scope for reform to produce real gains. But it is probably best not to oversell it.

What happened on the Australian data front this week?

The Westpac-Melbourne Institute Consumer Sentiment Index rose 5.7 per cent over the month to an index reading of 98.5 in August 2025. All five subindices registered monthly increases: ‘Economic conditions next 12 months’ (up 7.6 per cent), ‘Family finances vs a year ago’ (up 6.2 per cent), ‘Family finances next 12 months’ and ‘Economic conditions next five years’ (both up 5.4 per cent), and ‘Time to buy a major household item’ (up 4.2 per cent). Westpac noted the RBA’s rate cut this month has reinforced expectations for further declines in borrowing costs. Amongst those surveyed after last week’s RBA decision, just over half of consumers with a view now expect mortgage rates to be lower in a year’s time (closer to 60 per cent for those with a mortgage).

The ANZ Roy Morgan Consumer Confidence Index edged up by just 0.1 points to an index reading of 89.4 points for the week ending 17 August 2025, in this case little moved by the RBA rate cut. Weekly inflation expectations fell 0.1 percentage points to 4.9 per cent.

The S&P Global Flash Australia Composite PMI Output Index rose to 54.9 in August from 53.8 in July, indicating an acceleration in business activity. The Flash Services PMI Business Activity Index rose to 55.1 this month from 54.1 last month, while the Flash Australia Manufacturing PMI Output Index increased to 53.9 from 52.3 over the same period. In other positive signs, new work inflows including exports were up, firms reported increasing their staffing levels at a faster rate to meet additional workloads and business sentiment also improved. More good news: reported price pressures eased this month, as both the rate of input and output cost inflation eased relative to their July rates of increase.

According to the ABS Monthly Employee Earnings Indicator, total wages and salaries paid by employers rose to $103.9 billion in June 2025. That was up 0.5 per cent over the month and 5.9 per cent higher over the year from June 2024, but down from annual growth rates of seven per cent over the previous financial year. The Bureau said the Health care and social assistance services industry accounted for 14.6 per cent (the largest share) of total wages and salaries paid by employers across the 2024-25 financial year, while the same industry’s increase in wages and salaries paid accounted for 21.6 per cent of the total increase paid by all employers in the 2024-25 financial year.

Other things to note . . .

• The opening remarks from the Prime Minister and the Treasurer at this week’s Economic Reform Roundtable. According to the Treasurer, the government was ‘looking to build consensus around three types of outcomes: Clear reform directions – areas where there’s momentum and broad agreement on the direction of travel even if unanimity isn’t there yet. Specific reforms – the handful of changes we could all agree on now. And ongoing priorities – where there’s appetite in the room for further work.’ Beforehand, the two released a joint opinion piece.
• Delivered on the eve of the Economic Reform roundtable, Productivity Commission (PC) Chair Danielle Wood’s speech to the National Press Club: Growth mindset: How to fix our productivity problem. Along with a helpful roundup of the Commission’s reform proposals (linked to in detail in last week’s roundup), the PC Chair emphasised the need for governments to ‘regulate with growth in mind”. She stressed that for growth ‘the single most important driver is new ideas,’ and reminded her audience there is ‘no single policy reform that can bring productivity growth back to its long-term average’ but instead, to shift the dial, ‘governments will have to make a lot of pro-productivity decisions.’
• Grattan Institute CEO Aruna Sathanapally’s presentation to this week’s Economic Reform roundtable on A better tax system.
• Also from the Grattan Institute, a submission on seven ways to improve Australian gas policy.
• CEDA makes the case for a more seamless Australian economy.
• The e61 Institute highlights the importance of labour market dynamism for Australia.
• Does AI really boost productivity at work? Getting the regulatory settings right could help.
• In the AFR, John Authers predicts winners and losers in the new world order.
• Southeast Asia’s trade plan for the post-Trump World.
• This FT Big Read asks, is AI hitting a wall?
• On emissions-adjusted productivity growth.
• The rise of solar power in US electricity generation.
• The Economist magazine says Trump’s trade targets are ‘shrugging off’ his attacks.
• Meanwhile, the WSJ considers the confusion created by recent US trade accords.
• Findings on housing booms and productivity growth from the Canadian experience (IMF research).
• On the enduring allure of the big power summit.
• The origin of life happened quickly.
• The Joe Walker podcast discusses Australia’s Great Stagnation.
• The FT Economics show looks at cracks in Russia’s wartime economy.