What economists are paying attention to this election

As Australians prepare to head to the polls, Assistant Professor of Econometrics Jamie Cross explains why political policies might win votes, they won’t solve our productivity problem.

As Australians prepare for the upcoming election, the major political parties are fighting to win hearts and minds on two key issues.

Cost of living and housing affordability.

While short-term policies may win votes, without substantial investment in productivity growth and long-term economic reform, it is uncertain whether it will be enough to secure a sustainable and prosperous future for Australia.

So, what are the major parties focused on?

Cost of living

Both parties are trying to strike a delicate balance between addressing cost-of-living pressures and maintaining economic stability.

But could the proposed policies potentially make the problem worse?

While the Reserve Bank of Australia (RBA) is independent to the government and plays a primary role in managing inflation through interest rate adjustments, government can influence inflation indirectly through fiscal policy in the form of taxes, transfer payments and general spending.

Labor and the Coalition have both proposed policies to ease cost-of-living pressures, with Labor proposing tax cuts for the lowest income bracket and the Coalition proposing a temporary tax offset for people earning up to $144,000 and a temporary cut on the fuel tax.  

Labor has also proposed government spending in the form of rebates on electricity and solar installation.

However, these policies could have unintended consequences.

While tax cuts may provide immediate relief, they could also fuel inflation by increasing demand for goods and services and driving up prices, therefore worsening the problem.

On the spending side, economists generally agree that reducing government spending, particularly the kind that fuels consumption, can help bring inflation down; while increasing it can only worsen the current crisis.

Housing affordability

Housing affordability has become a key battleground, with both major political parties proposing to tackle the issue with policies aimed at reducing barriers to homeownership, particularly for first-time buyers.

Labor has announced new government loans for 40,000 homebuyers, with government investing up to 40% of the purchase price. All first homebuyers would also be eligible for 5% deposits under Labor’s expansion of the Home Guarantee Scheme. 

The Coalition has proposed a new first home buyers' scheme in which people would have access to 40% of their superannuation (up to a maximum of $50,000) to purchase a property.

While well-intentioned, these schemes could inadvertently drive-up housing prices by propping up demand in an already overheated market.

On a more positive note, both parties have aimed to address the core of the problem – lack of supply of new homes.

Labor has already established their $10 billion Housing Australia Future Fund and pledged to build a further 100,000 new homes nationwide for first home buyers. They have also announced an additional $1.5 billion infrastructure program aimed at speeding up housing construction. 

The Coalition has proposed to scrap the fund, but announced a $5 billion spend on public projects that would speed up the development of half a million new homes. They’ve also announced a tax deduction on the interest paid on first $650,000 of a mortgage for first homebuyers of new builds. 

However, such initiatives take time to have an impact, and the immediate effects of inflation may persist for some time.

The alternative way to address housing affordability is through the more direct measures which the Greens have proposed, such as rental price caps.

These policies aim to control housing costs without fuelling further price increases and have been met with some support, as they directly address the affordability crisis without exacerbating inflationary pressures.

Like with all government policies, there's no free lunch.

In the long-run, such price caps could worsen the supply constraints since there's less demand for investors to purchase new properties. 

Australia has a productivity problem 

Many economists view the proposed policies as insufficient to address the deeper structural issues currently affecting the economy.

This is largely due to the ongoing global economic uncertainty and the domestic hangover from the pandemic, which has left little room for long-term economic reform.

The mining boom, which has driven much of Australia's economic growth over the past few decades, is in decline.

With global demand for Australian natural resources slowing, the country is left grappling with the challenge of maintaining growth without the same level of natural resource wealth.

At the same time, productivity, defined as the efficiency with which a country can use its labour and capital to produce goods and services, is also in decline.

This is bad news, because productivity is a key driver of economic growth, higher wages and increased living standards.

Neither political party has addressed the issue, largely because policies aimed at boosting productivity tend to be long-term and not front of mind for voters.

For example, substantial investments in research and development (R&D) would be necessary to address the productivity gap, but such investments are often not seen as politically viable due to their long-term nature.

The Productivity Commission has suggested three ways we could address the issue including: 

1. New policies that create a more dynamic and competitive economy

2. Improving the skills of the workforce through better education quality (both pre-job and on-the-job training)

3. Increasing investment in, and effective use of, data and digital technologies 

In normal times, the government would likely be able to take a more forward-thinking approach, but the pressures of the current economic environment are forcing politicians to focus on short-term, vote-winning policies.

These policies are aimed at medicating present day symptoms while ignoring the underlying structural disease that is our productivity problem.

With domestic pressures abound, neither side has addressed exactly how they plan to deal with the international elephant in the room – Trump’s tariffs. However, we’ll leave the economics of that for another day. 

Dr Jamie L. Cross is an Assistant Professor of Econometrics & Statistics at the Melbourne Business School, University of Melbourne. He teaches Predictive Analytics in the Master of Business Analytics at Melbourne Business School.

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