Fixing the Productivity Commission

Aims to bring more analysis into a debate that is already raging.
Productivity Commission Amendment (Reducing Inequality) Bill 2017
Jenny McAllister

This bill places inequality firmly on the agenda of one of our country's most influential economic policy institutions. We consider the bill at a time when inequality in Australia is at a 75-year high, and when global leaders are warning that inequality threatens the global economy.

The Productivity Commission is tasked with providing research and policy advice on industry, industry development and productivity. Its scope is broad; it encompasses both specific industries and the productivity performance of the economy as a whole. Its influence is significant. Most people in this chamber could easily identify economic debates in the last 30 years where the commission's intervention has been decisive, and on many of these occasions its advice has, of course, been hotly contested. What is uncontroversial is that its advice has been central to government decision making, and we can no longer afford to allow this advice to be developed insensibly to the significance of economic inequality. The commission is already required to consider a range of considerations—everything from ecological sustainability to regional development is listed in its enabling legislation. Inequality should be on this list.

We can also no longer afford to starve our government of credible, focused research on inequality. The Productivity Commission is well placed to apply its substantial resources to generating just this type of analysis. The bill would require the commission to do just this: tabling an inequality report every five years, aligned with the production of the Intergenerational report. Doing so would bring valuable analysis into a debate that is already raging.

There has been growing discussion of economic inequality in the media and in these corridors in the last 12 months, and it is not just because people have got around to reading a couple more chapters of Thomas Piketty's book. There is a palpable fear that inequality has bred populism in Australia and overseas, and that it threatens the economic consensus that has held sway since the 1990s. Just this week we heard the governor of the Reserve Bank calling on workers to demand higher wages and the head of the Business Council of Australia writing that, rather than being allowed to pool in certain cities or among certain citizens, the business community must ensure that the benefits of growth are felt by all.

I am heartened by those sentiments but, in the flurry of sudden interest, we cannot forget that inequality is not, in fact, new; nor is the imperative to address it. Inequality was important before Brexit and it was important before Trump. Inequality affected ordinary people's lives well before it affected our political systems. Inequality threatened families' security and their stability well before it threatened business's access to global markets. We should not have to look to shock election results to find an imperative to address inequality, because the imperative lies in basic fairness—in families who are working harder for less, sandwiched between one generation that fears it may never be able to afford to buy a house and another generation that fears it may never be able to afford to retire. The imperative has always been there, and I am glad we are starting to get the momentum to address it.

Australians like to think that we are removed from the stark inequality that we see in America and the United Kingdom—and in some ways we are. Income and asset concentration in Australia is a fraction of what it is in the United States. The GFC did not hit us hard, as we entered it with significantly less inequality than other nations and, during the 2000s, Australia's middle incomes grew strongly—unlike other countries in the OECD that experienced slow growth or falling middle incomes. A Labor government responded to the GFC with a strong stimulus that prevented widespread joblessness and the inequality that comes with it. We should be proud of that intervention, but it has not insulated us from the broader trends that have been in play since the 1980s. Over the past four decades incomes for the top 10 per cent have risen nearly four times as fast as they have for the bottom 10 per cent, and this is not just the result of high-income earners being able to negotiate better pay packages. It reflects broad changes in the way our shared prosperity is divided.

During the 1990s wages decoupled from productivity growth, and even though Australian workers are more efficient and productive than ever before they are not being rewarded for it in wages. The labour share of national income in Australia has dropped from 75 per cent in the 1970s to just 53 per cent in 2016. The share for business, on the converse, is increasing. Let us be very, very clear about what this means: it means that investment pays better, much better, than work. But only—and this is critical—for those who can afford to invest. These dynamics are starting to weigh on our social structures and on our economy. Wealth is far more unevenly distributed than income. In 2003 the wealthiest 20 per cent were worth 57 times more than the poorest 20 per cent. Ten years later that figure has risen substantially: they are now worth 71 times more. The three richest Australians own more than the million poorest Australians put together. Today inequality is at a 75-year high. Australia now sits in the bottom half of the OECD's rankings for economic inequality.

We may live in a time of deepening economic inequality; however, it is worth reflecting that for most of our history since federation we have actually experienced falling levels of inequality. At the start of federation, we were a very unequal nation. When the Anzacs headed to Gallipoli, inequality was at its peak—one per cent of Australians owned one-third of all wealth and earned one-eighth of all income—but for the next 60-odd years inequality steadily fell, reaching a low point in the 1970s. The point I want to make is this: what happened over those six decades was not an accident, it was not a quirk of trickle-down economics; it was a direct function of the progressives' project to make Australia a fairer place for everyone. The labour movement and its political representatives have fought and won policies that shared Australia's growing prosperity much more fairly over those 120 years, and those policies became part of Australia's social contract. They evolved into institutions that were able to survive changes of government. This social contract drove down inequality in the postwar period and, to the extent that it survived changes in the 1980s and 1990s, it helped Australia avoid the excesses of inequality that we see today in the US and the UK, and there are a few aspects of it I want to briefly touch on, because they go to role of Labor governments in navigating the transformation of our economy to become more open and yet still fundamentally fair.

The first element, of course, is having a targeted welfare net. Between the health care provided by Medicare, and now the NDIS, the payments and the income support available, we seek to protect our poorest from the very worst effects of inequality. We do that very efficiently. The second element is having a progressive taxation system, reflecting the principle that those who earn more can afford to contribute more. The third element is publicly available universal education, a system of public schooling and the wide availability of tertiary education. But perhaps the most important element is our protection for wages and workplace conditions. In 1904, the world's first Labor national government started to put in place systems to manage workplace conciliation and arbitration. The systems developed by the labour movement in those early years were uniquely Australian. It was a solution that shaped dramatically the relationship between the labour movement and the state, and it formed the basis for decades of industrial outcomes that lifted the living conditions of millions of Australians.

But, like so many of the other bulwarks against equality, this has been eroded by continuing conservative calls for deregulation. And it starts to have consequences. Earlier this week, as I mentioned, the Reserve Bank governor said he would like to see workers asking for more pay increases. I agree. But it is not timidity or a lack of ambition that is holding Australian workers back; our industrial relations system has been reshaped to limit the bargaining power of workers in their workplaces. It shows in the level of unionisation today, dropping to only around 10 per cent of the private sector workforce. We need to be careful about this. The Australian social contract lifted living conditions and reduced inequality for Australians for much of the last century, and Labor has been a proud part of that story. But under conservative governments, as welfare payments are cut, workplace protection slashed and penalty rates removed, inequality has started to increase. Australia is the most unequal it has been in 75 years.

There are some people who might say, 'So what?' They say we should be focused on prosperity, not inequality; that as long as the pie is growing, it does not matter if some people are taking bigger and bigger pieces. I do not agree, and neither do most Australians. When surveyed, almost three-quarters of Australians agree that differences in income are too high. Inequality is not just about money; inequality shuts the door to opportunities, and Australians are not happy for wealth to decide the quality of someone's education or their health care. We do not think that your wage should depend on what your parents earned.

What has also become increasingly obvious in recent years is that the dichotomy between prosperity and fairness is false. More equal societies grow more quickly. That is not just wishful thinking from those on the Left. It is the considered view of hard-headed economists in institutions like the IMF. On a microeconomic level inequality creates barriers to people starting a business or going to university or being able to participate fully in the economy. It is a drag on growth. More broadly, income inequality affects the way an economy operates. Increasing the pay of low- and average-income earners boosts growth more, much more, than increasing the return to the well-off. These households spend more of their extra incomes, stimulating the economy. The OECD estimated that income inequality between 1985 and 2005 reduced economic growth among its member states by almost five per cent. As the head of the IMF, Christine Lagarde, explained: the benefits of higher incomes are trickling up not down.

Why this bill then? Whatever excuses there may once have been for ignoring economic inequality, they have dropped away. All the signs demand action: economics, political pragmatism, not to mention basic fairness. I do want to be clear that I do not believe that passing this bill will solve inequality. We need concerted action to level access to education, to strengthen workplace rights, to make our tax system more progressive and to make our welfare system fairer and stronger. This bill does not tackle those specifics. Instead, it is a step in building the policy infrastructure to make sure we do these things. It aims to fire up the public service institutions and to build the expertise that we need to look at inequality and properly address it. It aims to build a wealth of expertise and knowledge within an eminent public policy institution through establishing a requirement for a five-yearly inequality report produced by the Productivity Commission. It seeks to use that capability to bring these issues before the parliament regularly for our consideration and response.

I am from the political Left, and I am conscious that over the years there have been regular calls from within that tradition to dismantle the Productivity Commission. I understand the hesitation that some may have in tasking it instead to look at economic inequality. My own view is that nearly always we are best to build on and transform the institutions we already have.

Australia has a proud tradition of innovative public mechanisms to deliver on public policy. Medicare remains an extraordinary achievement. Globally, our superannuation system is much admired. We have also proven skilful at recasting older institutions to meet new challenges. In the 1980s and the 1990s under Labor, we transformed Australia's political and economic institutions to respond to a more open world. To provide just one example, the Reserve Bank's role changed profoundly in the eighties, reorienting its activities to deliver effective monetary policy in a newly opened financial system.

Today we need to retool all our institutions once more to address the challenge of our times: the growing disparity in wealth and income. The Productivity Commission has changed direction and purpose before, and it will have to again. From the Tariff Board of the twenties through to the Industry Assistance Commission of the seventies up until its present form, this institution has been repurposed to respond to contemporary policy imperatives. But, institutions matter. They have a rhythm of their own and they develop momentum that survives changes of government.

The great Nugget Coombs, arguably one of our most celebrated public servants, understood this. He played an incredible role shaping the institutions of the postwar period. Reflecting on that he said, 'I was not a fan of revolution.' He said there is:

… only reform—the creation of new institutions, the recasting of those already existing, the revitalisation of the moral and social imperatives which lend them vigour.

This bill seeks to ensure that the Productivity Commission is alive to one of the most significant moral and social imperatives of today: economic inequality.


Jenny McAllister is an Australian Labor Party Senator for New South Wales and was National President of the Australian Labor Party from 2011 to 2015.  This is the text of her second reading speech on introducing the 'Productivity Commission Amendment (Addressing Inequality) Bill 2017' on 22 June 2017.


See also:

Suggested citation
McAllister, Jenny, 'Fixing the Productivity Commission', Evatt Journal, Vol. 16, No. 3, July 2017<http://evatt.org.au/news/fixing-productivity-commission.html>