Treasurer Jim Chalmers says he’s serious about improving Australia’s productivity performance, and to his credit he has done more than a few of his predecessors have by at least talking about it.
But that’s where it ends. It turns out that when Chalmers asked the Productivity Commission (PC) to review Australia’s tax system, he demanded that any proposals must boost investment but also be revenue-neutral in the short term, a fiscal straitjacket so tight that it rendered it a “borderline-impossible and extremely silly task”.
Inevitably, the result was a “clunky” mess that recommended lowering Australia’s corporate tax rate—which “has fallen out of step with peer countries”—but only for smaller companies. That’s a problem, because there’s strong evidence that productivity gains mostly come from the largest companies, which are likely to face a net tax hike under the PC’s proposal.
Add in a public complaint from one of Australia’s largest companies, and Prime Minister Anthony Albanese decided enough was enough, telling reporters “the only tax policy we’re implementing is the one we took to the election”.
For those not familiar with the election campaign, that means tokenistic measures like freezing beer excise taxes to shave 5¢ off the price of a pint, a comical $5-a-week income tax cut, and the taxing of unrealised gains on superannuation.
Tax reform has, yet again, been shelved for at least another three years.
Albanese made the call but really, it all comes back to Chalmers. For whatever reason, he appears to be in denial that real, productivity-enhancing tax reform almost always involves upfront revenue trade-offs. Think shifting from economically destructive taxes like stamp duty to more efficient ones like land taxes or a reformed, broadened GST.
These kinds of changes boost growth, lift living standards, and eventually help to balance the budget. But up front? They tend to cost money, meaning a government that’s serious about improving productivity has to wind back its own spending to pay for it.
And that’s why Chalmers tied himself into something of a Gordian Knot by setting such binding upfront constraints on the PC and other participants at his roundtable. By barring discussion of any reform that might dent the budget, he ruled out the kind of bold, meaningful changes that would actually move the productivity needle.
To be clear, deregulation and housing productivity—the main items remaining on the agenda—matter too. But these are largely state and local issues, such as stamp and other duties, payroll taxes, and excessive amounts of red and green tape (looking at you, Victoria). They’re all economic handbrakes, discouraging investment, mobility, and efficient land use. But they’re also huge revenue raisers, and the states won’t fix them unless the federal government gives them a good reason to.
Basically, Chalmers is now going to ask the states to do the hard work (politically) but is offering them nothing in return (perhaps he’ll churn out another essay on “values-based capitalism” to inspire them). It’s the fantasy of free reform—wanting the gains without paying the price.
There’s no denying that Australia’s tax system is ill-fit for purpose. It distorts decisions, stifles investment, and hits low- and middle-income households hard through perpetual bracket creep. Fixing it won’t be costless, but pretending we can seriously improve it without fiscal trade-offs is simply delusional.
Unfortunately, this whole exercise suggests Australia’s political economy may be too broken to fix the tax system, and the lucky country might just have to wait for a true crisis before seeing meaningful reform.