Ross Garnaut: Prophet with a sunny view of our better future

Economist Paul Krugman’s endlessly repeated maxim that “productivity isn’t everything but, in the long run, it’s almost everything” has deluded far too many of the economics profession’s conventional thinkers.

It’s a throwaway line that should be thrown away.

It implies that any economic objective other than improved productivity is hardly worth worrying about. Such as? Distributional fairness aka “intergenerational inequity”. Tell that to the 40 per cent of voters under 40, and see how far you get.

It implies that the structure of our economy never changes, nor does the planet we live on. So the single-minded pursuit of improved productivity will somehow either stop climate change or magically deliver us a zero-carbon economy without any need for government intervention.

Or maybe the proviso “in the long run” is saying that our great, great-grandchildren will be able to look back on the clean-energy transition as little more than a blip. What a pity we live in a succession of short runs, not the long run.

A more realistic view is that, should the world fail to stop climate change, life will become almost unlivable, much of the economy will be stranded assets, and every spare cent we have will be spent shifting from one part of the country to another, and on buying hugely expensive water and permanent air conditioning.

A less cataclysmic future would see climate change get a lot worse before the major economies finally got their act together and ended the use of fossil fuels. This, of course, would lead to much unemployment in our coal and gas industries and much loss of export income.

Our future, no matter which way you envisage it, doesn’t sound very inviting. Much of our “natural endowment” of coal and gas deposits will be worthless and our “comparative advantage” in flogging them off to other countries will have disappeared. Do you still believe our government should be only worried about improving productivity?

What we need is some sort of economist prophet who can help us overcome this existential threat, not an army of blinkered economists telling us all that matters is raising our material standard of living.

Fortunately, among the profession’s abundance of unproductive thinkers is a lone prophetic, and so productive, thinker, Professor Ross Garnaut, who sees not only how we can minimise the economic cost of the transition to clean energy, but also what we can do for an encore. What we can do to fill the vacuum left by the looming collapse of our fossil fuel export business (which, by chance, happens to be our highest-productivity industry).

Because economists are such incurious people, Garnaut seems to have been the first among them to notice that, purely by chance, Australia’s natural endowment also includes a relative abundance of sun and wind.

Until now, we thought these were non-resources and of little or no commercial value. It took Garnaut to point out that, in a post-carbon world, they had the potential be our new-found comparative advantage. To provide us with a whole new way of making a bundle from exports, while generating many new jobs for the miners to move to.

When you add the possibility of structural change to the rules of conventional economics, you get what’s a scary thought for many economists: maybe our natural endowment isn’t ordained by the economic gods to be unchangeable through all eternity.

Maybe there are interventions fallible governments should be making to move our economic activity from one dimension of our natural endowment to another. Maybe such a switch is too high-risk and involves too many “positive externalities” (monetary benefits than can’t be captured by the business doing the investing) for us to wait for market forces to take us to this brave new world.

Maybe changing circumstances can change the nature of our comparative advantage in international trade, meaning the government has to nudge the private sector in a new direction.

It was Garnaut who first had the vision of transforming Australia into a “Superpower” in a world of ubiquitous renewable energy. And it was he who uncovered the facts that made this goal plausible.

Exporting our fossil fuels is cheap, whereas exporting renewable energy would be much more expensive. So whereas it was more economic to send our coal and iron ore overseas to be turned into steel, in the post-carbon world it soon will be more economic to produce green iron and other green metals in Australia and then export them.

In a speech last week, Garnaut acknowledged that, in its first term, the Albanese government began to lay the policy foundations for the Superpower project. The economic principles are set out clearly and well by Treasury’s “national interest framework” for A Future made in Australia, released after last year’s budget, he says.

The re-elected Albanese government has already restated its commitment to the project. Garnaut says there’s much more for the government to do in creating the right incentives for our manufacturers to re-organise and expand.

Research sponsored by his Superpower Institute finds that Australian exports of goods embodying renewable energy could reduce global emissions by up to 10 per cent. So we can contribute disproportionately to global decarbonisation by supplying goods embodying renewable energy that the high-income economies of Northeast Asia and Europe cannot supply at reasonable cost from their own resources.

This would “generate export income for Australians vastly in excess of that provided by the gas and coal industries that will decline as the world moves to net zero emissions over the next few decades”.

Garnaut concludes: “The new industries are large enough to drive restoration of growth in Australian productivity and living standards after the dozen years of stagnation that began in 2013.”

The present fashion of obsessing with productivity improvement for its own sake is counterproductive and probably won’t achieve much. We should get our priorities right and focus on fixing our most fundamental problems – unfairness between the generations, action on climate change and fully exploiting the opportunities presented by our newfound strength in renewable energy – and let productivity look after itself.

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How top earners kid themselves (and us) they're overtaxed

Apparently, the nation’s chief executives and other top people are groaning under the weight of the tax they pay. Is it any wonder they’re doing such an ordinary job of running the country’s big businesses? When you see what’s left of their pay after tax, it’s a wonder they bother turning up.

I know this will shock you – just as it does every time the business media remind their readers of it. According to the latest available figures, for 2020-21, the top-earning 1 per cent of taxpayers paid more than 18 per cent of the total income tax take.

Taxpayers in the top 10 per cent paid 46 per cent of the total income tax collection of $237 billion.

Think of it. Just the top 10 per cent pay almost half of all the taxes. Do you know that the bottom 50 per cent of taxpayers pay less than 12 per cent? Talk about lifters and leaners. Those lazy good-for-nothings have no idea how easy they get it. And still, they whinge unceasingly about the cost of living.

How’s your bulldust detector going? All the figures I’ve given you are true, but, like many of the things said in the political debate, they’re misleading. If you’re not smart enough to see how they’re misleading, that’s your lookout.

It’s true that because income tax is “progressive” – people at the top pay a much higher proportion of their income than those at the bottom – people at the top end up paying a much higher share of the total tax take.

That’s because they’re considered able to bear a bigger share of the cost of government. And remember that about two-thirds of those in the bottom half would have (often not well-paid) part-time jobs.

But what the people who bang on about how much tax they’re paying want you to forget is that although income tax is the biggest tax we pay, it’s just one of the many taxes – federal, state and local – we pay.

In fact, it accounts for only about half of all the tax we pay. And almost all the other taxes are “regressive” – they hit the bottom end proportionally harder than the top.

So, take account of all the other taxes, and the rich man’s burden is a lot less heavy than the rich old men try to tell us.

It’s clear that, of all the taxes we pay, it’s personal income tax that the well-off most object to and want to pay a lot less of. Whenever you see them arguing that we need major tax system reform to “sharpen incentives to invest, innovate and hire” and make the system “genuinely productivity-enhancing”, that’s what they really mean.

Most voters approve of Prime Minister Anthony Albanese’s decision to help ease cost-of-living pressure by diverting a big chunk of the stage 3 tax cuts from high-income earners to middle and lower earners, but the (Big) Business Council was distinctly disapproving.

“The [original] stage 3 package rewarded aspiration and started to address bracket creep with a simpler system”, but “the changes do not address any of the real issues with our tax system”, it said.

But if you’re not impressed by the argument that pretends income tax is the only tax that matters, the big business lobby has others. “Personal income contributes too much of our [total] tax revenue … [at] 51 per cent today,” it says, implying we should cut income tax and increase other, indirect taxes.

A related argument is that few countries are as reliant on income tax as we are. Figures for 2021 say our personal income tax as a proportion of total taxes is the fifth highest among the 38 member countries of the Organisation for Economic Co-operation and Development.

Again, it’s true but misleading. It’s a false comparison because, unlike almost all the other countries, Australia uses income tax to cover the cost of social security payments – such as unemployment and sickness benefits, disability and age pensions, as well as healthcare benefits – whereas other countries cover these with separate, income-related social security contributions imposed on workers and their employers.

Calculations by Matt Grudnoff of the Australia Institute show that if you add to income tax the social security contributions imposed in other countries (and, in our case, add the states’ payroll taxes), our ranking goes from fifth highest to seventh lowest. So much for that argument.

Some people argue that we should add our compulsory employer superannuation contributions to our income tax, now set at 11 per cent of wages. But that argument is wrong because the super levy is not a tax.

Taxes involve the government making you pay money into its coffers, which is then spent by the government as it sees fit. With super contributions, the money goes into an account with a super fund that has your name on it and is always yours to spend as you see fit once you reach a certain age. If you die without spending it all, what’s left goes to your rellos.

And here’s another thing. One reason income tax accounts for as much as half of Australia’s total tax collections is that the Abbott government abolished former prime minister Julia Gillard’s carbon tax and her mining tax.

The very business lobby groups who supported these anti-tax-reform measures are now complaining that we’re too dependent on income tax. If they were genuine, the problem could be easily fixed: take up Professor Ross Garnaut’s proposal for a new, bigger “carbon solution levy”, which, by raising $100 billion a year, would greatly reduce our reliance on income tax.

Finally, don’t let the rich guys’ talk of high taxes fool you into believing Australia is a high-tax country. That’s the opposite of the truth. When you take total taxes as a proportion of gross domestic product, the OECD average in 2021 was 34 per cent. Ours was less than 30 per cent, making us ninth lowest. And only three of the eight lower countries are rich like us.

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