Australia is experiencing a period of "slow relative decline" due to collapsing productivity and a departure from economic reforms that once fueled its success, according to OECD Secretary-General Mathias Cormann.
Cormann, who previously served as Australia's finance minister, stated that the nation's competitive intensity has waned, leading to stagnating or declining individual living standards despite overall economic growth, often driven by population increases. He noted that labor productivity in Australia has grown by a mere 0.66 percent annually over the past five years, placing it at the OECD average.
"Relative decline means rival nations get richer and more competitive while we congratulate ourselves for standing still," Cormann explained. "The economy can keep growing on paper, pumped up by rapid population growth. But individual living standards stagnate or even worsen."
Historically, Australia navigated economic challenges through significant reforms. In the early 1980s, governments under Bob Hawke and Paul Keating floated the dollar, reduced tariffs, and liberalized the banking sector. John Howard's tenure saw the introduction of the Goods and Services Tax (GST) and granted formal independence to the Reserve Bank. These measures modernized the economy and allowed Australia to capitalize on the mining boom.
However, Cormann suggests that following the surge in commodity prices, political will for reform diminished, leading governments to increase spending and rely on past reform dividends. This period saw increased regulation and a shift towards subsidies, which Cormann labels the "new protectionism."
This approach, he argues, devolves into a system where businesses seek government handouts, increasing taxes and prices for households while failing to address the core issue of productivity. Cormann estimates that restoring Australia's early 2000s competitive intensity could boost GDP by up to three percent, a goal hindered by "political cowardice."
The issues are not solely attributed to the current Labor government. Cormann acknowledged his own past involvement in administrations that also saw increased spending and regulation. The current government, he noted, has accelerated this retreat by embracing subsidies and centralized workplace rules.
To counter this trend, Australia needs to implement faster approval processes, simplify its tax system, and ensure any industry assistance is transparent, temporary, and rarely applied. The country also requires infrastructure and housing development to keep pace with population growth, rather than using migration to artificially inflate economic figures while per capita living standards decline.
Cormann warned that without addressing productivity growth, economic policy debates become a zero-sum struggle over dividing a stagnant economy. He expressed concern that if the current trajectory continues, future generations will bear the brunt of Australia's "sleepwalking" into decline.