Productivity & Economy
Unlike the glorious bipartisan reform programs of the 1980s-1990s, Australian governments in the last 20 years have not left any outstanding mark on the economy or society. The country has been living off the earnings from the market deregulation and competition programs of the past. We have only seen public policy go the wrong way, fielding a surging interventionist mode, raising the national debt, stifling the market, raising taxes to vying the top socialist spot with China’s so-called communist regime. On the back of high commodity prices, Australia has been coasting on a few years of mining revenue that spared us fiscal crises and is masking our relative decline. Our productivity has collapsed over the last 10 years due to unrelenting penalties and disincentives placed on individual effort from the regulatory and policy side of Government. It is not likely that this will change in a hurry with Federal Budget forecasts to 2030. Government spending and new taxes will keep constraining productivity growth. Other than the blip from Government lockdown payments, Australia’s living standards growth have slipped to the bottom quarter of the OECD table, and the OECD’s average improvement is not great to begin with.
The factors causing poor productivity in Australia are multifaceted but can be sheeted home to the bloated size of the government (the public sector) and the wrong priorities that are leading the country astray from a free and competitive market.
The last comprehensive reforms Australia undertook were in the 1980s because of PM Malcolm Fraser’s and PM Bob Hawke’s leadership in commissioning work to open the Australian economy. The implementation of reforms wasn’t complete until the mid-1990s, but from the mid-80s they started to impact the workings of the economy. Since the inflation driven rise in interest rates that led to a severe recession in 1993, Australia has enjoyed three decades of continuous growth. Competent management by PM John Howard’s team, particularly the capable Treasurer Costello, saw the introduction of the GST in trade-off for nuisance taxes and the national debt cut down to almost nothing. Reforms were not confined to a particular industry but were a series of opening of the economy to fierce competition, domestic and overseas. The Campbell Report on the financial system that led to the floating of the AUD, Ross Garnaut’s report on the Northeast Asian Ascendancy that took up the dismantling of the protectionist state with intellectual leadership from Australian universities. It has been a long time since we saw such competitive spirit across the Australian political economy. What we have now is wasteful spending chasing nebulous goals and objectives that have little to do with ensuring Australia’s cost structure stays competitive with the most aggressive economies:
Excessive government spending and waste
High taxation and national debt resulting from misplaced large government priorities
Net-Zero costing $100,000 per taxpayer, with zero impact on global emissions
Irrational energy policy leading to surging electricity prices while AI calls for lowest prices
Damage to manufacturing when onshoring essentials is supposed to be prioritised
Industry strangulating regulations causing housing crisis and high cost of education
Poor immigration planning and execution adding fuel to fire in cost of living.
Australian taxes are so high that one-third of national income goes to taxes, 80% of which is Federal. Social security takes more than one-third of the Federal Budget. With an ageing population, this demand will only get more acute. Will we be able to afford it in future? We need to bring in comprehensive tax reform to unleash the supply side of the economy, growing the GDP denominator to minimise the risk surge in the national debt, which is due to pass the $1 trillion mark this financial year.
To give some perspective, the national debt was kept at floor levels during the Howard – Costello years. Those were the days when Australia struggled with trade deficits year in year out for half a century, occasionally raising concerns over the country’s foreign debt as the trade account deficit hovered at times around 5% of GDP. It’s only when the resources boom came to the rescue from the mid-2000s that the current account improved. Yet, since then, despite repeated resources booms, our national debt has gone up unabated, even discounting the Covid-19 pandemic period.
Bipartisan Reforms of the 1980s-90s
The economic rationalist principles that dominated Australian policy making in the 1980s and early 1990s set Australia up for a solid 3 decades of uninterrupted economic growth (an OECD record). This free-market shift fostered environments where competition and efficiency could be introduced through the specific industry reforms and their implementation unfolding over subsequent decades. The reforms were driven by the adoption of Economic Rationalism in academia and government, the economic philosophy that gained prominence in the 1980s championing deregulation and privatisation to improve total efficiency and lower costs from cutting excessive government spending. This philosophy led to widespread introduction of microeconomic reforms from the late 1980s into the 1990s across key sectors like telecommunications and electricity, which set the stage for reforms of other key industries including aviation, transport and manufacturing including automotive. The creation of a national competition framework advanced in the early 1990s with a key National Competition Policy (NCP) Committee of Inquiry, reporting in 1993, culminated in the formation of the Australian Competition and Consumer Commission (ACCC) in November 1995 and the Productivity Commission in April 1998. This paved the way for the Domestic Aviation Review (the Kingsland Review), commissioned by the Hawke Labor Government and published in 1986. Led by consultant John Kingsland, the review examined the structure, regulation, and performance of the Australian aviation sector in line with international deregulation trends (eg, the U.S. Airline Deregulation Act of 1978). Kingsland recommended a phased transition away from the restrictive duopoly that had limited competition since 1952 (primarily between government-owned Trans Australia Airlines and privately held Ansett Airlines), advocating for greater market entry, price flexibility, and reduced government intervention to foster competition and lower fares.
While the Kingsland Review was foundational for initial deregulation, later inquiries built on it. The Independent Review of the Two Airlines Policy (1981, led by Ian McPhee) provided early groundwork by critiquing the duopoly but stopped short of full deregulation. Post-1990 evaluations, such as the Bureau of Transport and Communications Economics’ Deregulation of Domestic Aviation: The First Year (1991), assessed the immediate impacts, confirming benefits like increased passenger numbers (up 10-15%) and lower prices. More recent reports, like the ACCC’s Airline Competition in Australia (updated annually since 2018), monitor ongoing market openness but focus on post-deregulation issues such as dominance by Qantas and Virgin. The deregulation spurred by the Kingsland Review transformed Australia from a highly protected market to one of the world’s more competitive domestic aviation sectors, though it remains concentrated today due to lack of policy progress in recent years. In August 2024, the Department of Infrastructure, Transport, Regional Development, Communications, Sport and the Arts released the Aviation White Paper, which outlines the vision and policy framework for opening and advancing Australia’s aviation industry toward 2050. The ongoing deregulation framework has resulted in domestic airfares, which had been around $900 for full economy Perth-Sydney return tickets in 1986, falling to about $500 today.
Among the reform zeal of the 1980s and 1990s is the Campbell Report – officially the Final Report of the Committee of Inquiry into the Australian Financial System – released in Sep 1981. This report was instrumental in the deregulation of Australia’s financial system and the eventual floating of the Australian dollar (AUD) in Dec 1983. Commissioned in 1979 by the Fraser Liberal Government under Treasurer John Howard and chaired by Keith Campbell, this landmark inquiry provided a comprehensive blueprint for modernising Australia’s heavily regulated financial sector, which had been constrained by post-World War 2 controls on interest rates, lending, foreign exchange, and banking licenses. The Campbell Report argued that Australia’s financial system was inefficient, stifled innovation, and hindered economic growth due to excessive government intervention. Its 600+ recommendations aimed to create a more competitive, market-driven system. Key points relevant to deregulation include:
Removal of Interest Rate Controls: The report criticised caps on bank deposit and lending rates, which distorted capital allocation and favoured established institutions. It recommended phasing out these controls to allow market-based pricing, enabling banks to compete freely.
Banking Sector Liberalisation: It advocated allowing new domestic and foreign banks to enter the market, ending the protection of the “Big Four” (Commonwealth Bank, Westpac, NAB, and ANZ). This led to the approval of 16 foreign banks by 1985 and new domestic licenses (eg, Advance Bank).
Deregulation of Foreign Exchange: The report highlighted the inefficiencies of Australia’s fixed exchange rate system and strict foreign exchange controls, which restricted capital flows and trade. It recommended liberalising exchange controls and moving toward a flexible exchange rate regime, setting the stage for the AUD float.
Capital Market Reforms: It proposed easing restrictions on capital markets, including reducing controls on corporate borrowing and bond issuance, to deepen Australia’s financial markets and integrate them globally.
The decision to float AUD in December 1983, implemented by the newly elected Hawke Labor Government under Treasurer Paul Keating, was a direct outcome of the Campbell Report’s recommendations on foreign exchange deregulation. Its key impacts:
Exchange Rate Flexibility, which the report argued would be much better than a fixed exchange rate regime as managed by the Reserve Bank of Australia (RBA) at the time, which limited monetary policy autonomy and exposed the economy to external shocks like commodity price swings. A market-determined exchange rate is better at absorbing such shocks and aligning with global trends such as the U.S. dollar float in 1973.
Capital Flow Liberalisation: The Campbell Report’s push to abolish foreign exchange controls (restrictions on Australians investing abroad or foreigners investing in Australia) created the conditions for a floating currency. By November 1983, most exchange controls were removed, and in December 1983, Keating and RBA Governor Bob Johnston announced the AUD would float, with its value set by market supply and demand.
Impact of the Float: The float allowed the RBA to focus monetary policy on domestic goals (eg, inflation control) rather than defending a fixed rate. It also exposed Australia to global capital flows, increasing volatility but enhancing economic flexibility. The AUD’s value dropped initially but stabilised, supporting export competitiveness.
While the Fraser Government began implementing some Campbell Report recommendations (easing interest rate controls in 1980), the Hawke Government (1983 – 1991) embraced the report’s vision more fully, driven by Treasurer Keating’s reformist agenda. Key outcomes included:
Banking Competition: By 1985, foreign banks like Citibank and Deutsche Bank entered Australia, and interest rate caps were fully removed by 1986, spurring competition and innovation (eg, home loans became more accessible).
Financial Market Growth: Deregulation deepened Australia’s bond and equity markets, attracting foreign investment. The Australian Stock Exchange (ASX) modernised, and capital inflows grew from $2 billion in 1983 to $20 billion by 1989.
Economic Modernisation: The Campbell Report aligned with broader 1980s reforms (tariff reductions, labour market flexibility), transforming Australia into a more open, market-oriented economy.
Some argued deregulation increased financial volatility (eg, the 1987 stock market crash) and favoured large institutions over consumers initially, but long-term benefits included lower borrowing costs and greater access to credit far outweighed the risks.
The float of the AUD was also influenced by the 1980 Martin Report (Review of Foreign Exchange Arrangements), which specifically recommended liberalising exchange controls, reinforcing the Campbell Report’s broader vision.
Background and Context
Australia’s economy in the post-World War II era was heavily protectionist, relying on high tariffs (averaging 25–30% on manufactured goods by the 1970s), import quotas, and subsidies to shield domestic industries like textiles, clothing, footwear (TCF), motor vehicles (PMV), and manufacturing from international competition. This approach aimed to foster self-sufficiency but resulted in inefficiencies, higher consumer prices, and limited export diversification beyond commodities. By the 1980s, amid global trends like the Uruguay Round of GATT negotiations (1986-94) and domestic microeconomic reforms under the Hawke Labor Government (1983-91), there was growing recognition that protectionism hindered competitiveness. Earlier efforts, such as the 25% tariff cut in 1973 and Industries Assistance Commission (IAC) reports from the 1970s (eg, the 1975 Crawford Study Group on Structural Adjustment), laid groundwork but were piecemeal and faced resistance, with protection peaking for sensitive sectors in the early 1980s (eg, 57.5% for automotive industry).
The Garnaut Report marked a turning point, arguing that Australia’s future prosperity depended on integrating into the dynamic Asian growth story rather than clinging to outdated protectionism. It emphasised that reducing trade barriers would boost productivity, attract foreign investment, and reorient the economy toward export-led growth in services, resources, and advanced manufacturing. The report’s 500+ pages of analysis and modelling projected that Northeast Asia would drive global economic growth, with Australia’s trade share potentially doubling by 2000 if it liberalised. Core proposals included:
Phased Tariff Reductions: A general reduction of tariffs on manufactured goods to 5% by 1996 (from averages of 15–20% in the late 1980s), with deeper cuts for non-sensitive sectors and a freeze on increases for protected industries like TCF and PMV until reviews.
Elimination of Quantitative Restrictions: Phasing out import quotas and local content schemes, particularly in automobiles and textiles, to expose industries to global competition and encourage efficiency.
Export Promotion and Diversification: Shifting assistance from protection to adjustment programs (eg, retraining, R&D subsidies) to help industries transition, while prioritising trade ties with Asia over traditional partners like Europe.
Broader Liberalisation: Advocating unilateral tariff cuts as a complement to multilateral efforts, with adjustment safeguards, but no new protections, for vulnerable sectors.
These recommendations were grounded in economic modelling showing that full liberalisation could add 1-2% to annual GDP growth, offset by temporary social supports to mitigate job losses (eg, in manufacturing, where employment fell from 20% of the workforce in 1980 to 12% by 2000).
Impact and Outcomes
The Garnaut Report directly influenced the Hawke Government’s 1991 Statement on Industry Policy and tariff reforms announced in the 1988-1990 federal budgets, accelerating the shift from protectionism. Tariffs on most manufactured imports were cut to 5% by 1996, and quotas on TCF were dismantled by 2000, with PMV tariffs reduced from 45% in the late 1980s to 15% by 2000 (and 5% by 2010). This complemented the 1983 AUD float and financial deregulation (per the 1981 Campbell Report), creating a cohesive reform package that boosted Australia’s export-to-GDP ratio from 15% in 1980 to 20% by 1990, with manufactured exports up 12.7% annually in the 1990s. Long-term effects included enhanced competitiveness (eg, tourism doubled, and Asia became Australia’s top trading partner bloc), though challenges like regional job displacements led to targeted assistance programs. The report’s vision aligned with subsequent policies under the Keating (1991-96) and Howard (1996-2007) governments, culminating in today’s low tariffs of 3-5% and free trade agreements (AUSFTA, 2005). The Garnaut Report was instrumental in the 1980s for its forward-looking, Asia-focused strategy that politically justified broad deregulation. Some critics noted the short-term pain for protected sectors but studies including by the Productivity Commission confirmed substantial net gains in welfare and efficiency. The synopsis of a paper presented at the Conference of Economists in Adelaide in Oct 2002 by Assistant Productivity Commission Commissioner Dean Parham states that:
“Microeconomic reforms were introduced from the mid-1980s to stem the slippage in growth in Australia’s productivity and living standards. Productivity growth more than doubled in the 1990s to reach a record high. A range of possible explanations for the productivity surge are examined in the paper. The three most plausible are microeconomic reforms; education and skills in the workforce; and the rapid uptake and smart use of information and communications technologies. To a certain extent, these three factors have interacted. The surge in productivity growth has underpinned growth in average incomes that is strong by both historical and international standards.”
Economic reform tends to result in winners and some losers and good policy should cater for support and redeployment of factors of production that are released from unsustainable industries. For Australia as a small economy subject to international competition for trade and economic development, an outcome was in the loss of 100,000 manufacturing jobs through the 1990s. A key driver of reform was the Gregory effect, which refers to the adverse economic consequences of a rapid expansion in Australia’s mineral export sector, particularly during resource booms, which leads to an appreciation of the real exchange rate of the AUD. This appreciation makes non-mining tradable sectors – such as manufacturing, agriculture, and other exports – less competitive internationally, causing a contraction in those industries and structural shifts in the economy. It is a key concept in the “dependent economy model,” highlighting Australia’s vulnerability as a resource-dependent nation where booms in mining exports create ripple effects on the broader economy. The mechanism works like this: Inflows from mineral exports like iron ore and coal improve the balance of payments and terms of trade, increasing demand for non-tradable goods (like housing and services). This bids up wages and prices, appreciating the currency. The stronger AUD raises the relative cost of Australian non-resource exports, reducing their demand abroad and leading to job losses or stagnation in those sectors. It is Australia’s domestic equivalent of the Dutch disease (coined by The Economist in 1977, referencing the Netherlands’ 1960s gas boom) or the “booming sector” model by W. Max Corden and J. Peter Neary (1982).
Later refinements by Gregory and David Gruen in the 1990s argue that high exchange rates drive import substitution in consumption, amplifying the effect during booms. This explains why the car industry in Australia could not be sustained despite large and increasing annual subsidies from the government. Car manufacturing depends on a huge market for volume production and an extensive network of suppliers. It is not possible for the country to compete against the U.S., Japan, then China on a unit cost basis. And if we were willing to spend big money on subsidies, the question would be why cars and not some other industry or industries. Given its high labour cost and tightly regulated labour market, would it be better for Australia to focus on niche manufacturing instead?
Regardless of microeconomic reform, the Gregory effect would inevitably cause some de-industrialisation as seen in the 1970s-80s mining boom and the 2000s-10s China-driven resources surge, when the AUD reached parity with the USD. Labour and capital shifted from non-tradables to mining/tradables, exacerbating sectoral imbalances. On the other hand, if the boom ends abruptly, the economy can experience “deflationary shocks”. In the 1970s boom, mineral exports grew rapidly, appreciating the AUD and contributing to manufacturing’s share of GDP falling from 25% in 1970 to 10% by the 2000s. The 2010s mining Boom led to a surge in the terms-of-trade and a 30% real AUD appreciation (2008–2013), flattening non-mining exports until the currency depreciated post-2013. Australia has had many debates about diversifying beyond resources to reduce the commodity price volatility impact, but this is easier thought than done given the difficulty in giving up the benefit of natural endowment. The correct response to economic upswings was for Australia to face the risks head-on and learn how to manage them, from hedging foreign exchange to making businesses resilient by maintaining a low-cost structure and a competitive domestic market. The 1980s-90s reforms were to address these two needs and Australia did well out of those restructures.
Australia needs to regain the zeal for national reform of this calibre to reset the course of this country considering that there are both urgent requirements and abundant opportunities for domestic niche manufacturing amid the new geopolitical landscape.
