Nothing, nowhere ever at all: Why timing is so important when it comes to economic reforms

Despite their importance, these reforms have been largely absent in Australia for more than 20 years. The election campaign has been no different. Rather than implement tax, welfare, industrial relations, competition, trade or financial reforms, successive Australian governments have instead become addicted to demand-side policies.

Since before the global financial crisis through to the current phase of the COVID-19 pandemic, governments of both political persuasions have relied almost solely on fiscal policy (spending and taxation measures) and monetary policy (changes to interest rates) to try to solve problems and win elections.

What would a country look like if it spent more than 20 years relying on fiscal and monetary policies to solve all its problems? Spoiler alert: it would look strikingly similar to Australia today.

Government debt would be through the roof. Inflation would be high from growing supply-side constraints. Productivity growth, wages growth, investment and innovation would be at rock bottom since demand-side policies merely shift demand between the past and the present.

The level of competition between businesses would be low as vested interests grow and become entrenched. We'd have little action on structural challenges like climate change and inequality. People with disabilities and the aged would struggle with poor services. We'd have a central bank which would be responsible for everything under the sun: wages, climate change, the environment and gender would be common topics in the speeches of central bank officials.

The reason Australia has had barely any supply-side reform in 20 years is simple: we've forgotten how to do it. The leaders that have tried to do it (think: Rudd, Gillard, Abbott, Shorten) did too much too fast, got the timing wrong, created too many losers and not enough winners, got booted out of office (or didn't get elected in the first place) and saw many of their reforms reversed. After watching what happened to their predecessors, other leaders and contenders took entirely the wrong lessons: that reform isn't possible, Australians don't want it, or that it isn't required anyway. "Vanity projects" is how the Prime Minister referred to tax reform.

Make no mistake though, supply-side reform is not only desperately needed, it is entirely possible. We know what needs to be done, we just need to remember how to do it. Fundamentally, it hinges on getting the timing right.

The first step is to recognise that reforms are interrelated. They build off each other, they are dependent on each other, and they create their own momentum. Reforms to government spending don't work without reforms to tax. Reforms to tax are unfair without reforms to welfare and housing. Reforms to welfare and housing are unsustainable without reforms to labour markets. Reforms to labour markets need reforms to competition policy to keep the worker-business balance right. Reforms to competition policy require reforms to trade if there is to be a level playing field.

These interlinkages are a wonderful thing, because they produce momentum. It's a bit like renovating a house. Renovations might start in the kitchen, but they quickly move to the bathroom, to the living area and then to the bedrooms. Renovations build off each other. Australia's history shows reforms work the same way.

Reforms build momentum and momentum has its own logic. And just like renovating a house, everything is done according to a budget. Fiscal policy is not just about debt and deficits, it sets a budget which prioritises and sequences reforms. A renovation plan stops your house from falling over. A carefully sequenced budget is just as important.

Australian governments have consistently failed to appreciate this. Rather than building sustained momentum for reform, they've cherry-picked. The result is plain for all to see. Tax reform without spending reform has resulted in huge structural deficits. Attempts to reform industrial relations without reforms to welfare, housing or competition has led to legitimate outcries of unfairness which have stopped reform in its tracks.

The timing of reforms is key to making them politically palatable. Industrial relations reform is more palatable if it comes with reforms to strengthen the social safety net. Reforms to superannuation and tax concessions are more palatable if they come with tax cuts. Measures to increase taxes are more palatable if they come with spending cuts elsewhere and a credible plan for good quality, sustainable fiscal policy. The enormous government spending and tax cuts during COVID-19 was a missed opportunity to undertake serious reform.

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Reforms should also be sequenced with the political cycle. This is a delicate but critical choice. If you wait too long, it becomes too hard to start. Interest groups grow around the feed. Ministers become used to competing to carve up GDP, rather than grow it. Go too fast, though, and tiles peel off the heat shields and you risk crashing and burning. Yet, the political math favours doing the most difficult reforms at the start of a new term, when political capital is highest and the opposition at their weakest, so the benefits can be seen and felt in time for the next election.

Having a genuine reform agenda means having a multi-year, multi-term plan. Having a reform agenda that spills into a second term bolsters a government's case for re-election. The election mantra of "getting on with the job" doesn't work if you haven't done anything.

Two misconceptions often get in the way of implementing reform.

The first is the obsession with election mandates. History suggests these are less important than many think. Hawke and Keating undertook major reforms with no real mandate for them. They built their mandates from within government. A new government needs to build the case and momentum for reform from day one. "It's far worse than we thought," is how each press conference should begin, then commissioning of advice on what needs to be done that brings together multiple disciplines and interests.

The second misconception is that reform hurts confidence by scaring people and creating uncertainty. This couldn't be more confused. Australia is not standing still. We are sliding backwards. Much like a car, the Australian economy depreciates if we don't take care of it. Australia's steady fall in international rankings on competitiveness, the ease of doing business and corruption is testament to this steady decline. Reform builds confidence. It sends a clear signal to businesses and consumers that the economy tomorrow will be better than the economy today, leading to more investment and more employment in anticipation.

Whoever wins the next election needs a plan for reform, and timing is everything. There is a great American film in cinemas right now called Everything, Everywhere All at Once. We don't want the next government to do that with their program, but we can no longer afford the Australian version either: "Nothing, nowhere, ever at all".