Angus Taylor says tax reform could take inflation pressures off economy

“Targeted immigration also needs to be part of the answer to fill the remaining gap. Longer term, skill investment is crucial, but it must be effective and responsive to what the market needs.”

Taylor will argue the Reserve Bank, facing its first independent review in 40 years, should remain focused on its 2 to 3 per cent inflation target.

He will say that with real interest rates – the 4 per cent gap between official interest rates and inflation – deep in negative territory, “frugal Australians” are taking their money out of savings, which in turn is “fuelling strong consumption”.

Another key risk is a price-wage spiral, which Taylor will say is possible due to industrial relations changes being considered by the federal government.

“If there is a race between wages and prices, real wages will lose. We saw that in the 70s and 80s and we will see it again if Labor gives in to the extreme demands for industry-wide bargaining we are seeing from the union movement,” he will say.

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The October budget will contain a downgrade to the long-term forecasts for Australian productivity, after falling to 60-year lows through the past decade.

On Monday, Chalmers said he was optimistic about the economy’s medium-term future but conceded global economic clouds were darkening.

“There’s no use pretending that we would be completely spared a global downturn, and the global situation is getting worse, not better,” he told ABC Radio.

Taylor will argue that while economic reforms in the 1980s and 1990s delivered long-term productivity benefits, they have now run their course.

Changes in the nature of the economy, with healthcare, social assistance, disability assistance and education accounting for almost a third of economic activity, mean the government has to look at productivity-enhancing reforms across the public sector, he will say.

A report released on Monday night by the Productivity Commission, which is inquiring into challenges to Australia’s productivity rate, provides support for Taylor’s concerns about the public sector.

The interim report, which looked at the way businesses and bureaucracies used technological breakthroughs to improve their operations, found all governments spent about $900 billion a year or almost 40 per cent of GDP.

But commission deputy chair Alex Robson said the take-up of innovative technology by government departments was poor.

“Innovation in government services is often slow, piecemeal, disorganised and inconsistent across jurisdictions. Yet it is critical for the quality and value for money of services,” he said.

“Even small gains from diffusion and adoption in the public sector will improve outcomes or realise billions of dollars in better services or cost savings.”

Robson said fewer than 2 per cent of Australian businesses produced global-level innovations, adding that rather than “cutting-edge” inventions, the domestic economy might benefit more from ensuring “incremental” advances were spread more widely to local companies.

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