KPMG welcomes the Intergenerational report (IGR) – we see it as an important process to help shape the right settings and policies for Australia’s future. It should be ‘above politics’. Even though the figures are inevitably projections, the real benefit is that it provides policymakers the capacity to think about future scenarios and what we need to be doing differently to maintain and enhance living standards for Australians.

When considering recent productivity trends it is important to look behind the headline number – we know it is variable by industry over time. Individuals and industries don’t become less productive overnight, so the shock we are seeing in current data (productivity went negative in Q1, 2023) is mostly due to measurement issues. In the longer term, having policy settings that enable greater productivity is critical, and for boosting Australia’s future economic growth this means capital deepening – investing in technological advancements to boost productivity – as future industrial developments are going to be more capital dependent than labour dependent.

KPMG research has shown that capital deepening in high tech is a real driver of productivity and of real wage growth – and this is going to be even more important with the energy transition facing the country, as we know those industries facing the biggest decarbonisation challenge are hugely capital intensive.

There is a crucial need for policies that boost investment in a globally competitive environment for capital. We are seeing with the Biden administration’s Inflation Reduction Act the beginning of capital movements towards the US and away from where they would otherwise have gone. Therefore we need an industry policy that facilitates and enables capital to want to be situated in Australia. We know global capital wants to find a home where has its highest risk-adjusted return.

The mooted Carbon Border Adjustment Mechanism is a start and will provide certainty to investors, businesses and consumers, but the main game is about transitioning to a low carbon economy and lowering the cost of energy production through the widescale adoption of renewable energy as quickly as possible. Looking to harness our natural competitive advantages, and adopting tax and industry settings that hasten that outcome, is the next stage of policy development that we would like to see emerge from State and Commonwealth governments.

The IGR confirms that the dynamics of population and evolution of business means current tax settings will not be fit for purpose over mid-long term. While we understand wholesale tax reform is difficult for governments of all colours, given there will be to a degree ‘winners and losers’, as a nation we cannot shy away from reform in the medium-long term. Even though it is 13 years old, we still have the gold-standard blueprint with the Henry tax review.

Incremental tax reform in a balanced way should be on the agenda for all parties looking ahead. Tax can be crucial at the margins when investment decisions are being taken. We would like to see the government produce a tax roadmap on how the tax system will support, and be adapted for low carbon/net zero economy ambitions.

In terms of population, the two years of Covid saw the highest rate of ageing of the Australian population since the 1970s. So there is a need to turbo-charge the introduction of young skilled migrants at the start of their careers. KPMG modelling has shown that in a scenario where the cumulative number of skilled overseas migrants is increased by 265,000 over the next five years real GDP would be almost $30bn higher in 2030 than in a baseline projection. Using the assumption that the new migrants are 20% more productive than the incumbent workforce on average – which is consistent with a focus of increased migration on skilled workers – there could be an additional lift to GDP on top of this.

Our analysis is consistent with previous studies which have shown that the composition of the migration intake pre-COVID was budget-positive – via higher incomes and more tax revenue - and does not depress local employment or wages in the long run. A refreshed skills-focused migration program would provide a similar boost to the economy and lift real per-head incomes. Policies like identifying an appropriate pathway to  permanent residency for students and young professionals will be important, taking into account the wider reforms of the education sector and the contribution which graduating students make to future-ready industries.  

For further information

Ian Welch
KPMG Communications
0400 818 891