Summary

This submission to the Senate Select Committee on Productivity in Australia identifies productivity growth as the essential driver for raising long-term living standards. While the federal government does not control all economic levers, it can strengthen foundational elements including competition, labour markets, housing, health, education, and regulatory settings. The report focuses on four major economic reform opportunities: tax reform, maximising talent, creating more homes and better cities, and supporting the transition to net zero.

Tax reform

Improving tax system efficiency by shifting from more-costly to less-costly taxes could materially boost Australian living standards. More revenue is required to manage the costs of an ageing population and rising community expectations. Current tax revenue stands at 29.4 per cent of GDP, which is low compared to the OECD average of 34 per cent.

Support states to replace stamp duties with general property taxes

Replacing state stamp duties with general property taxes represents the most significant tax reform opportunity in Australia. Stamp duties are inefficient as they discourage mobility and distort choices regarding where people live and work. The federal government should incentivise states to make this switch, following the precedent of the National Competition Policy reforms of the 1990s.

Reduce income tax breaks

Broadening the income tax base by curbing concessions could raise more than $20 billion annually. This would reduce the government’s reliance on bracket creep for budget repair and decrease economic distortions. Superannuation tax breaks and the capital gains tax discount are identified as primary areas for reform.

Reform superannuation tax breaks

Superannuation tax breaks cost nearly $60 billion annually, or over 2 per cent of GDP. These are poorly targeted, with two-thirds of benefits flowing to the wealthiest 20 per cent of households. Recommended reforms include raising the Division 293 tax from 30 to 35 per cent, lowering the income threshold for this tax to $220,000, and reducing the pre-tax contribution cap to $20,000. Additionally, taxing all retirement earnings at 15 per cent could save over $5.5 billion per year.

Reduce the capital gains tax discount and curb negative gearing

The current 50 per cent capital gains tax (CGT) discount has overcompensated property investors for inflation. The report recommends reducing the discount to 25 per cent, phased in over five years. Combined with curbing negative gearing—specifically preventing rental losses from being offset against wage income—this would raise approximately $11 billion annually and help improve home-ownership rates.

Harmonise tax rates across savings

In an ideal scenario, tax rates would be consistent across different saving types, perhaps via a dual income tax structure. A consistent treatment would encourage households to seek the best pre-tax returns rather than chasing tax concessions, although this would inevitably require raising tax rates on current concessionally-taxed vehicles.

Broaden and/or raise the GST

Australia’s GST base is narrow by international standards and is being eroded as consumer spending shifts toward GST-free items. Raising the rate to 15 per cent could generate more than $50 billion per year. Approximately 60 per cent of this revenue should be directed toward a compensation package for the bottom 40 per cent of households to cushion the impact on vulnerable populations.

Redesign resource rent taxation

Government revenues from fossil fuel extractors are relatively small despite high profitability. Redesigning the Petroleum Resource Rent Tax (PRRT) and considering a resource rent tax on critical minerals like lithium and cobalt would ensure Australians receive a fairer share of resource wealth as the global economy transitions to net zero.

Maximising our talent

A well-functioning labour market must utilise the talents of all Australians. With persistent labour market tightness expected, barriers to work should be reduced for women with young children, older workers, and migrants. This includes addressing the efficient matching of jobs and skills and supporting workforce adaptability.

Childcare reforms remain critical

In 2024, nearly 300,000 parents reported childcare issues affecting their ability to work; 93 per cent of these were mothers. High effective marginal tax rates, often exceeding 60 per cent, remain a significant barrier. The government should test alternative funding models, including flat-fee models and direct provision, to ensure quality and affordability.

Support flexibility in the labour market

Hybrid and remote work can lift participation among under-represented groups without harming productivity. The government should avoid limiting these practices and ensure non-compete clauses do not unnecessarily restrict job switching, particularly for low-wage workers.

Improve skilled migration

Skilled migration offers significant economic benefits, but the current programme is often slow and expensive. Reforms should include reallocating visas via a revised points test, making permanent employer-sponsored visas available for all occupations paying at least $90,000 per year, and streamlining the skills recognition process to prevent migrants from working below their skill levels.

Creating more homes and better cities

Australian housing is among the least affordable globally, with stock growing more slowly than the population since 2000. Planning controls add hundreds of thousands of dollars to housing costs, and urban density remains low compared to international peers. Allowing more housing in established suburbs would lead to cheaper homes and shorter commutes.

Sharpen states’ incentives to boost housing supply

The federal government should reward states for specific, verifiable reforms that relax residential land-use controls. Policies like the Low-Rise Housing Standard (permitting three-storey townhouses) and the Mid-Rise Housing Standard (permitting six-storey developments near transit hubs) should be encouraged through federal incentive payments.

The New Homes Bonus is not working

The current $3.5 billion incentive for building 1.2 million homes is failing due to rising interest rates and construction costs. Incentives should be paid in instalments based on progress towards meeting recalibrated baselines rather than only at the end of the five-year period.

The Productivity Commission should regularly evaluate the performance of state land-use planning regimes

The Productivity Commission should assess planning systems using metrics like ‘zoning taxes’ and the ratio of house prices to construction costs. This oversight would help ensure commercially feasible housing capacity meets future demand and would advise on reforms such as relaxing minimum car-parking requirements.

Get major infrastructure projects right

Governments must improve upfront assessments and cost-benefit analysis for major transport projects. Politically motivated ‘megaprojects’ often carry significant risks and lead to substantial cost overruns. Buying smaller and ‘off-the-shelf’ can reduce risks and total costs compared to bespoke, over-scoped projects.

Supporting the economic transition to net zero

Climate change poses a moderate risk to the economy today, which is expected to reach very high levels by 2050. Mining, construction, and agriculture are particularly vulnerable. Emissions-reduction targets for 2035 and 2050 provide a predictable environment for investors and consumers.

Climate change will hit productivity hard

Extreme heat reduces outdoor worker productivity, while frequent extreme weather events damage facilities and disrupt operations. These factors will lead to significant financial losses and reduced national productivity, with mining, construction, agriculture, and power generation being most affected.

Targets guide investment and encourage action

Current policy gaps exist between government targets and actual emission levels. Strengthening the Safeguard Mechanism and New Vehicle Emissions Standard is necessary. Transitioning to a renewables-based system will eliminate the waste of two-thirds of fossil fuel energy inherent in the current system of digging, processing, and burning fossil fuels.

A decarbonised economy can be a more productive economy

Decarbonisation is an opportunity to modernise the industrial sector. The median age of Australian industrial facilities is 58 years. Shifting to low-emissions production allows for consolidation and efficiency gains. Australia could also double its critical mineral exports by 2050 if it maintains its current market share.

The electricity sector is the keystone

The transition requires building sufficient renewable generation, storage, and transmission to replace coal. Significant procurement issues exist; for example, the Snowy 2.0 project is three years late and 900 per cent over budget, and Project Energy Connect is two years late and 82 per cent over budget. Rigorous cost-benefit analysis and better coordination are essential for the energy market’s Integrated System Plan.