The impetus for supply side policies
Historically, improvements to the Australian economy on the 'supply side' were vigorously pursued following widespread acceptance that the Australian economy was a 'poor performer' by international standards. Australia had a problem of inefficient performance in a number of sectors that had been shielded from competition, including domestic aviation, electricity supply, shipping, railways, manufacturing and telecommunications. This resulted in higher costs and an inefficient allocation of resources, forcing up production costs (and prices) and damaging the international competitiveness of Australia's tradables sector (i.e. exporters and import competing businesses).
Up until early 2008, Australia faced capacity constraints, largely because of a relative under-investment in infrastructure in the past. Problems such as container ships queuing at ports, road congestion, and electricity constraints during hot days, all pointed to a need for infrastructure investment and reforms in Australia. In addition, capacity constraints emerged in the form of skilled labour shortages that required policy action in the form of investment in education and training. All of these factors contributed to Australia's poor productivity performance over the 2000’s.
AS policies are needed to boost productive capacity (pushing out the nation's PPC) in order to prevent the re-emergence of capacity constraints once growth returns to (or exceeds) trend levels of 3.25% per annum. The importance of productivity is highlighted in the following extract from the Productivity Commission report titled 'The Productivity Reform outlook', www.pc.gov.au (May 2013):
'It is a very rare Minister who is not in favour of productivity growth, and few do not know instinctively that it is our flexibility, our workforce capabilities and our competitive environment, rather than the swings in the terms of trade or the commissioning of any big project, that determine the economy our children will inherit.'
Accordingly, the government announces new measures in most budgets to increase infrastructure investment and boost expenditure on skills development to ward against the onset of capacity constraints in future years - all designed to boost Australian living standards.
With an ageing population and an end to the terms of trade booms, which have provided significant boosts to Australia's income since the early 2000s, the role of AS policies becomes all the more important. Well targeted AS policies that ultimately boost Australia's productivity over time will be needed to fill the void. Without productivity enhancements, Australia's future rates of economic growth will be limited and average living standards will be compromised. This sentiment is summed up by David Gruen, in his address to the Productivity Perspectives Conference in November 2012:
'So the terms of trade and the ageing of the population are both likely to work against us, rather than for us, in the future. If this is the case, we will rely on productivity improvement to again become the dominant contributor to growth in Australian incomes.'