Australia must update its approach to the economy or risk stagnating living standards and missing national emissions reduction targets, a leading economist has warned.

University of New South Wales Professor Richard Holden told the National Press Club in Canberra on Wednesday that the nation is failing to address a series of increasingly urgent problems in areas like taxation, health, education and the transition towards net zero by 2050.

He said governments must reignite reform agendas in these areas to replicate the world-beating run of consistent economic growth achieved between the early 1990s and COVID-19 in 2020.

“It’s been two decades since our last major economic reform,” Holden said on Wednesday.

“Good management isn’t just set and forget; the reform process doesn’t have to be constant, but it also can’t be absent – since our last major reforms our tax system has become dated, bordering on obsolete.”

Here are four takeaways from Holden’s speech.

1. Productivity is key

One big theme in Holden’s speech was that Australia must turn around more than a decade of weak productivity growth to ensure workers  improve their living standards.

Australia averaged productivity growth of just 1.2 per cent since 2005 – only about half the rate achieved during the 1990s in a trend seen in other developed economies.

“Seemingly small differences in annual rates have big medium run effects,” he said.

“If we grow productivity at 2.5 per cent a year, then we will double our living standards every 28 years.

“If we grow productivity at 1 per cent a year, our living standards will increase by only a third over that same period.”

Governments must back reforms that encourage so-called “business dynamism”, better matching between workers and businesses, and investments in education and training to help lift productivity.

However, these efforts may not go far enough.

“We have historically relied on big innovations, like electrification of homes and industries, or the personal computer revolution, to get historical levels of productivity growth.

“Absent being innovative, big innovations, we actually get very modest growth.”

The advent of generative Artificial Intelligence is one area that could deliver a wave of innovation, but the key will be in how businesses apply the new tech.

The key benefit of AI is that it reduces the “cost of prediction, often dramatically”.

“That’s very useful, but by itself probably doesn’t get us a big leap in productivity.

“But if organisations of all forms, businesses, schools, hospitals, government departments can use better predictions to reorganise their processes, then the leap in productivity might indeed be dramatic.”

Economists have long warned productivity is too weak to generate better living standards for Australians. Photo: Getty

2. Reality check on education

The need for more productive workers relates to education policies, and Holden expressed concern about Australia’s worsening outcomes, at least as measured by standardised tests.

“Since the international PISA tests began in 2000, Australia’s educational standing has been in constant decline relative to our peers.

“In 2000, there were 35 countries with lower PISA maths scores than Australia; since then 16 of them have overtaken us.

“We’re also doing worse in absolute terms – from a starting point of a little over 500, our math scores have fallen by 33 points, reading scores by 26 points, and science scores by 24 points.”

These tests measure the capability of students to contextually reason and apply critical thinking skills to various unknown situations rather than just foundational skills (which are also important).

Holden said randomised controlled testing of which policies work best to improve education outcomes show the path forward may ultimately involve more investment in our education.

This includes “high-dose tutoring, managed professional development for teachers, frequent feedback for students, the use of data to guide instruction and reduced class size”.

“High-quality [randomised controlled] trials show that reducing class size by about 25 per cent has a big impact on student outcomes.

“It’s not necessarily cheap, but it is effective.”

3. Staggering environmental challenge

Decarbonisation is another “staggering” challenge facing the Australian economy, Holden said.

But even if net zero is achieved by 2050, the nation has to replace about 15 per cent of GDP that is being generated by fossil fuel exports, like coal and gas.

“We will be faced with one of two scenarios: Scenario one is that the world also moves to net zero, and our fossil fuel industries will have essentially no export destinations.

“Scenario two is that a meaningful proportion of the rest of the world doesn’t decarbonise and our mining exports in the traditional form are still viable.

“But given that we don’t know which scenario will occur, and we can’t just wait to find out, we will have to have green energy superpower capability on hand, just in case.”

The advent of a critical minerals industry is an “exciting opportunity”, Holden said, but would be unlikely to replace the scale of Australia’s current fossil fuel industry.

Likewise, Australia could become an exporter of renewable energy, but bringing the nation together towards transforming a major industry in this way will require a “visionary” in the same sense that Steve Jobs helped revolutionise personal computing.

“There is the prospect of Australia becoming a green energy superpower.

“True, we have some natural advantages like sun, wind and cheap land.

“But it takes more than those natural advantages to pull off a technical revolution – it takes a visionary who can co-ordinate all manner of different actors.”

4. Ageing population

In 1996, just 12 per cent of Australians were aged over 65, but today that figure has grown to 16 per cent and by 2060 it will be 20 per cent.

“And of course, because the total population is rising, there will be a lot more elderly Australians.

“We have fewer than 600,000 Australians over 85 years of age today. In 2060 that’s projected to be more than 1.5 million people.”

Australia’s track record of caring for the elderly is already poor, with the Aged Care Royal Commission exposing a litany of failures among private organisations and governments.

The task is only going to get more challenging, and requires accepting basic facts.

“This is going to cost a lot of money, and there’s really no getting away from that.”

Economic growth could help pay some of that bill, but there will also be harder questions.

“One is whether it’s right for people to die with significant superannuation balances while younger people pay for their aged care – this is an intergenerational equity issue.

“It’s also an efficiency issue because of the additional tax burden on younger Australians.”