The economist

Australia has a productivity problem. The affliction is not as bad as it was, and it’s shared with other countries, but it’s still there. For more than a decade – since around the time the mining investment boom kicked off in earnest – productivity has been slowing. In fact, in the period from 2003 until the end of last year, productivity growth averaged barely 1 per cent, below the long-term average of 1.6 per cent and a far cry from the glory days of the late 1990s, when productivity was nearly 4 per cent.

Weak productivity has profound implications for potential growth, which in turn affects employment, incomes and our standard of living. Potential growth is determined by the combination of productivity and population growth, which is also slowing, partly because of the inexorable drag from ageing. It’s a worrying combination.

Slower potential growth means we can’t run the economy as quickly as before – it overheats more quickly as spare resources, labour and capital are exhausted sooner. Inflation likely results, which ultimately requires higher interest rates, cruelling our growth prospects.

Eminent economist Professor Ross Garnaut AO calls the extended period of suboptimal productivity growth “the Great Australian complacency”. It was a period of “easy prosperity” in which we did not have to worry about sagging productivity because our terms of trade continued to rise. National income grew strongly as a result, so sluggish productivity slipped down the list of national concerns.

Our terms of trade, however, peaked back in 2012 and have since all but halved, so, the onus is back on productivity to deliver prosperity. The good news is that there are signs of improvement. The second quarter National Accounts showed that productivity growth lifted to 2.7 per cent in the year to June, the fastest increase since late 2012. The bounce partly reflects the cooling of the mining investment boom as projects are completed and output ramps up. This transformation from investment to production has much further to run. There may also be a boost from earlier innovation and the introduction of new technology, the early stages of which can be a drag on productivity.

It is important to examine what went wrong with our previously favourable productivity story. Complacency certainly was a factor – motivation to innovate and be efficient is fleeting when your income is soaring. Few of us work for mining companies, but we all benefited from the largest rise in the terms of trade since the 1890s.

There were, however, other factors at play. Yes, there was the huge run up in resource investment, where projects are notoriously lumpy. It takes years to construct multi-billion dollar facilities and associated infrastructure for say, a liquefied natural gas project, with no output until completion. This dynamic plays havoc with productivity calculations.

Policymakers, though, need to take a large slice of responsibility. It is difficult to identify major structural reforms in the last 15 years that have endured and added to the economy’s underlying efficiency. Since the tax reform initiatives in mid-2000s, there have been few profound reforms. There were workplace changes from both major parties, but many were unwound, partly for political purposes.

Things were different in the 1980s; there were bold and enduring microeconomic reforms that generated long-term pay offs, some of which are still generating benefits for the economy, decades later. To be fair, the waves of reform in the 80s and 90s often were driven by the onset of crisis or recession, which Australia has managed to avoid for more than two decades.

The welcome absence of crises may explain the recent lack of reform, but in no way excuses it. One reason politicians are reluctant to make tough decisions is the fact that the pay offs accumulate over decades. Governments lose political skin making changes, only for the rewards to potentially go to their opponents.

Not all of the blame should go to the politicians, though. Industry needs to take a stronger lead in making the necessary adjustments, innovating and adopting new technologies and practices. Government can set the landscape, but the private sector must be more proactive, rather than waiting for governments to do the heavy lifting.