The Economist: Putting Our House in Order

The recent Productivity Commission report puts forward common-sense reforms to address the perpetual puzzle of poor productivity and perhaps arrest Australia’s slow slide into mediocrity.

We wrote in Company Director in October 2016 that Australia had a productivity problem. The latest National Accounts reveal that we still do, but at least quicker steps are being taken to address it. Indeed, the Productivity Commission, the Federal Government’s independent advisory body, has been empowered to undertake five-yearly reviews of our productivity performance. The commission’s groundbreaking first report was released back in September — more on that soon.

Unfortunately to date, there has been much talk about improving productivity but little tangible progress. The statistics don’t lie. In the year to June 2017, Australia’s rate of growth in labour force productivity — measured by changes in output per hour worked — was just under one per cent. This is the same rate as in the previous year, but less than half the growth rate of five years ago. Productivity growth, in fact, has been below the long-term average of1.6 per cent now for three straight years.

Persistently weak productivity has profound implications for potential growth. A lower effective speed limit for our economy affects employment, incomes and, ultimately, our standard of living. Potential growth, of course, is the product of both productivity and population growth, but the latter also has slowed, partly because of the inexorable drag from ageing.

The latter will continue — in fact, our rate of ageing will accelerate — a development that should focus an even brighter spotlight on the need for faster productivity growth. There will be fewer workers — and, therefore, taxpayers — as the population ages, and the deficit of workersrelative to retirees may not be assuaged by automation. No-one really knows how disruptive, positive or otherwise, the so-called “coming of the robots” will be.

Rightly, directors responding to an AICD survey are concerned about the lack of improvement in our productivity performance. The latest Director Sentiment Index (DSI), released in November 2017, showed that 20 per cent of directors nominate low productivity growth as an urgent issue the government should address in the short term.

In the same survey, more than one third of respondents nominated productivity growth as one of the main economic challenges facing Australian businesses. AICD members remain frustrated about the lack of tangible progress on reform, a crucial ingredient to enhancing productivity. Perhaps that will change now the commission is on the case.

To be fair, fixing a persistent productivity shortfall is difficult. Working longer hours won’t do it. That just increases the denominator of the productivity equation. It’s the numerator (output) that needs to rise.

Gone, it seems, are what some described as the “low-hanging fruit” picked during the reform frenzy of the 1980s. People forget that these reforms were hard-won, some over many years, with many of the changes keenly contested in parliament. If the low-hanging fruit already has been picked, how do we reach the juicy reform offerings higher up in the economic tree? The answer may lie in the views of AICD members. Respondents to the DSI survey want less short-termism, another push for broad-based tax reform, more infrastructure spending, greater focus on fostering innovation and better standards of education. Interestingly, industrial relations reform ranked only “mid-table” on directors’ lists of measures to enhance productivity. A tweak of workplace regulations is obviously no longer the go-to change for business leaders. Current productivity problems are complex; the solution will be multifaceted.

The written summary of the mammoth inquiry and recommendations runs to 1200 pages, with 16 supporting documents and working papers. The sheer size of the report hints at the enormity of the Productivity Commission’s undertaking. What makes it distinctive is the broad-based nature of the recommendations. Previous work has tended towards the specific — in effect, to-do lists relating to the market economy. This time, the commission has set out “broad principles” to outline the growing productivity challenges.

The commission’s argument is that with investment in the market economy already carrying a substantial load, Australia needs to focus on the non-market economy, which accounts for some 20 per cent of GDP and 30 per cent of employment. It has called for a joint reform agenda with the states to work through longer-term measures to improve productivity.

The agenda would include measures for local health networks to reduce chronic illness (which has a higher incidence in low socio-economic groups) and increase workforce participation. It would also include a focus on better educational outcomes so workers can gain essential skills relevant to future jobs and measures to lift investment opportunities in cities and towns. This is the challenge ahead: to ensure Australia does not “sleepwalk into mediocrity”.

One of the Productivity Commission’s more interesting suggestions is for an enhanced health system, with patients the centre of attention and mental health a key focus. The argument is that a happier, healthier workforce is more productive — and better placed to find work if unemployed.