Investment drives productivity

How do countries get rich? They can be born to wealth or work hard at it. We are seen as the “lucky country”, blessed with natural endowments, our prosperity riding up and down with the commodity cycle. But that’s only part of the story. In the 1980s women entered the workforce in vast numbers, pushing up national income. In the 90s we got the pay-off for big-bang reforms. The following decade China’s demand for minerals gave us all a pay rise. The decade drawing to a close saw incomes stagnate as productivity growth halved.

The Business Council of Australia argues our economic story in the past 40 years is simple: labour productivity has accounted for 80 per cent of the improvement in average income growth. In its budget submission, the big-business lobby makes a robust case for investment to boost productivity growth to get us out of the doldrums.

Rather than Canberra setting pay, or the industrial umpire mandating a “living wage”, as Bill Shorten promised, investment is the missing link to higher living standards. Both Treasury and the Productivity Commission have raised the alarm about “capital shallowing” as business investment as a share of GDP is now at levels seen in the wake of the 90s recession. Another worrying factor is the lack of innovation of companies. Outside of the top echelon, our companies are not keeping pace with their peers around the world. So-called multifactor productivity stalled for 15 years and fell last year. That these core drivers of growth are so weak should be of “paramount concern”, the BCA says.

Scott Morrison and Josh Frydenberg know this and have set off modestly on a productivity agenda. The Coalition is cutting red tape for big projects, funding road, rail, water and energy projects, encouraging skills development and expanding the instant asset write-off for businesses with a turnover of up to $50m on assets worth as much as $30,000. That measure targets medium and small businesses, which also are getting a lower tax rate, in stages. But larger businesses, which do the bulk of investing, have been waiting for tax relief that would make our regime more globally competitive. Regrettably, the political system can’t deliver that now, so the BCA argues for a new permanent broadbased investment allowance, set as a bonus deduction of 10 per cent in an asset’s first year. In simple terms, the effect is to increase the after-tax return on an investment so projects that may not be viable now will get the green light. We support this principle but worry some revenue will be lost on projects that would have gone ahead anyway. The idea is likely to find its way into the Treasurer’s second budget.

We argue ad nauseam about the need for reform, so welcome the BCA’s voice; during the election campaign we did not hear much about the need for workplace flexibility or lower taxes. Like many, business probably expected a Labor win in May, perhaps shelved expansion plans. Some big players also have been focused on third-tier social and governance fads, while the scandal-prone banks have kept their heads down and credit-risk powder dry.

But the time is ripe for change and to get active on issues that actually matter to shareholders and that promote the national interest — employing people, coming up with new products and creating wealth. The BCA’s fiscal game plan is on the right track. An economy meandering at sub-2 per cent cannot deliver the jobs, higher wages and services Australians expect. Private investment and higher productivity can get us to the next level. With the budget likely back in the black, the Treasurer now needs to go all out for growth.