Workers better off, budget back in black earlier if nation gets productivity up 0.3 per cent
Close to a trillion dollars would be added to the economy if productivity levels were lifted by just 0.3 per cent annually, a new report says.
Workers would be $11,000 better off a year, the budget back in surplus four years earlier than expected and the economy close to a trillion dollars larger if the rate of productivity growth were lifted by 0.3 percentage points annually, according to a report that warns of an irrecoverable loss of living standards.
The analysis from the Menzies Research Centre echoes concerns expressed by former Reserve Bank governor Philip Lowe that households’ cost-of-living pain was a result of historically low productivity levels, rather than interest rates, and was a “political” problem, not an economic one. Former competition tsar Rod Sims backed Dr Lowe’s belief that weak productivity performance was a political problem that demanded that governments step in.
“Businesses are there to make profits – that’s sort of what we want them there to do,” Mr Sims said on Monday. “If they have to compete on price and on productivity, they will. But if they can avoid that, they will also. There’s no magic wand there to say ‘business, get a move on’. This government’s got to get that scene right.”
The warnings came as opposition finance spokeswoman Jane Hume said she would force public servants to work in the office if the Coalition wins the next election.
Senator Hume told the MRC that Labor and public sector unions had “made work from home a right for the individual, not an arrangement that works for all. This is unsustainable. This is commonsense policy that will instil a culture that focuses on the dignity of serving the public, a service that relies on the public to fund it, and a service that respects that funding by ensuring they are as productive as possible.”
Treasury estimates have suggested that productivity growth over the longer term of 0.3 percentage points above the current assumption of 1.2 per cent a year would raise per-capita incomes over the next 40 years by $11,000.
The research analysis, conducted by MRC, a Liberal Party-aligned think-tank, shows that the same increase in productivity would have the budget back in surplus four years earlier – by 2030-31 instead of 2034-35.
Annual GDP would also be $877bn higher, with $250bn more in revenue flowing back to the federal government,
This would mean the budget would record a cumulative $12bn surplus instead of the $221bn deficit projected by 2030-31.
“Falling productivity is one of the principal reasons Australian living standards have declined in recent years,” the report says. “Living standards will not improve unless our productivity crisis is solved. Long-term productivity growth is the reason that the average Australian worker now earns seven times more in real terms than they did at Federation, while working 14 fewer hours per week. If we don’t find new ways to kickstart productivity, the rising living standards we have experienced over many decades are at risk.
“Higher productivity also supports better government services by growing the economy and government revenue.”
MRC said a “modest” 0.3-percentage-point annual increase in productivity growth – “reversing Treasury’s recent downgrade” – then the budget would be in surplus four years earlier and cumulatively to 2034-35. “The current government’s approach of a government-run ATM to support a few chosen sectors is not a productivity policy,” it said.
Dr Lowe told The Australian this week the nation had lost the ability to take on difficult reforms. The former RBA chief’s comments echoed similar remarks made by his successor, incumbent governor Michele Bullock, who in an appearance before the House of Representatives economics committee last month called on the government to help improve productivity outcomes.
The MRC report said previous shifts in productivity were not predictable and it could not be assumed that supporting a particular technology or innovation would lead to future changes in productivity. It said that obvious reforms to improve productivity were politically untenable. These included reform of the GST and state-based stamp duties.
However, it said there were other reforms that could lift productivity, including deferral of capital gains tax for businesses reinvesting in new assets – as occurs in Britain – and increasing the instant asset write-off to $30,000 and making it permanent.
The MRC also cited: more streamlined planning and zoning frameworks; driving adoption of AI technologies through government service delivery; and shifting the Australian Strategic Capabilities Accelerator out of the Defence Department to model the successful US DARPA program. Jim Chalmers last year implemented a 12-month review into the nation’s productivity. It won’t report until after the federal election.
The Coalition has accused Labor of being asleep at the wheel on productivity by ignoring the underlying cause of falling living standards.
Opposition Treasury spokesman Angus Taylor accused Labor of presiding over a 6 per cent collapse in productivity since it took office. “This means Australians are now working 6 per cent harder just to maintain their standard of living,” Mr Taylor said.
“We are currently among the worst performers in the OECD. Under Labor, Australia has fallen to the back of the pack in achieving its economic potential.
“Productivity is the key to Australia’s economic potential. Without it, there is no prosperity. True productivity means working smarter, not harder – producing more with less effort.
“Productivity reform must be the foundation of Australia’s economic growth strategy.
“This is why a Coalition government will embed a whole-of-economy productivity goal in our fiscal strategy as we seek to return productivity to its historical average over time.”
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