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Why global disgrace of Australia’s productivity needs fixing urgently

20 March 2024

Australia’s labour productivity (GDP per hours worked) is at the same level it was eight years ago, and its abysmal performance is not only far worse than other advanced countries, but also one of the poorest in the world.

Productivity is vital to countries’ wellbeing because of its highly significant effects on standards of living -- and the cost of living in Australia and what Australians believe governments should be doing to lower it, is fodder for what is probably the country’s most contentious political issue.

According to the Productivity Commission’s latest Shifting The Dial Report, governments can enhance productivity growth by supporting education and skills development, improving regulatory design to create the right incentives for private sector investment, and ensuring the community benefits of public infrastructure are realised through project appraisal processes and appropriate asset management.

Productivity is a measure of how efficiently individuals, businesses, and other participants in the economy turn in-puts into out-puts, and the greater the increase in productivity, the greater the possibilities for wage increases.

These help wage earners win their battle for financial survival in the face of rising costs of living.  

 Why productivity growth lags

There appears to be something close to a consensus among economists that the broad reasons for Australia’s declining productivity growth include changing demographics, changing international national trade patterns, and the changing nature of industries as the nation moves towards a more service-based economy.

Politicians tend to throw hands in the air in mock despair and say there’s little governments can do about any of this stuff, but clearly that’s being -- to put not too fine a point on it -- loose with the truth.

The Productivity Commission report, referred to above, lists precisely what the Federal Government needs to do to enhance Australia’s productivity.

For example, Australian governments’ support for education and skills development lag behind being countries with comparable economies. Similarly, technology that plays such an important role in raising productivity is behind the times in many instances in Australia.

These are some of the reasons why in December last year Macks Advisory published a newsletter article headed “Australia’s dramatic competitive loss must be turned around”.

In 2004 Australia’s economy was the fourth most competitive in the world, behind only the US, Singapore, and Canada – interesting in that Canada’s economy, similar in many ways to Australia’s is also now in similar trouble to Australia’s for similar reasons. (See more on that below.)

Meanwhile the concerning fact remains that the competitiveness of Australia’s economy has slipped from 4th to 19th among the world's advanced economies.

An insight into Australia’s economy

Australia’s labour productivity has been stricken in the past eight years by what economists call “capital shallowing”, a phenomenon where a country’s population grows much faster than its ability to grow business investment, infrastructure, and housing.

This results in a situation where workers’ capital is depleted, which in turn disastrously effects productivity.

Canada’s population grew last year by a record 1.2m people, and thus its economy is caught in what the board of National Bank of Canada calls “a population trap” – a danger facing Australia.

Like Canada, our population is growing faster than business investment, infrastructure, and housing, which has worsened costs associated with congestion, intensified a rental crisis, and steepened a decline in productivity.

The federal government, organisations like the Grattan Institute and others that are overtly pro-immigration, maintain their stance with the presumption that Australia runs what is fundamentally a skilled migration program.  But empirical data indicates that’s farcical.

Most of Australia’s immigrants aren’t skilled, which is one of the main reasons the nation’s productivity has been in decline since the mid-2000s when migration programs began expanding.

Gerard Minack is a veteran macro strategist, well-known for being one of the most bearish– and keenest – observers of financial markets, and he’s been analysing, forecasting, and advising on them for more than 35 years. He says the main cause of Australia’s poor productivity performance is “a giant capital-to-labour switch. Australia relied on increasing labour supply rather than increasing investment to drive growth”.  

Broader reasons have already been described above under the sub-heading “Why productivity lags”.

 A South Australian perspective

SA Premier Peter Malinauskas used a public forum in Whyalla last month to make it plain to fellow Australians they needed to improve productivity to pass improved living standards on to the next generation, and he did this in spruking his plan to reindustrialise the Upper Spencer Gulf region with green energy.

Growing productivity he said, was essential to easing the cost-of-living crisis and boosting prosperity, but he said he wasn’t talking about improving productivity by boosting people’s quality of work, the type of work and the outcome from every unit of labour deployed.

Mr Malinauskas maintains that anything politicians can do to fix Australia’s cost-of-living crisis can only be “marginal”, but the Productivity Commission – as we pointed out at the start of this article – has stated precisely what governments need to do to improve Australia’s productivity

He admitted: “We talk about a cost-of-living crisis on a frequent basis and, more often than not, you get a politician saying: ‘We’re going to try and reduce the price of petrol, we’re going to try to reduce the price of groceries’, and nine times out of 10, it’s all bullshit.”

Macks Advisory suggests that’s probably a widely held opinion, and we’re not here to quarrel with it.

Rather would we simply draw readers’ attention to the fact the Productivity Commission has spelt out what needs to be done, and can be done, by the government to rectify a crisis in which millions of voters are suffering. Unless it IS rectified, we believe the electoral cost could be high.   

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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