Productivity in Australia is growing at its slowest pace in 60 years, undermining the ability to lift living standards, with decarbonisation and Covid challenges threatening to drag the rate down further, the Productivity Commission has said.
In the first instalment of the commission’s latest five-yearly review, the government agency said the average Australian generated seven times more output than in 1900, improving wealth even as hours worked have consistently fallen. Still, future gains may be harder to get as environmental and other “headwinds” intensify.
“Productivity growth is essential to address the nation’s economic challenges, including rising cost-of-living pressures, but it is not guaranteed,” commission chair Michael Brennan said before the launch of The Key to Prosperity report.
The review comes after the previous one, Shifting the Dial, was largely ignored by the previous Turnbull and Morrison governments. Recommendations from that report “continue to be relevant”, the latest one says.
Some headwinds are global, such as supply chain disruptions in the wake of Covid. Building local capability, including redundancy when supplies fail, may be costly and drag on productivity gains compared with previous competitive trade approaches.
While Australia is “highly exposed” to the threats of climate change, weaning the economy off fossil fuel industries will bring its own risks. Despite the need to handle the transition efficiently, the report notably did not recommend putting a price on carbon.
“Decarbonising the economy in line with international commitments over the next thirty years will have a non-trivial bearing on productivity outcomes,” the report said.
Developing and implementing new technologies will require new investment to replace, rather than increase, the economy’s existing capital stock, it said.
In some cases that may raise production costs – such as dropping coal in steel-making – at least until the replacement technologies fall in costs. For some areas, such as aviation, the alternative carbon-free options are in their infancy, with uncertain costs to come.
Those challenges, though, won’t be Australia’s alone. Still, the same slowdown in Australia’s productivity advances have been shared elsewhere too, crimping other nations’ ability to increase living standards.
For Australia, productivity gains have “slowed significantly” in the past decade”.
“If, over the decade, productivity had instead grown at an annual rate consistent with the average over the past 60 years [1.7% compared to 1.1%], gross national income per person would have been around $4600 higher [or 6%] in 2020 ,” the report said.
The Covid-imposed changes, such as increased working from home, provide some pointers to how productivity rates can be increased.
“The uplift in online capacity [among both businesses and households] combined with a broader embrace of the innovative potential of digital technology, can transform the way the economy operates,” the report said.
With about 90% of workers now in services, extracting ever higher output can become a harder task than improving production from sectors such as mining and farming. The latter sectors have benefited from increased application of capital, trimming the workforce, a shift harder to apply to some services at least.
Australia has historically benefited from the attraction of migrants who have brought fresh skills and innovation. But “global migration patterns have not returned to those observed prior to the pandemic and it is not guaranteed that Australia will remain as attractive to working migrants as it was previously”, the report said.
Of course, increasing productivity doesn’t mean the spoils are shared evenly, as Sally McManus, the ACTU head, noted on Twitter.
Todays graph from ABS national accounts: Productivity growth does not automatically make wages rise. pic.twitter.com/sumq94btaP
— Sally McManus (@sallymcmanus) July 31, 2022
Similarly, the report concedes not everything that is important can be measured and valued, including mental health and a clean environment.
“If there are no markets to provide an indication of how different environmental outcomes are valued, or regulations to influence behaviour to achieve environmental outcomes valued by the community, then this can mean there are environmental consequences of productivity growth that detract from people’s wellbeing,” it said.
One consequence of the attention on productivity may be that the treasurer, Jim Chalmers, revises the projections used in his budget. According to John Hawkins, a senior lecturer at the University of Canberra who served as a senior economist with both Treasury and the Reserve Bank, the Morrison government relied on 1.5% annual growth.
“It’s a bit unrealistic because it’s assuming that we’re going to get a pickup in the productivity growth rate,” Hawkins. “There’s no sign of that happening anytime soon, and that’s making the forecasts a bit rosy.”
