John Hewson
The productivity collapse

While the struggle to curb inflation has drawn a lot of attention, one of the most pressing economic challenges facing the government has been widely ignored: the collapse in productivity.

The Treasury’s budget forecasts were for productivity, or GDP per hours worked, to grow a modest 1.5 per cent a year, a slight improvement on the weak pre-pandemic rate of 1.2 per cent. From March to December last year, however, productivity actually declined and, taking a longer-term view, it has basically been flatlining for many years.

Increased productivity is the key to increased wages, profits and overall growth, which is why the Reserve Bank has long emphasised that a revival of productivity, at least to the pre-pandemic pace, is critical to its control of inflation and future monetary policy.

A national productivity strategy is desperately needed, and it should be a whole-of-government exercise, requiring effective co-ordination between all levels. The best approach would be for the government to first commit to an overarching target – say, to double national productivity in five years, or longer. It should then ask ministers to submit to cabinet proposals of what they would need to do in their respective portfolios to help achieve that objective.

To be clear, this would certainly not be a cue for ministers to rush out and hire consultants. The blowout spending on consultants, especially by the previous Morrison government, wasn’t just wasteful – it undermined the essential role of the public service. This practice must be rejected, and public servants allowed to reassert their roles as the principal policy advisers. The PwC scandal has demonstrated the ease with which a major consultant can ignore or flout the rules, and highlights that the public service is not really equipped to effectively manage such consultancies and the associated key issues of confidentiality and potential conflicts of interest. Too often I’ve observed governments decide on a course of action and then turn to a consultancy to deliver the rationale for it, circumventing their own bureaucrats to seek the “credibility” of a brand among the Big Four consultancies.

Most portfolios would already have the necessary information at hand to respond to the cabinet request. The big areas are well known and have been extensively reviewed – such as tax, and education, training and skills development. The problem has mostly been a lack of political will to implement some of the necessary and well-documented reforms over recent years.

It will be crucial to link the national productivity strategy with the government’s new policies to rejuvenate manufacturing and, most importantly, with the proposed work of the new Net Zero Authority that the government is establishing to steer the transition to renewable energy. This government already recognises the significance of the industrial revolution that will result from an effective transition to clean renewable energy – in keeping with this, it might even consider an official focus on low-carbon productivity.

A key element to an efficient transition is the need to fully exploit our domestic innovation in technology, with the CSIRO re-established as the driving force behind our national technology development, co-ordination and implementation. Two obvious targets for increased investment would be an improved national broadband network and our public transport.

Australia has an enviable record in developing new technologies, particularly in areas such as medical research, having created many globally significant patents. However, we have a very poor track record in commercialising these initiatives in a way that could contribute significantly to our national productivity. Perhaps the most embarrassing example of this failure, in the context of the necessary climate transitions, is the world-leading solar panel technology that was developed at UNSW Sydney, which has gone on to become a multibillion-dollar global business based in China. This is a tragedy, given we could easily have a competitive edge in environmental technologies using our plentiful solar and wind power and renewable gases. These natural advantages could set us up as a world leader, and certainly underwrite the government’s desire to be an energy superpower.

This was part of the intention with the establishment in 2012 of the Australian Renewable Energy Agency (ARENA) – to partner more efficiently with the private sector to support clean technology development. Unfortunately, the focus under the previous government was less on facilitating the process and more on sewing it up, by appointing mates to ARENA and the Clean Energy Finance Corporation, and there’s been no accountability.

The related challenge here is to tie a national productivity strategy to education and training to harness our best talent. This is especially important in light of the planned increase in immigration laid out in last month’s budget. Our country needs to provide the essential skills and experience to maximise our national productivity, as well as to target skills gaps. And we must develop a more effective way to engage foreign students post-degree to ensure that, on completing their studies, they don’t simply leave for better opportunities overseas.

The realisation of an effective national strategy to boost productivity will require a 1980s-style commitment to broad-based reform. We haven’t seen a large-scale, unified effort since the Hawke–Keating overhaul of the social contract and of the financial system – even the GST was piecemeal. That said, much of the hard work towards financial sector reform under that Labor government – including lifting interest rate controls and floating the currency – was already laid out in the findings of the Campbell Committee inquiry into the financial system, which was released in 1981. As a result, the Coalition was supportive of the reforms proposed by their successors, and that bipartisanship was key to their success.

Unfortunately, it seems the Coalition’s response to these sorts of challenges more recently has been to pump billions into a particular sector, as indeed they did with the housing sector, to try to stimulate our growth recovery from the lockdown-induced recession. The legacy impacts of this have been disastrous, as their package just about blew up the housing construction industry, with a few thousand building companies going to the wall and massive inflationary effects on the costs of building materials. The perverse consequence is that the Coalition’s subsidies have hurt many of the people they were intended to help, as some found their building and renovation projects scuttled by cost overruns and many prospective buyers have been simply priced out of the housing market.

The development of a national productivity strategy should be a bipartisan effort, in which reforms from portfolio to portfolio are the outcome of a contest of ideas to determine the best way forward. Unfortunately, this type of constructive government is clearly beyond a Peter Dutton-led opposition, whose media mates are constantly on the lookout for any opportunity to tear down Albanese and his government.

A unified effort is what’s required not only for the best ideas but also to promote their benefits. It takes time to sell and explain the case for each piece of a productivity strategy to a jaded workforce and what has been characterised somewhat mischievously by the opposition as a “reform-weary” electorate.

In attempting to explain the drop in productivity, The New Daily columnist Alan Kohler recently suggested, provocatively, that “workers don’t care any more”. He maintains the decline in productivity has coincided with a sustained decline in real wages and “a rise in the difficulty of getting a pay rise”. Union membership has fallen and workers’ collective bargaining power has been “sapped” as the balance of power has shifted from labour to capital, he writes, noting “there is surely nothing more corrosive for productivity than jaded, disengaged staff who have lost hope”.

These are all trends the Albanese government has already taken steps to reverse, following the Jobs and Skills Summit, which provided an excellent base to adopt a national productivity strategy. And the government has already started work on the crucial area of taxation.

There’s no doubt that if we can change some of those inequities and disincentives in the tax system, we will get a productivity boost. But it’s only a start. A successful national strategy to get more growth for our labour requires a concentration and co-ordination of initiatives across portfolios, such that the sum of the parts exceeds the whole. It will take bold action – it won’t be implemented by a government that’s worried about being accused of moving too fast, or doing too much, or breaking promises.

This article was first published in the print edition of The Saturday Paper on June 3, 2023 as "The productivity collapse".

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