Furphies, fetishes and fixes in the productivity debate
Get ready for the usual demands from some major business organisations for purported “fixes” for Australia’s low productivity growth ahead of the government’s August Productivity Summit.
A cut in the company tax rate and demands for industrial relations reform are little more than special pleading. Business can and must do better, and there are fruitful policy options they can advocate.
But first, is Australia’s productivity performance truly so woeful?
As our population ages and we demand and get improved medical services, the so-called non-market services sector is the fastest-growing component of our economy.
These are activities such as health and education, policing and defence.
Labour productivity is simply GDP per hour worked. But what is the GDP of a doctor, a nurse or an aged-care worker?
Would we truly be better off if each worker in an aged-care facility looked after 40 residents instead of 20? And would we benefit from school class sizes being doubled from 25 to 50 students?
Since statisticians haven’t worked out how to quantify the GDP produced by workers in the non-market services sector of the economy, the assumed productivity of those workers is zero – zilch.
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So, for every worker who moves out of high-productivity sectors like mining, manufacturing and agriculture – where each worker uses lots of sophisticated capital equipment – and into non-market services, Australia records a decline in its measured productivity growth.
In 1950, agriculture, mining and manufacturing were responsible for about half of Australia’s employment, with services production contributing the other half.
Services now contribute about 90 per cent of our employment.
The shift into services is the hallmark of a successful economy, yet it is a drag on measured productivity growth.
Nevertheless, we should be trying to increase our productivity growth since the Productivity Commission estimates it accounts for almost all the improvement in the living standards of Australians since Federation.
Some business organisations continue to advocate a cut in the company tax rate from 30 per cent to 25 per cent and deregulation of the labour market as ways of increasing Australia’s productivity growth.
While both would increase the profits of the companies these organisations represent, higher profits do not necessarily equate with higher productivity. Just ask a monopoly or oligopoly.
Cutting the company tax rate would bestow a windfall gain on all companies that have invested at the higher tax rate.
Accelerated depreciation, and even instant asset write-off as provided for in a cash flow tax, would stimulate new investment without conferring windfall gains on legacy investments.
Deregulating the labour market was tried by the Howard government when it introduced WorkChoices. That didn’t go well.
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Reducing workers’ wage rates and conditions is effectively a redistribution from wages to profits. Hardly a formula for increased productivity growth that should increase wages and conditions, not reduce them.
The Howard government’s WorkChoices didn’t end well. Photo: AAP
Creeping regulation in Australia has been a brake on productivity growth.
Our housing crisis has been caused in part by a big increase in the average time taken to build a house.
It seems that whenever anything goes wrong with a housing project, calls for state or local government regulation to prevent it happening again are heeded. But it is folly to seek to regulate against anything ever going wrong.
As chair of a deregulation taskforce comprising federal and state government ministers in 2007-2010, I was responsible for 27 areas of regulatory reform towards Australia becoming a seamless national economy – not eight separate state and territory economies.
This project – now 15 years old – should be revisited to check for backsliding and where regulatory barriers have been erected.
Australia’s morass of state and federal approval processes has become an inhibitor of major projects getting off the ground.
This has not only affected traditional resource projects, it is also a brake on energy transition as solar and wind projects are held up.
Under the Australian Constitution, land-use matters are a state responsibility, but the federal government also gets involved through the Foreign Investment Review Board and its international environmental protection obligations.
A major projects facilitation office could be established in the Prime Minister’s department or Treasury to ensure approval processes are efficient while protecting the environment and native title.
These are just a few proposals for lifting productivity growth. There are several more, some of which were canvassed in the final statement of the National Reform Summit I co-convened in 2015 involving business organisations, trade unions and civil society organisations such as ACOSS and National Seniors Australia.
Through a two-month process we found a lot of common ground. A fresh look at that statement would avoid having to start all over again.
Craig Emerson is a former minister in the Rudd and Gillard governments and former adviser to Prime Minister Bob Hawke. He is the managing director of Emerson Economics.
