What can revive Australia’s economy if rate cuts can’t?
If the treasurer is looking for fresh ideas, he should read this new paper on Australia’s readiness to lift productivity.
Unless you’re under a rock, you’ll know that the RBA delivered an expected 25 basis point cut to cash rates to 3.6%.
A typical headline read: “A belated boost for homeowners”. It certainly was a boost for those with plenty of debt, and the media was at pains to highlight the plight of homeowners (property gets clicks and are big advertisers, after all), while focusing less on the ‘losers’, such as savers, both young and retirees.
And the rate cut came with a sting in the tail: the RBA downgraded its expectations for medium-term productivity growth from 1% to 0.7%. That’s a big cut, though the trend had been down for some time – the government’s 2023 Intergenerational Report pegged productivity growth at 1.2% over the next 40 years, down from its previous estimate of 1.5%.
So, the RBA is cutting because our economy remains in the doldrums. The problem is that it knows interest rates aren’t likely to revive our economic fortunes.
Instead, the heavy lifting will have to come from government policy and the private sector. On that front, the government is ruling out every potential economic reform, and none in, at present.
If Mr. Chalmers is looking for fresh ideas, he should read a new paper from the Australian National University, ‘How ready is Australia to improve productivity’.
Unlike so much of the economic claptrap that’s been written about turning around our economy, this paper provides an easy-to-understand framework of the key drivers of productivity and where Australia is doing well and where it can improve.
The authors, Robert Breunig and Dean Parham, first define what productivity is and why it’s important:
“Productivity is a measure of the rate at which inputs are transformed into outputs. More national productivity means a country is leveraging more and higher-value goods and services from its inputs and endeavours. National productivity growth reflects the ability of a nation to generate additional income from the same inputs. That is why productivity growth is central to lifting living standards.”
The authors then outline the key drivers for the economy:
Figure 1: Key determinants of national productivity performance. Source: ‘How ready is Australia to improve productivity’, Robert Breunig and Dean Parham.
The four over-arching themes are:
- Motivation: people must be motivated to improve productivity. Competition motivates individuals and businesses to do more. On the other hand, burdensome regulations can sap the incentive to be more productive.
- Capabilities: Individuals and businesses must have access to the resources they need to improve productivity. Skills, technology, and infrastructure are critical here.
- Efficiency of markets: Markets need to operate in a way that encourages investment in skills, capital and knowledge, and the productive allocation of resources.
- Stability: Investments that lead to strong and sustained productivity growth are underpinned by economic, social, and political stability.
The paper makes that great point that governments can’t directly affect national productivity – except for improving their own productivity. However, what they can do is to influence the key drivers to improve living standards.
The authors have measured ‘productivity readiness’, via various quantitative metrics, across 118 countries, including Australia. So, where does Australia rank?
Well, it comes in at 11th for productivity readiness, with Singapore, Luxembourg, and Switzerland topping the table. The US lags, ranking 19th.
Figure 2: Values of productivity indices. Source: ‘How ready is Australia to improve productivity’, Robert Breunig and Dean Parham.
Australia does well on scores for motivation, capabilities, and stability, though not as well for efficiency of markets. The latter reflects “relatively stringent labour regulation environment and increasing government involvement in the economy.”
I’m surprised by Australia’s high score for motivation given the large number of industries operating as duopolies and oligopolies, especially versus the likes of the US.
Nonetheless, Australia scores well overall, though the authors suggest the following to boost our economy:
- Our biggest weakness is efficiency of markets, which means improving the regulatory environment and labor market flexibility stand out as areas ripe for reform.
- Improving competition, investment freedom and government effectiveness could lift the motivation score.
- Reducing barriers to trade and foreign investment could boost the motivation and efficiency of market scores.
- The capabilities score has fallen over time, suggesting opportunities for improvement in education and R&D spending.
- The stability score has declined in Australia and globally, indicating more can be done to bolster the rule of law and government effectiveness.
This article first appeared in Firstlinks, a Morningstar Australia publication.
