Productivity

Ensuring Australia’s economic sustainability

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National goal: Lift the economy by increasing productivity, both within the public sector and Australian businesses, to drive growth, competitiveness and living standards.

Australian productivity context

Australia is coming off the back of a dramatic productivity growth decline. In the mid-1990s, average multifactor productivity growth was 2.3% p.a. In stark contrast, from 2003/04 to 2010/11, this fell to 0.4%. In 2012, Australia’s productivity performance finally started to improve, thanks to cost cutting and corporate restructuring in response to uncertain economic conditions and greater international competition driven by the high dollar.

However, these gains are stalling and productivity has plateaued in 2013. Australia needs a new approach to productivity to realise its considerable potential. A recent EY study calculated that Australia has yet to unleash $305 billion in productivity potential, with 85% of workers believing they could be more productive1.

Productivity issues

  • Not just a government issue – Too often, productivity is seen as a problem for government. While the incoming Government has a vital role in adjusting policy levers, business leaders and the union movement have an equal responsibility to promote meaningful ideas to drive productivity within organisations.
  • Slow pace of improvement - Without deliberate intervention from the Federal Government and business leaders, Australia will take 20 years to achieve its full potential, assuming productivity continues to improve at the same rate as it has over the past 7 years. With intervention, this time could be halved.
  • Lack of measurement – As a country, we lack national productivity targets and fail to measure, or even take into account, the productivity benefit or cost of policies. Until Australian policy makers and business leaders understand the metrics they are managing for, they will not pull the right productivity levers.
  • Public sector productivity performance – Australia’s public services sector is dragging the productivity chain, with annual labour productivity growth at -0.6%, in contrast to the private sector, which stands at 1.4%.
  • Low value jobs – Australia continues to foster low value jobs through both its cultural resistance to offshoring and remaining tariffs, which are propping up an industry’s least productive businesses and confuse market signals. We need to be more accepting of ‘creative destruction’, where the demise of less successful firms enables the more innovative and productive use of the released labour and capital in other companies or industries.
  • Industrial relations tension – This is fraught with difficulty because of the fairness/productivity trade off. Unions are hostile to the idea that such regulations should be required to demonstrate that the public interest benefits exceed the economic costs.
  • Low female workforce participation – Over the past decade, Australia has made some gains in female workforce participation, with the rate rising by just over 4%, largely due to older women joining the workforce. However, there is still considerable room for improvement. In fiscal 2012, the ABS recorded male labour force participation at 79%, 14% higher than the female rate of 65%. The labour force participation rate was higher for males than females across all age groups.

    This issue alone is costing the nation billions of dollars in unrealised productivity, and high government benefit payments as interrupted careers result in greater reliance on family support and lower retirement savings.

Productivity recommendations

The Federal Government has two roles in supporting productivity:

  1. Improve productivity performance in the public sector
    The public sector needs to put its own house in order and improve the productivity of its 1.9 million employees – or more than 16% of the Australian workforce. To date, such efforts have largely revolved around incremental improvements. In future, government agencies, at all levels, need to be far more ambitious, targeting:
  • DemandRemove any programs, reports, committees or regulations that don’t add value to the country. This needs to be an effort across local, state and federal levels of government and can start with an online campaign calling for ideas and submission from any organisation or individual tax payer to create a “National List of Waste” to remove from the country.
  • SupplyMake more radical use of technology and automation and take another look at privatisation, or at least at outsourcing functions to the commercial sector. If government processes and functions were subject to market testing, many would fall behind best practice. While policy should remain in the hands of government, the vast majority of service delivery could be performed more efficiently by the private or not-for-profit sectors.
  • Transparency Measure and report annually on the productivity performance of individual agencies at local, state and federal levels. If government believes productivity is important, it has an obligation to publicise its own performance and compare it to previous years. This is not about cutting costs, but about tax payers getting ‘more bang for their buck’.
  1. Use policy levers to remove productivity hurdles
    Other sections of this report cover many of the Policy preconditions for productivity growth. They include: creating a stable macroeconomic environment, investing in infrastructure, investing in education and training and sustaining a balanced and predictable regulatory environment – particularly with regard to tax, industrial relations and foreign investment rules.

    Beyond these essential elements, government has the following range of levers to support businesses in unleashing their productivity potential.
  • Set a productivity target for the country
  • Controlled removal of remaining tariffs, terminate selected industry subsidies and test competition restrictions
  • Review workplace regulation with an eye to productivity
  • Declare war on wasteful regulation
  • Promote innovation
  • Engage business leaders and the union movement in tackling productivity
  • Encourage participation

Productivity conclusion

Pro-productivity policies are rarely popular, and therefore a hard sell politically. Hopefully, the incoming Government will have the resources to advance unpopular reforms that will yield the highest productivity payoffs, via a broad and consistent policy that tests proposed solutions, measures performance and adjusts to new market and economic conditions.

1EY Australian Productivity Pulse, May 2013