As John Howard noted recently, many of us have ‘‘won the lottery of life being born in Australia”.
Others have chosen to make Australia their home because of the opportunities that are afforded here.
But our future prosperity will require us to make our own luck, and no task is more important to this end than boosting our productivity.
Productivity has contributed over half of the 3.1 per cent annual average growth we have enjoyed over the last 28 years.
The dividend for the Australian people from this record run of growth and higher terms of trade has been a lift in national income per person from around $40,000 to over $70,000 in real terms.
Australia now has the 11th highest GDP per capita in the world. But our productivity growth has been slowing, averaging 1.1 per cent over the last five years. Should we get our average annual productivity growth to lift from 1.1 per cent to 1.5 per cent where it has historically been then annual incomes per person will be over $3000 higher by the end of the decade.
To understand how we lift our productivity, we need to first understand why it has been slowing.
It would seem three main factors are at play. First, as the OECD has found while innovations are clearly occurring, giving benefit to some firms, they have not spread as widely to other firms across the economy as one would hope.
There is a clear gap between those at the frontier and the rest.
Many firms appear to be waiting for technologies like artificial intelligence, autonomous vehicles or the ‘internet of things’ to mature before they adopt them.
Second, for some technologies it takes time for the full benefits to be seen. This was the case with electrification which came to the US in the 1890s, but it took 30 years for factories to reconfigure their process to enable them to take maximise the gains. A corollary today is the effective use of machine learning which requires a new approach with the right data sets, skilled technicians and analysts as well as a regulatory framework fit for purpose.
Third, there is a long-run structural shift in the Australian economy towards services as incomes rise. The services sector, which makes up around 70 per cent of the Australian economy compared to around 60 per cent three decades ago, tends to by its nature to have lower levels of productivity. Services are more labour-intensive, and less likely to see capital substitution.
So how much and how quickly our productivity increases from here across the overall economy will depend on the actions of governments, employers and employees, who all have a role to play.
Business needs to back itself and use its balance sheet to invest and grow.
With Australian corporates enjoying healthy balance sheets, low borrowing costs and strong equity market conditions, the question is are they aggressive enough pursuing growth?
For example, share buybacks and capital returns are becoming increasingly prominent and the default option for corporates but is a buyback always the best option for the future growth of the company and therefore the economy?
Over the last 12 months, approximately $29 billion has been returned to shareholders in the form of buybacks and special dividends compared to an average of $12 billion over the previous four yearsa 140 per cent increase.
Understandably management and boards when they are in possession of excess capital either from asset sales or strong operating cash flows will want to be prudent around capital allocation.
But the lesson from companies like CSL and Cochlear is to take advantage of conditions, invest in research and development and back yourself to grow.
For these companies, the willingness to take appropriate risk is part of their long term growth strategy and success.
A more positive approach to investment and growth by Australian corporates would not only lead to a stronger economy but would contribute to the goal of capital deepening.
Government is focused on enabling productive businesses to invest in more and better quality tools to equip workers; creating opportunities to improve the skills and capabilities of our labour force and empowering businesses to put labour and capital to work.
We are pursuing reforms across the tax, industrial relations, deregulation, competition, education and health systems allowing us to produce more with what we have. It’s a full-court press.
But it’s important not just for the Commonwealth to be focusing its energies on the productivity agenda but the States and Territories as well, as they are after all primarily responsible for service delivery.
Productivity is truly a national task requiring a national conversation and therefore I will be placing productivity as a standalone agenda item at the next meeting in October of Treasurers (CFFR).
This will enable Commonwealth, state and territory treasurers to outline their priorities with a view to building a shared commitment to lifting Australia’s productivity performance.
The fundamentals of the Australian economy are strong. We are as well placed as any other country to navigate the choppy seas ahead. However, in order to continue along our path of economic growth and rising living standards we need to work together – governments, employers and employees to boost our productivity performance.
Productivity, as US Nobel prizewinning economist Paul Krugman has said, ‘‘isn’t everything but in the long run it’s almost everything”.
Simply put, lifting our productivity will see Australians earn more for what they do and this will be to everyone’s benefit.
“Productivity is truly a national task requiring a national conversation.”
Josh Frydenberg is the federal Treasurer.