Australian financial system: productiveness key in wages, housing, and commerce however the engine has stalled

There’s one word that helps explain wage growth, the housing shortage, and even the iron laws of global trade that US President Donald Trump has struggled to overcome.

Productivity.

It’s the word every economist wants to talk about, and every politician hopes to avoid in the heated battle of a Federal Election campaign.

Improving productivity means more quantity and better quality of the products and services Australians buy, without needing more resources, staff or equipment.

Mining is an example. Workers have over a century gone from using pick axes and carts, to giant excavators and autonomous haul trucks. Employees can now move thousands of tonnes in the time it once would have taken to shift a single tonne of ore.

Rising productivity is the major driver of incomes in the long run, as it grows the economic pie and helps keep cost of living under control.

But in the long run, “we’re all dead” — as famed 20th century economist John Maynard Keynes once said — which may be why productivity doesn’t much rate in dinner table conversations.

Australia’s productivity, measured for each hour worked, has been falling for about three years. It has returned to roughly the same level as nearly a decade ago.

The Reserve Bank reckons this slower-than-average productivity growth has sliced about $30 billion from the national economy.

“It is very hard for an economy to support real wages growth in the (long term) without productivity growth,” RBA head analyst Michael Plumb recently said.

Home and away

Australia’s housing affordability crisis is where the productivity pain has hit families most visibly.

Analysis by the Productivity Commission in February showed the construction industry was finishing about half as many homes for each hour worked compared to 30 years ago. Adjusting for bigger and better homes, productivity was still down 12 per cent over the three-decade period.

That has had a more significant impact on housing supply than the transient effect of interest rates or the worker shortage.

Data from the Australian Bureau of Statistics shows the information technology, finance and farming sectors had the biggest improvements over the past 30 years. Mining has the highest productivity but has been stagnant, while health and education were stalled.

Productivity is also critical on the global stage.

It is very hard for an economy to support real wages growth in the (long term) without productivity growth.

Countries which embrace free trade will tend to shift their focus towards the industries where they earn the most value. For the resource-rich land Down Under, that has meant commodity exports are dominant.

Manufacturing has been less globally competitive and so has become a smaller part of the economy, shifting workers into mining and services. This story has been similar in the US.

Mr Trump’s chaotic tariff moves are intended to bring manufacturing back to his country but only work by pushing up the price of imports sourced from overseas markets. That helps high-cost US producers at the expensive of rising prices for families, and through supply chains for American businesses.

The general view of economists is that free trade brings competition, bigger markets and a focus on the sectors with an advantage, which boosts productivity. Protecting businesses with tariffs and subsidies will generally lead to weaker, lazier and less innovative industries.

“There is strong evidence that lowering trade barriers, including tariffs, as Australia did through the 1970s and 1980s, and its subsequent impact on competition, was one of the fundamental drivers of the strong productivity growth Australia experienced through the 1990s,” HSBC chief economist Paul Bloxham said in a recent note.

“Increased competition from global producers forced local businesses to become more efficient, and provided consumers with more options.”

That boosted innovation and income growth while lowering unemployment and prices, he said.

But much of this is under threat, with economists from NAB warning the looming trade war between China and the US is a treat to productivity and growth everywhere.

Making money moves

Debate is still raging about why Australia’s productivity has stalled. Big growth in government-run services, red tape, a less dynamic economy and lack of competition have all been blamed.

Another explanation is a “bubble” of productivity into 2022 — when the economy was inflating fast but reality was yet to catch up through higher prices.

The slowdown and the lack of a clear plan in Canberra to fix the problem has sparked alarm among commentators, including AMP chief economist Shane Oliver.

“The Australian election campaign is not going well for anyone hoping for rational economic policies designed to strengthen the economy,” he said in a recent research note.

Mr Oliver said Liberal moves to cut red tape and by Labor to lower income taxes were positive but were “overwhelmed by both sides trying to outdo each other with a spendathon”.

“Unfortunately, the array of cost-of-living promises will do nothing to boost productivity and turn around the slump in living standards,” he said.

“They are mostly just band aid solutions.”

Restarting the productivity engine is politically tough and will have short-term costs.

Top of the most to-do lists is tax reform, because Australia is more reliant on the worst taxes than almost any other developed nation.

HSBC’s Mr Bloxham said choices about “what is taxed, and how much, impacts the overall ‘economic drag’ created by the tax system”.

Heavy taxes on income tend to discourage working, he said, while high corporate taxes will slow investment. Stamp duty on new homebuyers is the worst tax, damaging home ownership and the ability of workers to move for jobs.

“A more-efficient tax system both supports government budget sustainability, and supports better economic outcomes, including investment, hiring, and innovation — all factors which enable productivity,” Mr Bloxham said in a recent note.

“Australia’s tax system has had little reform in recent years. It is becoming increasingly inefficient.”

Also high on the list would be policies to promote competition, he said, which would push businesses to innovate, invest, and improve their efficiency, leading to higher incomes and lower inflation.

Government spending is a third significant factor. The public sector has been expanding rapidly since the pandemic while business stalled through 2024. Workers are shifting from the private sector to government roles.

That trend has weighed on productivity, with analysis by the Productivity Commission showing sectors of the economy with high government control have been performed most poorly over the past decade.

But as RBA governor Michele Bullock has hit back against that view, arguing the jobs were needed to provide social services.

https://thewest.com.au/business/economy/australian-economy-productivity-key-in-wages-housing-and-trade-but-the-engine-has-stalled-c-18431205

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