This week the RBA has given its strongest warning yet that our poor productivity performance is threatening the living standards of Australians. While the RBA did finally cut interest rates they have done so reluctantly and warned that there may not be future cuts unless Australia’s productivity performance can turn around.
The RBA slashed its forecasts on productivity by 30 per cent.
Productivity is important because it is a big determinant of how fast the economy can grow without causing inflation. Productivity just measures the amount of stuff we produce for a given amount of effort, normally the hours we work. If productivity rises, the money supply can rise without causing inflation and hence interest rates will be lower.
Productivity does not mean working harder. If productivity rises, we can work less and maintain our standard of living. Or if productivity falls, like it has over the past few years, we have to work longer just to maintain our standard of living. This is why there has been massive growth in the number of people who have to take on two jobs to make a living.
In the first term of the Labor Government productivity has fallen 5.7 per cent. There has never been a fall like it. The previous record fall over a three-year period was just 0.6 per cent during Paul Keating’s recession we had to have. The latest fall is off the charts.
Because productivity measures how much we produce it moves in the same direction as our disposable income levels. In the first three years of this government, the disposable income of Australians has fallen by 8 per cent, the greatest post-COVID fall of anywhere in the developed world by far.
It is hard to conceive what 8 per cent means but the average full-time wage in Australia is close to $100,000 now. So that means that an average worker has gone back by $8000 a year in just three years.
Finally, the Labor Government has gotten the memo about how much productivity matters. Next week they will host a productivity summit in Canberra although it is not clear yet whether it will be much more than a talkfest.
I am not a Monday expert on the productivity issues. Three years ago, before we saw a dramatic fall in productivity, the government held a Jobs and Skills Summit. As I wrote in *The Courier Mail* in September 2022, “the government’s Jobs and Skills Summit is paying almost zero attention to productivity and so it has almost zero hope of lifting long-term living standards.”
The Government did not even invite the Productivity Commission to its 2022 summit. That summit became just a vehicle for the unions to blindside business with demands for more power. As I said at that time, “after their union love-in is over, it would make sense for the government to convene a ‘productivity summit’.” Three years later the Government has taken my advice. Better late than never.
As I noted in 2022, if you are serious about lifting productivity you need to look at where our productivity has gone backwards. Over the past 20 years, only two economic sectors have seen their productivity go backwards. Mining by 18 per cent and Electricity, gas, water and waste sector by 20 per cent.
Yet the mining sector has not been invited to the so-called productivity summit next week. As an aside, mining’s productivity decline is partly explained by higher commodity prices. As prices go up, miners will exploit less productive ores. This makes their productivity look weaker even though they are making more money.
However, there is no such rational explanation for the energy sector’s slide. Over the last 20 years we have seen electricity and gas prices triple as we forced more and more renewable energy into our grid. The woeful productivity stats of our energy hurt all other Australian businesses because almost all businesses use energy.
Next week’s summit is called a productivity one, but it just seems to be an excuse to raise taxes from the GST to a new tax on driving. If the Government was serious about productivity they would tackle the elephant in the room of high energy prices.
