‘Not just the role of government:’ RBA urges businesses to up their game on productivity

On Monday (22 September), the RBA fronted the House Standing Committee on Economics to give an economic update and respond to policymakers’ questions.

Naturally, the topic of productivity was quick to surface in discussions. Liberal senator Simon Kennedy asked about the role of government spending in Australia’s abysmal productivity performance.

RBA governor Michele Bullock acknowledged that government service sectors, including the NDIS, healthcare and education, typically had low productivity levels, but cautioned against cuts on the basis of productivity.

“All those sorts of areas do have lower measured productivity, but they are all essential parts of an advanced economy and our demographics are playing a role here as well,” Bullock told Kennedy.

“I don't think you can make a correlation [saying] more public spending on these things is bad for Australia. I don't think you can do that. But it does mean that we have to look for productivity improvements in other areas if we can get them.

“It's not just the role of the government to look for productivity improvements, it's also the role of business.”

Productivity has been a hot topic recently for policymakers following a decade of stagnation. Economists, including those from the central bank, have said productivity growth is necessary to grow real wages and thus living standards.

Boosting productivity back to Australia’s historical average could see the typical worker earning $14,000 more annually, research from the Productivity Commission has found.

As Australia’s care economy grows to service the needs of its ageing population, Bullock suggested productivity gains in other sectors could offset this stagnation.

One solution could be found in addressing the lack of dynamism in Australia’s private sector, which the RBA has found to be a contributing factor to Australia’s productivity predicament.

“I think some of the evidence that we've had in recent times has been that Australian businesses haven't had the dynamism that some other industries overseas [have]. We haven't been sitting at the innovation frontier,” Bullock said.

“There's plenty of evidence to suggest that we could do better and businesses could do better here. Yes, there's a role for government in some ways, but businesses have to step up as well.”

A recent RBA paper found that declining competition in Australia’s economy had dampened productivity growth over the past decade.

The research, which aimed to quantify the link between competition and productivity growth, found that the average Australian would be $3,000 richer if competition hadn’t declined in the mid-2010s.

“These are important findings. They suggest that declining competition in the Australian economy can account for a significant portion of the slowdown in productivity growth, and therefore growth in incomes and living standards,” the central bank said.

Sarah Hunter, assistant governor at the RBA, told the committee that growth in the non-market sector had been a contributing factor to Australia’s productivity stagnation.

However, she warned that productivity measures did not capture holistic improvements, which were also important for living standards.

“The way we measure productivity in the national accounts data is very mechanical,” she said.

“On a more holistic definition, the Productivity Commission put out a paper [that] looked at the healthcare sector in particular and called out improvements in quality outcomes and shorter hospital stays for all kinds of surgeries, for example, better cancer treatment outcomes.

“These have happened over the last 30 years. We've probably all got an example we can tell ourselves, but they're not captured in the data that we're looking at. So you do have to be a little bit careful with how you look at the numbers.”

While these sectors were low in measured productivity, Bullock cautioned policymakers against simply shrinking the non-market sector in order to make up productivity gains.

“Don't correlate that to say to get productivity up, we have to dramatically decrease the size of the non-market sector. I wouldn't want anyone to make that connection.”