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Productivity Review

Conference

As part consultation on the Productivity Review, the Commission held a conference ‘Where to from here? Improving Australia’s Productivity Performance’ on 13 December 2016.

Opening comments from Peter Harris, Chair of Productivity Commission.

Invited speakers:

  • Saul Eslake - Potential impediments to improving Australia's productivity performance
  • Ian Harper - Competition policy as a driver of productivity growth
  • James van Smeerdijk - Digital Innovation and Prevention / Early Intervention
  • John Daley - The geography of productivity growth
  • Chris Richardson - The economics and the politics of productivity

Opening comments

Peter Harris, Chair of Productivity Commission

Transcript of video

First I want to thank everybody who’s made the time to come here today in the second week of December. We thought, gee, you know, bit of a struggle, not quite sure how many people will actually get to turn up. We had a phenomenal response, which is very, very good. So I’d like to thank everybody for making the effort. This task is really, in our view, both highly innovative and tremendously important and we hope that all of you are going to be contributors to it, not just for today but in the process that’s to come.

So I have, in the time-honoured tradition of these things, formal remarks to be made, but you won’t see them up there on the light bulb oriented screen. The light bulb oriented screen’s just a nice graphic to fill up the space while I bang on a bit for a couple minutes at the start before we get into the serious stuff.

First I’d like to acknowledge the traditional owners of the land on which we meet today and honour their elders past and present. Productivity Commission has a strong interest in indigenous policy via overcoming indigenous disadvantage and indigenous expenditure reports. It’s well aware though in the PC (Productivity Commission) that these are not evaluations of what works. So my remarks about traditional owners are not just simply the opening note to these remarks. PC continues a bit of a campaign to encourage a focus by government on the evaluation on this policy rather than simple reporting and ultimately after evaluation is some response to what works.

When the Treasurer asked us to undertake this five-year productivity review, there was an exchange with him of a kind that has not occurred previously in my time as chairman. Nor I think, in all likelihood, prior to that. The Treasurer wanted to discuss in detail with us the design of the brief before we received it. With a core aim of ensuring that this enquiry allowed us the maximum opportunity to gather new ideas and place them in a context that Australian governments acting together, but led by the commonwealth, would recreate the circumstances that would surely improve the economy’s ability to generate sustainable growth in national income. Most of you will know that the recent history in outlook for national income growth is at best unimpressive.

Transition from the resources boom was certainly one motivator for the Treasurer’s interest in discussing this task with us. But a broader question, how to apply and sustain the case for effective change in today’s public policy environment, is also inherent. Thus today, we meet in a new kind of process for this organisation: to open a discussion on what these ideas might be, how to frame them in a way that can convince Australians that their past has been assured by conscious, persistent, cross-governmental cooperation on improvements to the economic and social policies that define our markets and our public services. This moreover was not a one off, nor the product of fabled levels of bipartisanship but instead the product of good advice and serious leadership in a time of need and that it can be done again.

The focus and the terms of reference on productivity is a necessary but by no means sufficient step in that task. Productivity, even in polite company, often gets a bad name. Yet it isn’t now, nor has it ever been, a measure of national capability or worker behaviour. It has also suffered in recent times the same fate as the term 'microeconomic reform' once suffered in its time. A label as often as not misapplied as a means to proclaim the innate worthiness of any policy, idea or notion regardless of whether that claim was actually justifiable. So it’s important in this process to refine what productivity improvement means.

For us, this process will have a clear end in mind: improvements with a capacity to enhance the national income growth, or simply, prosperity. It’s not meant to be growth for growth's sake, nor is it to ignore wider national objectives such as quality of life. It is simply the right standard to use to demonstrate as objectively as information allows, what the scope of gains may be from such changes and at what cost for the likely beneficiaries. We will not in any case ignore the hard count benefits of new policies such as those that occur in many government-supplied services like health and education. The gains here are another form of prosperity. With that analysis done around the middle of next year, leadership must then takeover to judge the advice that we give and place it in a wider context such as vital issues around quality of life and how gains may be distributed.

But it cannot do this effectively without a strong foundation of advice on where lie the greatest opportunities for positive change. That is the task for us and for those who chose to contribute to the inquiry. Today we will not produce fully formed solutions, nor can we with absolute confidence even frame all the problems they are meant to solve. Thus, this will be iterative process of analysis and exchange, and consistent with our normal practice, we’re conducting it as far as we can in a public way. But it is ultimately a report for government and so the product will be released by the government at an appropriate time next year. Ultimately our aim is a practical agenda for all governments to together focus on opportunities for positive change and how to achieve them. The deputy chair and I have, in the lead up to today's first public step in this process, sought discussions with all heads of premiers and chief minister’s departments about the participation mechanism for states and territories. And we’ve spoken to almost all of them now; we have one more to do today.

We’ve planned to make this a strongly inclusive process as states and territories certainly have their part to play. I’m not going to link today’s discussion to any of the current issues with business investment or fiscal imbalance or GDP growth that may be popular at particular times in support of reform agendas. Not because they are unimportant, but because structural reform is a perpetual need rather than a one off response. Thus, this enquiry is to be repeated every five years.

Nevertheless, in case this leaves any room for doubt, there should be none. The Productivity Commission sees the opportunities that lie in structural reform to be the critical medium term agenda. Every five years we put a timeframe on it for any government.

So thanks very much for your attention to my short opening remarks. I think I’m now going to leave all of you in the hands of Melinda who’s going to otherwise direct the process and encourage our first round of speakers to entertain you with something more remarkable than what I’ve just said. Thank you very much.

Potential impediments to improving Australia’s productivity performance

Saul Eslake, Economist

Transcript of video

Thank you Melinda for the introduction. Thank you Peter Harris for inviting me to participate in these proceedings and my apologies in advance to my fellow speakers for not being able to stay for all of their presentations - but because Hobart is the only capital which does not have direct flights from Canberra (the scheduling must be advised by the same people who advise the AFL on the composition of their competition), I have to leave early in order to get home and meet commitments that I have this evening and tomorrow.

So, I am hopefully talking with the slides (very shortly) very shortly about impediments to achieving faster growth in Australia’s economy and greater prosperity through improving productivity. And that I hope is something that will set the scene for the rest of today’s conversation. I have listed five impediments to improving productivity and I’ll run through each of those and hopefully by the time I’ve finished doing that my slides will be up and running.

The first of these is politics – the political environment, which would-be reformers have to contend with.

The second is the potentially deteriorating quality of human capital, which I think important given the widespread acceptance that improvements in productivity going forward - especially in those sectors of the economy that have, for various reasons, been largely exempt from the processes of reform that dominated the 1980s and 1990s - really do require improvements in, and better use of, human capital in order to realise the potential for increased productivity that exist.

The third impediment is what I call “manufacturing fetishism” – by which I mean the widespread belief that’s not unique to Australia by any means and which spreads across the political spectrum, that there’s something inherently more worthy or noble about jobs in manufacturing than about the provision of services, which are too readily derided as consisting of flipping hamburgers and taking in each other’s washing. I want to show that the pursuit of manufacturing activity and employment as objectives in their own right, which seems to now have something approaching bipartisan support, will detract from efforts to lift the productivity of Australia as a whole.

In the same vein, I think a fourth impediment to improving Australia’s productivity performance is the romanticisation of small business – that is, the belief, which has always been part of the coalition’s core political agenda, and which now seems also to be supported by most of the rest of the political spectrum, that there is something intrinsically more noble or worthy about running a small business than there is about working in a big one, or for that matter in a government. In my view the pursuit of that agenda, as we are now seeing, is also likely to be inimical to improving Australia’s productivity performance.

And then finally, in something that shouldn’t come as a surprise to any of you who know me or my work well, there is a trade-off, in my view, between the pursuit of productivity and the pursuit of security in all of its forms. Failing to appreciate that trade-off, failing to recognise and understand that the pursuit of security has costs, including in terms of productivity, will also over time detract from our efforts to improve national wellbeing by pursuing productivity growth.

I think it’s very difficult - it will be very difficult - for bodies like the Productivity Commission, which have as part of their raison d’être, part of their modus operandi, the accumulation and presentation of evidence, of facts that can be used by reforming governments to articulate the case for reform and subsequently for monitoring and evaluating the success or otherwise of reform efforts in the kind of political environment that’s now emerging across the world.

For most of the reform era, public debate has been constructed on the perhaps unstated premises, the unspoken premise, that people are entitled to their own opinions but they’re not entitled to their own facts. Evidence-based policy advocates have long accepted the principle that the second president of the United States, John Adams, set out about facts. The context in which he made that quote I’ve displayed here was defending, as a lawyer, a number of British officers who had been falsely accused of shooting at and killing some patriotic Americans who’d refused to pay taxes or thrown tea in Boston harbour, or whatever particularly patriotic act that it was at the time. John Adams’ point was that no matter how much you might feel passionately about a particular thing you shouldn’t allow that to be uninfluenced by facts or evidence. However that’s not the political world in which we now live. We live in what’s become known as a “post-truth” world, which the Oxford English Dictionary in specifying this year’s word of the year has said one in which facts are less influential than emotions or opinions in shaping what people believe.

I had never heard of Scottie Nell Hughes until a couple of weeks ago, but this quote from her, as a leading CNN commentator and supporter of Donald Trump during the presidential election campaign, seems to encapsulate the way in which the American political system now works and you don’t have to be too plugged into the Australian political scene to see that there are specifically elements of that emerging here. If you don’t believe it then I commend to you a reading of Malcolm Roberts’ appendix to the thesis he wrote about climate change which includes all sorts of fascinating observations about the way the world’s international monetary system and central banks, for example, work. Or there’s, who I sometimes refer to as the odious Mr Gove, who said famously that people in that country (the UK) have “had enough of experts”. And while that encapsulated the sentiment that was heightened during the Brexit debate, again it’s been bubbling away and increasing in relevance in this country as well. It calls to my mind, for example, former Prime Minister Tony Abbott, when as opposition leader, being informed that a majority of Australian economists thought that the best way of dealing with carbon emissions was to put a price on carbon, replied that “that said more about the quality of Australian economists than it did about the merits of the proposal”. Again in this post-truth world this rejection of ideas, simply because they come from people who have a legitimate claim to know what they’re talking about, is going to make the pursuit of fact-based productivity enhancing economic and social reforms much more difficult to achieve than it was in the era of the 1980’s and 1990’s.

From one perspective it doesn’t help that there isn’t a burning platform, a sense of crisis, to embolden reformers and make people perhaps more receptive to the needed changes than they would be in a crisis environment. But as the Productivity Commission points out in its discussion paper that’s not the sort of circumstances that we should be wishing for in order to make the reform agenda more possible. It ought to be the case that the facts speak for themselves, with a bit of help from people who want to see widespread improvements in people’s standards of living. But, as I say, I think one of the chief impediments to achieving those objectives in the current environment is the nature of the political environment with which we now have to contend.

My second point was around the possible deterioration in the quality of Australian human capital. There’s no doubt that more Australians are getting more education. A higher proportion of the workforce has some kind of post-secondary qualification. Conversely, a diminishing proportion of the Australian workforce has nothing beyond year 10 of high school. And, in principle, an increase in the quantity of education possessed by the workforce is a Good Thing. It ought to be conducive to higher levels of productivity. But there’s been a lot of evidence, particularly coming out of the OECD, over the last fifteen or so years suggesting that the quality of education, however difficult that is to measure, matters more for the stock of human capital than the quantity of it that members of the workforce may have received.

The evidence on the quality of Australian education is far less encouraging than that on the quantity of education that Australians have received. Over the last couple of weeks we’ve seen both TIMSS and PISA surveys pointing to a decline, not only in Australia’s students’ performance relative to other OECD countries, but perhaps more disturbingly in absolute terms. More detailed evidence from the PISA survey in particular says that one significant reason for that decline in our overall average level is a decline in the proportion of our students who are above average, and a significant increase in the proportion of our students who are well below the average or even minimum standards.

Now the solution to that is not, as Simon Birmingham repeatedly emphasises, and I agree with him, spending more on education. Rather it is spending what we spend in a different way, or efficiently, in some cases, more equitably in others. But given the importance of human capital to lifting productivity in those areas where, as the Commission’s discussion paper notes, the greatest potential, in theory at least, seems to exist, the fact that measures of the quality of our human capital may be on the decline is another significant impediment to achieving lasting change. It may also of course be playing into the first of the impediments that I’ve just been discussing.

The third impediment I mentioned as what I described as “manufacturing fetishism” - the belief that there’s something inherently more worthy about manufacturing as an economic activity or a source of employment than anything else.

A point that a surprisingly large proportion of our political class and many others have trouble grasping is that the sum of the different sectors shares of GDP cannot exceed 100 per cent. If you are going to have a bigger than average mining sector - as Australia’s bound to have given our factor endowment - it’s a matter of mathematics, not economics, that some other sector or sectors have to be smaller as a share of GDP than they are in other countries with comparable standards of living. Given that Australia is a high income country, is likely to want to spend around 70% of our income on services, and given that most services are inherently non-tradable (even though the internet is changing the definition of non-tradable services a bit at the margin), it again is a matter of mathematics rather than economics that the manufacturing sector is bound to be one of the sectors that’s smaller as a proportion of GDP in Australia, given that we have not only a much bigger mining sector than most other high income countries but also, and partly related to that, a bigger construction sector than most other countries.

Seeking to fly in the face of that logic, as so many people of all sorts of political persuasions seem to want to do, is that not only mathematically illogical but leading us into, I think, some very misguided and ill-advised economic policies.

In so far as you can measure it, manufacturing is not a high labour productivity activity in Australia. Now, you can’t tell that from the indexes of labour productivity that are published by the Stats Bureau because, consistent with international statistical norms, they are published as indexes based in the same base year as the annual national accounts. Which means you can’t compare labour productivity across industries at any point in time or, for that matter, across geographies. What I’ve done for a long time is to create alternative measures of labour productivity by dividing the best measures we have of hours worked by industry or geography into the published pages of gross value added that give you dollar estimates of labour productivity that can then be used to make comparisons across geographies or industries, rather than simply over time as the published indices put out by the ABS allow you to do.

What that shows is that there are six industries in Australia whose productivity is above that of the economy as a whole, and they are the ones that intuition would lead you to expect to find in that category. I know that the data I’ve used has its flaws and that there’s been some intelligent criticisms of the way I’ve put this together. But I don’t think those criticisms seriously invalidate the ranking that I’ve shown there. What that chart illustrates is that, to the extent that governments succeed in increasing manufacturing as a share of GDP, which they seem to want to do, or to reverse the otherwise inexorable decline in manufacturing as a share of GDP, aggregate productivity is going to be lower.

And it’s going to be even lower to the extent that politicians succeed in increasing manufacturing in South Australia at the expense of other states, given that manufacturing productivity in South Australia is below the average for manufacturing as a whole.

Part of the reason for Australia’s poor manufacturing productivity is that we have an above average proportion of our firms managed by below average managers, by comparison with the United States - and that in turn is why manufacturing productivity in Australia as a proportion of US productivity is, according to a Treasury study that’s now a decade old but I doubt has changed by much - is the third lowest of all of the sectors that are identified in the EU Klems Database from which this series was compiled. And there’s possibly a reason for that too in the sense that, again as the Productivity Commission discussion paper notes in passing, Australia’s manufacturing sector has a higher proportion of small businesses in it than any others.

This leads me to the second last point about impediments to improving productivity, which is the romanticisation of small business. I said before, it is a long-standing article of faith for the Coalition that there’s something inherently more noble about running a small business than working for a big one. And that’s apparently why the Coalition Government is preferencing small business when it comes to company tax. What’s perhaps more surprising is that that’s become tri-partisan. The Labor Party and the Greens are opposed to cutting the company tax rate in general but they support cutting it for small businesses, apparently out of the belief that it will help promote jobs and innovation.

The ABS Australian Industry survey shows that, as small business advocates often quote, small business accounts for forty four percent of total private sector employment - although the footnotes in that survey tell you that ‘private sector’ excludes the banks which are of course of big employers.

But as my chart shows, despite accounting for forty four percent of total employment, small businesses have generated just five percent of the increase in total employment over the last five years. Whereas business with more than two hundred employees, who account for about thirty percent of total employment, have generated more than two thirds of the increase in employment.

Likewise ABS figures show that small businesses are far less likely to engage in any of the four forms of innovation than larger businesses.

So the belief that preferentially taxing small business will do anything to boost jobs and growth or innovation has no more evidence for it than the Immaculate Conception: and yet that seems to be an article of faith for all of our three parties.

The last point I want to make is that Australia has consistently got wrong the trade-off between security and productivity. This is a little bit flippant, but Budget Papers are meant to be a statement of our national priorities. So it’s interesting that over the last twelve years of Budget Papers No. 1, ‘productivity’ has had about two hundred fewer mentions than ‘security’. It has been mentioned more often than ‘security’ in only three Budget Paper No. 1’s, which happen to be the three in which Statement No. 4 was devoted to a productivity-related theme.

Now of course I’m not suggesting that ‘security’ isn’t important. Of course it is, in reality and for politicians: we can’t not have ‘security’. My argument is that the pursuit of ‘security’ without thinking about the probability of the risks that we’re seeking to eliminate, without trying to specify the probability to which we are trying to reduce whatever risks we’re concerned about, without considering the cost of getting to that lower level of risk, or the benefit of getting lower levels of risk, is taking a toll in terms of productivity.

I’ve thought for a number of years that the best way that anyone who wants a tax break, a subsidy, protection from competition or anything like that, knowing that their proposal will not stand the sort of scrutiny that the Productivity Commission gives it, is to wrap it in a ‘security’ blanket – that is, to depict it as a matter of ‘security’, not necessarily ‘national security’, but ‘biosecurity’, ‘water security’, ‘food security’, or ‘energy security’.

That’s because as soon as someone mentions the word ‘security’, we are supposed to turn our brains off, to suspend our critical faculties and never to mention such grubby concepts as cost and benefit.

Someone far more influential than I put this very well in a speech that he gave a couple of years ago before he became the governor of the Reserve Bank. Emphasising, perhaps even more so in an ageing society, that our inability to calibrate and indeed sometimes even to think about the trade-offs between security or risk mitigation and productivity, will threaten our ability to improve our standard of living over time through gains in productivity without actually necessarily doing a great deal to reduce the risks that we’re ostensibly concerned about.

So five obstacles to the goal which the Productivity Commission is setting for itself and with which it's being tasked by the government - political environment, the deterioration in human capital, manufacturing fetishism, the false romanticisation of small business and our inability to think seriously and sensibly, indeed in some cases to think at all, about the trade-offs between security and productivity.

Thank you very much.

Competition policy as a driver of productivity growth

Ian Harper, Competition Policy Review Chair

Transcript of video

Thanks Melinda and thanks Peter, to you and your colleagues for the opportunity to speak this morning, I appreciate it. I’ve been asked to say a few words about competition policy in light of the Competition Policy Review. This is also topical because the COAG (Council of Australian Governments) meeting last week produced what we had hoped would be an agreement amongst the jurisdictions to advance the competition policy agenda. Regrettably, at least from my perspective, it's not been signed by the Labor states but only by the conservative states. But there at least is an agreement and maybe, notwithstanding Saul’s remarks about politics and the obstacle or impediment that it presents, maybe that might be the beginning of some argy-bargy, we might see something down the line. But at the very least the agreement, which was presented to the COAG leaders last Friday contained the essence, the kernel, of the competition policy review recommendations. A new set of competition policy principles, a recommended agenda of reviews and all of that is very much in line with the recommendations of the Competition Policy Review.

I’m pleased, of course, that competition policy figures on the agenda here and in answer to the Productivity Commission’s question ‘Where to from here?’ at least in the case of competition policy I’d like to say, just follow the yellow brick road. The Competition Policy Review, my colleagues and I including Melissa over here, spent a year of our lives working through these recommendations. There are fifty-six of them in the report. I recommended them to the government at the time and at least the Labor opposition indicated that it only rejected three of them. So I was hoping for a greater degree of bi-partisanship than we’ve actually experienced to date. But it would appear that it has got a lot to do with Commonwealth State relations and other agendas more than competition policy itself, but that is yet to be seen.

So yes we have fifty six recommendations in there. Competition policy is an essential element of any agenda to drive productivity growth. It isn’t all there is of course, but it is an essential element of that. The logic I think is really quite clear, and that is that competition essentially for economists boils down to choice. Giving people choice over alternatives drives efficiency and innovation. There’s nothing that concentrates the mind, at least in the commercial world, more wonderfully than the word ‘No’, ‘Thank you very much, but no, I’d prefer this one over here’. That immediately sets in train, as anyone would know from the private sector, a lot of soul searching about what it is that’s driven people away. Are we too expensive? How can we lower our costs? How can we be more attractive? How can we be more innovative?

So the essence of the competition policy agenda is driving choice and focusing laser-like on those things that obstruct or restrict choice. The enemy of choice is exclusion, and exclusion can occur officially through regulations and policies, which exclude what, where, when, by whom. And you think of the raft of them; the trading hours restrictions, the planning and zoning rules, (dare I say it in the presence of Professor King) the pharmacy locations rules, parallel import restrictions, licensing rules and the whole box and dice.

Not suggesting that none of those things is supportable, obviously there is a public interest test to be passed here. The public interest test naturally draws attention to instances where competition and choice is by itself contrary to the public interest, and instances where there may be no alternative to achieve a particular objective than restricting choice. Classically, people speak about free sales of alcohol and things of that sort. Where the actual competitive mechanism itself, giving people choices, more of the same, different at different times, greater access, is actually inimical to the public interest and there isn’t any way to secure the public interest, so the argument goes, than by skewering choice itself. Now acknowledging that the public interest test is important and that at the end of the day, as Peter emphasised in his opening remarks, we’re not all about productivity for its own sake, we’re on about prosperity. We’re on about making ourselves and our communities better off and there are some things that are inimical to that.

Interestingly enough, although I had a lot of discussion about alcohol and one or two other things, no one ever raised the ban on the sale of weapons. Nobody said anything about that and yet if you take the competitive logic to its extreme of course you would say well it should have applied there too. We should have a review of the ban on personal firearms. Well nobody raised that, not in one thousand submissions. Because, I think, most Australians get it. They get the idea that competition, productivity and the agenda is not an end in itself it’s a means to an end. On the other hand, there are lots of subtle ways and lots of interested parties who would think of nothing better than to restrict choice, to find ways and excuses along some of the lines that Saul has already taken us this morning, dressing it up as in fact in the public interest. Well it may be, and this is something that needs to be tested. Hence the agreement, hence the notion that this should be regularly tested and that there should be an agency that oversees that process. We had recommended the establishment of a new agency; the agreement doesn’t countenance that. It countenances re-jigging the National Competition Council. That’s fine, provided that it’s given the resources and given the agenda to go through that.

So one form of exclusion, which as I say is the enemy of choice, is official exclusion - regulations. The other is conduct on the part of businesses in the market; conduct can be exclusionary and that is what the Competition and Consumer Act sets its face against. It sets its face against exclusionary conduct in all its forms. Well, we’ve made a whole raft of recommendations in respect of the Competition and Consumer Act. There was only one, which caused any controversy, and that’s the recommendation on section 46; governing the exercise of market power, one form of exclusionary conduct that our recommendation not be accepted. In fact, that’s now been accepted by the government of course and it stands before the parliament. So that’s on its way. We would expect it to go through given that Greens have indicated their willingness to support it as have a couple of independents in the Senate.

So official restrictions conduct (the CCA looks after that) and access. So natural conditions in markets - what we call natural monopolies, tight points or bottlenecks; one can think of examples. Again the Competition and Consumer Act, Part IIIA in particular, deals with those types of naturally arising type passes, bottlenecks, restrictions. Well, by their definition they exclude and that exclusion compromises choice. And where it compromises choice it compromises efficiency, innovation and productivity. So the competition agenda is right there.

The Productivity Commission, as Peter and his colleagues would well know, and again in particular my colleague Stephen King, who is overseeing this, was handed by the government the review of human services. The human services recommendations were, in the view of myself and my colleagues on the Competition Policy Review, the most important. Yes, we talked about taxis and pharmacies and all the rest because we were obliged to do a root and branch review. To open every cupboard door and see what lay behind it, what had been sitting there for twenty years since Hilmer. That’s why there’s all talk about those other matters. But I don’t think any of my colleagues, certainly not I, suggested as much as I think that pharmacy location rules need to change, that the entire great wheel of Australia’s productivity and living standards is turned on that axis. I mean it’s not. But human services certainly turns up on the agenda.

So what we did on the Competition Policy Review was to go where Fred Hilmer and his colleagues twenty years ago didn’t go. That is to say, to take the discipline of choice and competition, thinking about competition in that vein; choice beyond the government’s front door step right into the core of general government business, health, education and welfare. The discipline of choice should be introduced then. It’s very helpful for us that the NDIS was launched and people will be becoming more familiar with that notion during the currency of our enquiry. So I don’t have any difficulty at all in getting people to think about what it is we’re talking about. I simply say think the NDIS and then I say if we can give that degree of choice and command over their own destiny to Australians with a disability why would you deny that to Australian’s with no disability at all? In the fastest growing areas of public expenditure and, in the case of health, also the fastest growing industry in the economy – why would you do that? Now in every instance of course there will be arguments for and against.

The Productivity Commission was handed the review, its study report has just been released and I commend that report to you. It’s an excellent document. There the PC (Productivity Commission) has done what it was asked to do. To go through all of the human services and think about the ones where there may be the greatest capacity for this logic to work in our interest. And there are some suggestions there, unsurprisingly, including things like social housing and public hospitals, public dental services and end of life services. A lot of health services unsurprisingly but also, as I say, some other services as well. The PC (Productivity Commission) is looking for some response to that and I’d encourage everyone to carefully think about those recommendations and they’ll follow that up then with a series of more hard-nosed recommendations about how you would actually do this. I was particularly pleased, Peter, in that report to see an acknowledgment of a thing that weighed on my mind as we wrote these pages and that is that this is not a panacea. It doesn’t work in every case and there’s nothing in the Competition Policy Review nor in the PC’s study report that said ‘you just have to do this everywhere.’ In some instances public provision will remain the most important way to do this for those productivity enhancing ways, let alone other objectives.

I’ve mentioned COAG, so let me just conclude with one piece of advice. It was suggested that we could offer some advice to the process. In this area of course, it's well trodden given the review and so I don’t need to spend a lot of time on that. But let me just say that there’s one thing, apart from base politics, which seems to have caught out the agreement and explains the Labor states’ resistance to signing up to the agreement at this point. It’s the best question of competition payments. Now we approached that subject very gingerly because unlike the Hilmer review we did not recommend wholesale privatisation of public enterprise, in fact there are very few left to privatise (there are some). As a result of which as you would know, revenue went to the Commonwealth and the States got caught with the political fallout. In this instance, most of the benefits that would come from this series of recommendations will actually go down to the benefit of the States themselves. So to quote the former Treasurer Peter Costello who was opposed to competition payments and essentially ceased those competition payments when the Howard government took over ‘The states don’t need to be lead by the nose.’ They can see their own advantage and they should be encouraged along that way. So we didn’t recommend that there be competition payments. What we did recommend is that it ought to be clear where the benefits and the costs lie.

Reprising Saul’s very helpful comment about facts, we need the evidence. We need the facts. Maybe it is true that they can smell it out for themselves. But, of course, many members of the public can’t. So we’ve recommended that there be an agenda set up and then a reference for the Productivity Commission to do exactly that. To calculate the distribution of the costs and the benefits of these things one by one – let’s spell that out. And then, if there isn’t any money in the pot to actually grease the wheels with competition payments at least we will have a debate and we can see what it is that we are dealing with and we can see how the benefits and the costs lie. I think many of the jurisdictions would be frankly surprised that the benefits in many instances were redound to them along with the costs and it isn’t true that somebody else benefits and we pay all the costs, but it requires the evidence to be calculated.

So my piece of advice, Peter, or my hope, is that during this process of the PC’s review, which is entirely welcome on my part as you might imagine, is that the Commission does what it does best - go for the numbers. Do the work, do the calculations and explain to us all where the benefits and costs lie. That will help us to rank these reforms, some of which may be nice to do but aren’t really that important, and it will also help the public to gain an impression of what it is we’re talking about here. At the end of the day, I think Australian’s viscerally understand choice. Australians are my countrymen and women and in my experience, and I don’t exempt anyone here in this audience for a moment, I think just love to be able to say ‘No thanks mate, I’m off down the road.’ Well that’s a very, very powerful incentive. Drives up productivity. We just need to allow it to do its work.

Thank you very much.

Digital Innovation and Prevention / Early Intervention

James van Smeerdijk, lead partner for PwC’s Victorian Government practice

Transcript of video

Thanks Melinda, it’s great to be here. I’d also like to acknowledge the traditional owners of the land of the Ngunawall people and I’m not going to talk about it today, but there’s a productivity opportunity for Australia to invest in that we should be really looking at.

Innovation is the biggest contributor to big growth and when Peter asked me to chat today it was framed with, well, what is big that we’re underinvested in where the politics may actually not be insurmountable. I had a think about it, and I just want to talk about two things. One of them is what I think is the most important phenomena in the world today, which is digital innovation. And secondly, the massive underinvestment we make in prevention and early intervention in the, sort of, social purpose sectors. So I’m not an expert in digital innovation, but there’s a whole lot of links there if you interested to follow up on some public stuff we’ve done around digital innovation. But I’ve observed it now for some years, as our own business has transformed to focus on this as being the single biggest global opportunity for us as consultants. What I’m going to do is, as an amateur in this area, outline the gist of what I think the opportunity is.

So, I’ve come to the conclusion that we’re facing this technology change singularity in the world. So, what I mean by that, we’re at a historic turning point in terms of multiple technologies. There’s the Internet of Things, artificial intelligence, robotics, augmented reality, mobile technology, social media technologies, often in combination with other technologies, such as nanotechnology, biotechnology and new materials. What this is feeding into each other, connecting together and combining with globalisation to lead to this incredible acceleration of change over the coming decades. I think the world will be almost unrecognizable in a few decades. You already see some early visible disruptions occurring such as Amazon, Uber and Airbnb. What you don’t yet see is the emerging disruptions in the banking sector through blockchain and intech technologies. Watch this space for sure. In education, for example one Australian university has more online students now than have ever passed through their university. And in health, I was chatting to Pradeep Phillip yesterday and he said that when he was head of the Victorian health department his wife chose social media to choose their obstetrician for his twins.

So there are amazing disruptions about to occur and government isn’t immuned. The monopoly style positions that government have in many cases will be attacked by substitutes and eroded by transparency. So I think this is an enormous threat, challenge and opportunity for Australia. In the sense that, at the same time as this amazing technology singularity is emerging that we’re also going through a really important economic shift as well with globalization and the end of the resource boom. So, what do we need to do? First of all we need to recognise that we’re behind. Just some facts here - The US spends $285 billion in venture capital versus $4.5 billion by us. Now even on a population basis that’s tiny. Research and development; fifty percent of our business R&D (research and development) is in physical capital industries, which are really not the growing industries of the future. I echo concerns about education, in particular STEM course completions have fallen from twenty-two percent to sixteen percent from 2002 to 2012, which really is just a huge problem for us. So we’re behind. This is big; this is really, really big. We’ve done some preliminary numbers about the benefits of this and it’s just enormous. I don’t need to labour the point.

But what’s the role for government? I think there’s a bunch of things government can do around this. One is actually be the creator of innovation opportunities. What do I mean by this; open up government to outside solutions. Open data sets and connect those data sets. Allow for innovation processes to occur. You’ll get better solutions faster by using innovation processes. Secondly, the skill base; the biggest problem with STEM education is not in universities. It’s not even in schools. It’s that our early childhood investment is so poor that we don’t get the people into the school and university systems to produce the STEM graduates. There are actually things we can do all along the chain. There are also some short-term skills gaps, technical skills gaps, we can fill and there’s also ways of engaging business to create enterprise champions. We need to incentivise innovation more. That’s a whole other – all my tax colleagues tell us there’s plenty we could do, but they would. We can also, and I think it’s a really important one, drive much greater commercialisation of research. You know, KPIs beyond just citations for research institutions, real collaborative investment structures and researchers sharing the benefits. Then lastly, putting the citizen and digital first. There are well known techniques now about how you can focus on the client, people and then build solutions around them and joining up multiple agencies; and really they’re very powerful techniques. So there’s a whole bunch of stuff that government can do to enable this.

What do I reckon are the key things with a political lens on? I think there are three things. First of all, small to medium size enterprises, as we’ve heard from Saul, have low productivity. They also have the greatest potential to gain from pretty simple mobile internet technology uptake. We think fifty billion of untapped potential and interestingly almost half of that is regional and rural. So you think that politics would be good there. Second, some of those actions by government that I just went through in terms of building an innovation ecosystem. Some of them are not particularly difficult to do I would think. Some of them are more difficult. And the last one is – I remember as a consultant I cut my teeth in some respects on the National Competition Policy, which was alive at the time and there was the National Competition Policy review of regulation. Why don’t we do a new National Competition Policy review of regulation, but do it using design thinking with the customer at the centre. And don’t make the mistakes we made last time in doing every bit of legislation. Just do the really important ones.

So they’re the ones in digital innovation that I think are really important. The second topic I wanted to talk about was prevention and early intervention. So, I did a report a while ago putting a number on our social purpose market with percent of social impact. It’s pretty big, it’s half a billion dollars each year spent. That only includes health, education, social student housing – it doesn’t include justice, so the sector is really bigger than that. It’s dominated by government; eighty percent of the spending is by government, fifty-five percent of it by the Commonwealth. We looked at a whole lot of innovative possibilities about how you can begin to shift that. One of them was prevention and early intervention.

Now, prevention and early intervention is really underinvested in. If I could just give you two examples. Two Royal Commissions very recently, the first one, the Victorian Royal Commission into family violence: 227 recommendations in total, three on prevention, South Australian Child Protection Assistance Royal Commission: 260 recommendations, five on prevention and early intervention. So, I think this is a really powerful reflection that whenever we look at these sectors we always looking at the crisis end. That’s where we spend all the money, that’s where all the difficult delivery systems and politics are, but it doesn’t have to be that way.

I think there are some opportunities to invest more in prevention and early intervention to reduce demand in those acute sectors. Whether those acute sectors be the courts, the prisons and the police. Whether it be the hospitals, whether it be human services systems and welfare systems. We can invest in three different ways. One is before anything goes wrong, so primary prevention. Secondly, when you see early warning signs and thirdly managing chronic situations better. There are investment opportunities all along that spectrum.

I think it’s politically possible, because you can see a narrative there that you could sell; prevention is better than cure. Working with kids, less institutional barriers in those underdeveloped sectors. There’s a strong economic case and there’s a strong fiscal case.

There are some barriers; some of the benefits are longer term, not all of them though. There’s a perception that this takes dollars away from the front line. It actually creates more fiscal space, but there is a perception there. There’s also, when you get to the treasury departments and try to convince them to spend in here, there’s a lack of confidence in the execution and delivery of these benefits. I’ll give you just a couple of quick examples about the kind of things that I think are really worthwhile. One of them is early childhood. We put a submission into the Productivity Commission’s enquiry and you can see from these numbers that female workforce participation benefits of $6 million, well that’s okay. These are to 2015. But look at the benefits of a small increase in quality of early childhood – $10 billion. Look at the benefits of just getting an extra hundred thousand vulnerable kids into quality childcare – $13.3 billion. I think early childhood is one area that we really are underinvested in and I think it’s particularly true in the first thousand days of life as your brain is being wired, where we do almost nothing.

The second area of potential: chronic illness. We did a report with Obesity Australia last year and there is a tsunami of obesity washing over our community, which is creating massive costs for the future, and we’re really not doing anything about prevention or early intervention. It’s a really, really big cost. We estimated it very conservatively at $88 billion over 10 years. This is just the cost of getting a bit fatter not the cost of obesity; it’s the cost of additional, of growing obesity.

And the last one is domestic violence. A massive issue that creates a huge amount of volume in our police system, in our courts and in our prisons, which creates massive absenteeism, presenteeism, damage to people, intergenerational damage to people. And yet we’ve virtually invested nothing in prevention and early intervention in these areas. So we’ve done with our partners Our Watch and Big Health Work a submission to the Victorian Government Enquiry about the case for investing in prevention and early intervention. Interestingly, going back to the security issue raised by Saul, the Victorian government last week announced two thousand new police. Two thousand new coppers on the beat, that’s a lot of investment. Yet their biggest policy priority, prevention and early intervention, is still underinvested in. Let’s hope that changes as part of the reform program.

So to sum up in the second area of what should we actually do that’s politically possible, one of them is, why don’t we just finish the early childhood reforms? Early childhood provides benefits to the whole social purpose sector, this third of the economy. We’ve kind of started on it at COAG some time ago, but it’s kind of stalled and surely this is the single biggest thing we could do for productivity across all of those sectors. Secondly, what about a package, either putting a package together, or perhaps by sectors, around structures that allow for investment in prevention and early intervention across those human services sectors? They’d need to be tailored to the politics of each jurisdiction obviously in South Australia it would be around child protection at the moment, Victoria in domestic violence, but that’s not a problem it’s an opportunity. They’d need to feature poolled funding and governance structures, outcomes based incentives, transparent measurement, really agile implementation and a particularly place-based community-lead integrated initiative.

I think that the politics of this must be possible. If we can’t actually structurally reform these sectors, at least we can do this as a work around.

And one last point, one last stray point I want to make, was another of the biggest productivity opportunities we’ve got is just to simply increase the federal government’s term to five years versus three.

Thank you.

The geography of productivity growth

John Daley, Chief Executive of the Grattan Institute

Transcript of video

Thank you very much and, of course, thank you to the Productivity Commission for the opportunity to speak today. Today I’d like to add a geographic lens to our discussion of productivity and participation and for reasons that I hope will become obvious. I think that’s an important way to think about this and when we do we will think more about cities policy, particularly planning and transport, and think about those as major economic levers as well as social levers.

So, my argument is that shifts in consumption and technology are driving changes in production. Those changes in production are driving both firms and jobs towards cities, towards big cities and towards the centre of big cities. Those are both Australian and international trends and that creates big challenges for policy makers. If we want to maximize the volume of economic water that flows downhill, rather than trying to pump it up, which as we know tends to be very expensive and fairly ineffective, then we need to facilitate these economic trends that I’ve been talking about and if anything government policy has been trying to encourage the opposite over the last fifteen or twenty years. I might add, with conspicuous lack of success. The reason we need to worry about this is that if people can’t get to the jobs that are “naturally being created” towards the centre of our cities than that will have economic costs and it will have social costs and, as I will show, I think it will have political costs as well.

So, it’s worth remembering the fundamental thing that’s going on here is not changes in production it is changes in consumption. We are choosing to spend an increasing share of our wallet on services, particularly things like health services. The marginal dollar is being spent on services. That means that, for example, we are spending more on health and we are staying alive for longer and are in better health, which doesn’t strike me as an entirely crazy choice, but it does mean that we are spending less on manufactured goods. So not surprisingly, services account for almost all of the next jobs growth in Australia over the last fifteen years. It is a wee bit difficult to miss the pattern. Most of the jobs growth is in education, health, business and other services, accommodation and food; all of those other industries that don’t involve services are if anything flat or declining.

Now the consequence of an increasing share of both the economy and of jobs being in services is that an increasing share of the economy and jobs are in our cities. One way of looking at that is to look at a map of Australia’s economy. This is back in 2012; I’ve just this morning cut the SGS numbers for 2015 and 2016. The numbers are almost exactly the same except that Victoria and New South Wales are a very slightly larger share of the pie and the share of those capital cities has a very slightly larger of the pie and regional Western Australia and Queensland are a slightly larger share of the pie as a result of the growth of mining. Overall, our big cities remain, in fact just four big cities, remain about two-thirds of the Australian economy. That’s where we are. Our cities dominate the economy.

It’s not just about cities, it’s about the centre of big cities and trends here are changing and becoming even more about big cities. So if you look at 2006 to 2011, that’s the darker bits on the left hand side in Sydney and Melbourne. As you can see, about half of the net jobs growth is within the 2km radius of the centre of the city. That is not a very big area. Plenty of people walk that distance on a quite regular basis. So roughly speaking that’s from Docklands in Melbourne at one end to Parliament House at the other and that’s kind of more or less it - maybe a little bit of St. Kilda road as well. As you can see that’s different to the previous five years of 2001 to 2006 where jobs growth was a little bit more spread. This is not just an Australian trend; if you look at the US evidence again we see increasingly jobs growth is being concentrated towards what is described in the American literature as city centres as opposed to metros. Now that takes us to 2011, I thought we were going to have to wait until we got the census, assuming we’ll get the census, to find out what’s going on. But I discovered that Bruce Rasmussen has done some fantastic work looking at the Victorian Work Cover Authority data, which is one of those things I wish I’d thought of a long time ago.

This is what his numbers show - this is small business growth first between 2007 to 2011 and then 2011 to 2016 and the growth or destruction in the number of businesses by suburb. As you can see in both periods pretty well spread. Some net destruction of the number of small businesses in the eastern suburbs of Melbourne. I suspect that’s the financial crisis, that’s a bunch of small retailers going to the wall. So that’s the small business story. So far you go, ‘All right well that looks pretty well spread. No big deal.’ This is the story for medium sized businesses between 2001 and 2010. Take my word for it, if you look at a half million to one, if you look at over 10 you get exactly the same pictures. As you can see between 2007 and 2011 it was well spread and between 2011 and 2016 it is impossible to miss the picture. Almost every single suburb in Melbourne has seen a net reduction of medium to large sized businesses, apart from the CBD and the two kilometres around it. That is what is happening, and as I said, this is happening not because of government policy, this is, if anything, despite government policy.

Planning documents in Melbourne, as with all of the major states, for donkeys years have said ‘Let’s promote the growth of centres outside of the CBD.’ This is the glorious consequence of those policies. As I said, it’s the same for all businesses over the size of half a million dollars on the payroll, which is presumably seven or eight employees. So we’re not talking particularly large businesses in scheme of things. So that’s what’s going on, now of course ‘Why is this happening?’ and the answer is ‘Well, it’s not because the rent is any cheaper in the centre, it’s because businesses are choosing to move to the centre.’ One of the things that’s going on is that productivity per hour worked appears to be higher. Saul says you can’t measure productivity like that easily, but what you can do is look at gross value added or economic activity per hour worked and it’s clearly materially higher towards the centre.

In Melbourne you get an island out near the airport, which of course is the port of a contemporary society. You get a big out near Caulfield and Clayton and really that’s most of them. Now Melbourne is a particularly centric city although in Adelaide, Perth and Brisbane the pictures are pretty similar. Sydney is a bit different. It’s better spread across the Northern suburbs and you do get more going on in Parramatta and Penrith. I suspect that’s because the transport system of Sydney and the topography of Sydney is so difficult, it’s just not possible to get from the western edge of Sydney into the centre. Whereas it is in the other capital cities including Melbourne, which of course is a roughly similar size to Sydney but is basically dead flat as we know and does not have a very large harbour right through the middle of it. So that’s the pattern you get in Sydney. It is a different pattern, although not outrageously so and it does also appear to have some slightly different trends in terms of employment growth and better spread. There is a very real question about whether it is giving up productivity as a result. I suspect that it is. In places like Melbourne where you don’t have those obstacles of transport or topography you’re getting a very different pattern. So that’s what’s going on in terms of that.

Now, it may be that some of what is going on here is that businesses go to the centre because that way they collect more economic rent, because they are closer to the seat of government and they can get decisions in their favour, and there’s quite a nice article arguing that. But I suspect it’s not the only thing that is going on. I suspect much more of what is going on is that in a services economy, being close to lots of other services businesses is very important. It is those accidental face-to-face meetings, or indeed deliberate face-to-face meetings, that then mean that lots of other things can happen, often over the phone or over the internet or any other way. Of course it is possible that the NBN will completely change this picture and lead to masses and masses of regional growth. If so, it will be the first communications technology in 250 years that has had that impact. All other improvements in communications technology over the last 250 years have, if anything, increased the advantages of cities and large cities and driven activity into them. So those are the incoming trends.

What can government do about it and why does it matter to the Productivity Commission? The answer is that government have two very, very big policy levers here, even if they are marked in red with ‘do not touch’ and they are of course transport policy and planning policy. Now in terms of transport policy you might think given all of these trends and the importance of getting to the centre we’d have been spending like crazy on things that get you from the edge or middle towards the centre, but it is not so. In fact, the dominant place that we have been spending our transport money is in the regions and as my colleague Marion Terrill has shown there is a disturbing correlation with marginal seat location. We are talking about very, very large sums of money. We have seen transport-spending jump up from about 0.8 percent of GDP to about 1.2 percent of GDP and it has dominantly gone, as you can see, to the regions. So that is the policy choice we have made. It is an interesting question whether we would have got a greater economic payback if that had been spent, for example, improving the transport system of Sydney over the last ten years. Obviously these patterns are starting to change over the last little while with a bit more spending in the centre of Sydney and Melbourne. But they remain quite significant issues in terms of what looks like a misallocation of resources.

Then of course there’s the issue about planning policy. The reality is that if you live a long way from the centre it’s very hard to get to the centre particularly, as I said, in Sydney. As we can see, if you live on the edges of Sydney chances are there are relatively few jobs that you can get to. So we are probably giving something up in terms of economic activity. This is getting there by car; you get a similar story if you look at it in terms of public transport and again, the Sydney picture is noticeably worse than the Melbourne, Brisbane and Perth pictures.

Now what can we do about this? Essentially, you can either improve the transport links or you can increase the number of people who live in the orange bits, which are the bits of course that are already pretty well served for by transport links, both roads and public transport. Yet if you look at the numbers, and I’m sorry I forgot to include this slide today, that have been released recently from an academic study from South Australia, although we have substantially increased the density of the very centre of our city, the kind of inner two kilometres, that’s of course not a very large area, we have seen almost no change over thirty years in the density of our middle ring suburbs. Everybody agrees that density should go up in the suburb next to theirs. This again is a policy choice that governments make. Now, of course, there are social costs to increasing density and the people who already live there will pay those costs. On the other hand, there are massive social benefits to increasing density in the middle of suburbs and those benefits will be felt by those people who currently don’t live there but will be able to. Of course, that plays into housing affordability, it plays into the way that wealth is or is not well distributed across a community and of course, as I’m suggesting, it plays into the long-term economic productivity of the country in a very major way.

As I said, what I’m trying to argue is that this planning lever and this transport lever, it’s not traditionally part of the tool-kit but it is an important part. It also matters to participation. If you look at participation rates in any of the Australian cities, female workforce participation is pretty high towards the centre and as you go further away, and there are fewer jobs available, it becomes lower. Now there’s also a political angle to this. This is looking at first preference votes in the Senate in the election we’ve just held - not counting the Greens as a minor party. So I’m therefore counting them as a larger party. As you can see, the existing large parties have very high votes in the CBD and then there it’s a dartboard pattern as you go further out. It is very difficult to miss the pattern. It is true in all States. Over time this trend has been increasing. So yes there has been an increase in general for votes of smaller parties, but that ‘in’ trend has been particularly high essentially anywhere more than about thirty kilometres, in other words the outer suburbs, of our major cities. This is looking at distance from the GPO and minor party vote share, and as you can see again very difficult to miss the pattern and it’s been increasing over time.

When you try and explain all of this you get a massive problem statistically which is that essentially distance from the centre and minor party vote share and the proportion of people with higher education and incomes and the proportion of migrants are all extremely highly correlated. So figuring out which one is driving which is very difficult. What you can say is that there is a trend and what you can say is that these places further away from our CBDs are not very happy with what politics is delivering them and probably not very happy with what the changing shape of the economy is delivering them. I think there is probably both an economic and a cultural angle to this as well as a lot of the commentary around Trump has suggested. So that’s the story. We are seeing a trend of jobs concentrating in cities, big cities and towards the centre of big cities. We can fight that trend if we want to, but it will cost us both economically and socially. Governments do have levers available to them around their choices on transport and their choices on planning. In the meantime politics is going to make this complicated, because those areas towards the edge and in the regions are not very happy with what is happening and they are starting show up at the ballot box.

Thank you very much.

The economics and the politics of productivity

Chris Richardson, Director of Deloitte Access Economics

Transcript of video

Thanks Melinda, thanks everybody. The economics and the politics of productivity, in a sense I want to come back to where Saul started and where John finished, because there is, if you like, a big gap between those two. On the economics I would make an essential point, that if you think of those levers that we would like to move, and every speaker has mentioned some of them, there is a surprising amount of agreement on what we should do. I really don’t think the problem of this room or this nation is the economics. We kind of know what to do. What we aren’t good at doing, and arguably are increasingly worse at doing, is achieving it. How do we switch from a debate. I’m going to make that point by starting with the economics and in a simple sense, that’s two thousand years of recorded economic history, it shows that shares of global income are dominated by productivity. You have an industrial revolution and a small share of the world's population could carve out a massive hunk of the global pie.

But we happen to live in that blink of an eye of human history in which the likes of China and India are having their industrial revolution and that is magnificent. In a number of ways that has thrown prosperity at 24 million people living on a continent. We have a bunch of options because of that. In particular, if I can call it, the ‘China boom’ or the ‘resources boom’ – whatever you want to term it. That’s been absolutely magnificent for us. But I would suggest that there are three things to take account of that arguably say, taken together, they say the need for reform has lifted. Because I think that the pressure on living standards, that Peter mentioned in his introductory comments, there are some risks that that’s not going away.

One of those is because China’s magnificent success has partly come at the expense of borrowing some growth from the future. You look at business investment spending, there’s a share of a hundred and seventy different economies around the world. That is China overall in the right hand side, (that’s Chad on the left; he never got a check). China has built too much for its level of income and what it has built it has increasingly relied too much on debt to build. Right now China happens to be reinvesting in its old economies and that’s showing up in marvellous things like coking coal prices and the iron ore price. But do not underestimate this. This transition has only just begun and arguably will take the better part of a decade. And as that continues to happen, and will have to happen, that will throw up a series of challenges for Australia. We’ve already seen them for a while. They are the largest single reason why the living standards (per head, inflation adjusted) in Australia have struggled for some years now. China’s slowed down and a start of an economic transition are extremely important. This is not finished.

Second thought, a transition that we haven’t even yet begun - and yes, when they write the history of last decade and more, the economists – chapter one will be the rise of China and emerging economies, but chapter two will be a global financial crisis. One of the side effects of the global financial crisis is that central banks - when governments vacated the field and left the repair of the damaged economies to central banks you saw a remarkable fall in interest rates. Now, just on a very simple level, there is a reason why when economies are strong typically interest rates are high; strong economies, inflation risks as you hit capacity. There are reasons why when economies are weak you have low interest rates; you get the economy moving again. In Australia and around the world economies are okay but interests rates are the lowest that we’ve ever seen. I don’t have time to get into the economics and increasingly the politics of that, but again that’s not permanent. There are structural reasons to think that interest rates won’t quite return to the average of the past but they’ll certainly, eventually, be substantially higher than today. China’s transition is ongoing, it will be a challenge. This new challenge will eventually be a problem for Australia as well - and the well-known one around an ageing population and the impact of the underlying share of workers, or potential workers, versus total population.

What that says to me is something that’s pretty simple but is an important backdrop for this work that the Productivity Commission are doing and indeed the work that arguably everybody in this room, one way or another, is doing. All of us, in life, have a second job to leave the world a better place and all of us in our own ways are fighting that fight. And that fight is arguably harder, I would say, on the simple summaries of living standards in Australia are already pressured in that those pressures won’t go away. China’s transition will need to continue.

Interest rates at some stage will need to rise and Australians are, households much more than governments, but Australians are heavily indebted by global standards and ageing will have an impact. The need for a boost to our prosperity from our productivity, from moving the levers – it might be the cities reform, it might be the competition reform, it might be federal state reform, it might be taxation reform, it may be a range of other things you get to talk about this afternoon, but I want to make a point. This challenge - we now need more than ever to rise to it and just as the demand for reform and its good effects has risen, the supply of good policy actually making it out the other side of our parliaments has fallen away. Or to come back to my opening point, we mostly know what to do, but we are not actually doing it.

Now there are some reasons for that, you know, if you’ve had stagnant, or for chunks of time in recent years, fallen living standards, politics is harder. It’s not that across the last ten or fifteen years we went from Canberra being run by geniuses to Canberra being run by idiots. When the pie is not growing, you need some growth to grease the wheels of change. When that growth in living standards is not happening it becomes a lot harder to, not merely to govern, but particularly to improve the governance, if you like.

Second, and that old point that we’ve done a bit of stuff already, Australia is arguably the most successful advanced nation in the world over the last third of a century. Partly luck, having 24 million people on a vast continent, but partly because we genuinely did a bunch of good things. But you can only float the dollar once. There are whole bunch of things that we have already done. There’s still a big list of things we can do, but it is true that a bunch are already done.

The third point that I want to bring home strongly to you – so why, why are our political systems failing to generate these new reforms? We know there’s stuff that could be done and yes those first two reasons are important. But third to me is arguably the key and I think the economists may not have thought of this much, but I think we’ll understand it. Competition, as Ian noted, is mostly correct but occasionally tricky. Across a long period of time, and you saw those charts just at the end there from John, across a long period of time, the competition for votes in Australia has become much more intense. At least in part because we used to grow up, it was Holden or Ford, it was this football team or that football team. We were rusted on. It was this political party or that political party; you know, we always vote this way. And we’ve become increasingly distrustful of politics and politicians and frustrated with them. We are increasingly willing to change our vote. As that market for votes has become more competitive the behaviour of the participants in the market for votes has become increasingly bad.

I find this really quite frustrating, and it’s a simple rule of thumb I guess I would say that now for twenty years, each successive opposition in Australia has tended to become more willing to be populist and to take the cheap shot. Why? Because it works. It really does. You know, you can succeed. I would say that it’s getting easier and easier to become Prime Minister and harder and harder to then do something with it. That change in the market for votes, and hence the participant of those firms – the Labor, Liberal, National, Greens- you know, the people selling into those markets – their behaviour is a problem for us. What can we do? Well I don’t know. Or what I would say is, this is diabolically hard and there will be, perhaps many among you, and maybe particularly the economists among you, who will have the view that ‘alright, in the next recession we’ll get our act together because we’ve done it before’. And I’m afraid I’m quite strongly of the view that these structural changes, particularly around the behaviour of political parties, is such that, no, when the next recession hits we will still be Bart and Homer. We will still have our fingers wrapped around the throat of each other and be strangling away. For all the recognition of the economics there are sensible things to do, I have little confidence that even in a changed set of circumstances of a recession that we are going to lift our act.

Having said that there are some things. I’ve quoted at the top of that slide the economist Michael Jackson. At least admitting that people like me, and others you’ve heard from today, the temptation for us is always to insist on perfection. Which in my case is simply to find that everybody has got to realise that I am right and any other policy suggestion on tax reform, superannuation, aged care, federal state, you know, anything that deviates ever so slightly from mine is the product of idiots. That’s true – it’s true of me, and I’ve got to get over it. I’ve got to partly see whether it’s the individual organisation, maybe the Productivity Commission, maybe Deloitte Access Economics. It may be whoever else. We’ve got to admit that there’s going to be room for compromise. We actually agree on a lot and media are part of the story too.

Twenty years ago in 1998 John Howard comes out of hospital and there’s the thought “well we might have a GST”. And I spent twenty minutes doing a pre-recorded TV interview on the pros and cons of the GST. When it was shown that night it was only about three minutes and it turns out the GST only had cons. News is the argument, if you like, but whether it’s me insisting it’s my way or the highway or how we portray this. You know, I think Mr and Mrs suburbs think there’s much more disagreement among experts than there actually is. We agree on a lot and we should be more like Bernie Fraser and less like John Stone, who I dearly love, but again wanted that perfection all the time and accepted nothing less. Whereas, Bernie was willing to admit that - take superannuation, I didn’t love the reforms that have gone through but they’re better than what we had. This stuff is important.

Last of all, the weapons of mass destruction of the Australian political landscape. What is killing the ability of each of us around our second job to leave the world, to leave Australia a better place is oppositions. Now to be clear, this is both sides and I’m not saying one side more than the other. They are responding to incentives but we should not let them do it. We shouldn’t let them say no to all these things during a parliamentary term and then at five minutes to midnight ahead of the elections and say 'well yes we’ll take all that stuff'. We need to hold all political participants to a higher standard because until we do, we’re not going to get the better Australia that we deserve.

Thank you very much.