Productivity Commission

Rise of digital technology

Speech

Chair Michael Brennan delivered a speech to the Australia-Israel Chamber of Commerce (AICC) on 12 March 2021.

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It’s a great pleasure to be here with the AICC, and to be in Melbourne – on just my second trip back since March last year – and seeing signs of recovery. In reflecting on what’s changed in the last 12 months, it’s hard to fully put oneself back in the mindset of February 2020.

In trying to do so I am helped by a document that we put out in that very month - titled Productivity Insights 1. It made no mention of COVID. What it did discuss in great detail was the slowdown in productivity growth in the Australian economy.

It pointed out that average growth in labour productivity since the mid-1970s has been around 1.5 per cent. But in the five years to 2018-19 it was half that; and in 2018-19 it was actually minus 0.2 per cent.

The productivity slowdown is not confined to Australia. It is a developed world phenomenon. And it will surprise you to know that economists don’t agree on the causes: whether it be population ageing, increased risk aversion, low investment, widening inequality.

One of the more compelling arguments is that the pace of technological progress has basically slowed down. Which might sound odd because we are so used to hearing the cliché (and modern conceit) that we live in a world of unprecedented rapid change.

But Professor Robert Gordon of Northwestern University has pointed out that what he terms the “Great Inventions” of the late 19th and early 20th century made a bigger difference to the every day lives of people than have the digital technologies of the last three decades.

He lists things like: electricity, lighting, heating, air conditioning; motorised transport, aviation, the telephone, television, cinema, chemicals, plastics, antibiotics, and clean running water.

In Gordon’s words, these inventions:

“…had a more profound effect on every aspect of human existence. The digital revolution in contrast, while completely changing office procedures in all industries, had less impact on the everyday life of consumers or on industries involved with physical transformation such as manufacturing, construction, mining, utilities and transportation as well as important industries in the service sector…2”

Australian historian Geoffrey Blainey made a similar observation about technological progress between the 1850s and the First World War. As he describes it, in the space of one lifetime:

“Candlelight gave way to kerosene and, in the cities, to electricity...The bullock dray was almost superseded by the steam train, and the sailing ship by the steamship, while the car appeared on the streets and the bicycle was everywhere. A postman reached nearly every corner of the country and the telegram reached every town, while the telephone transformed talk in the cities…3”

As Blainey suggests, in many ways these were more dramatic changes than we have seen in the last few decades. Progress was neither simple nor linear. As Blainey says: “not everyone gained by these changes; some even lost.” And, as is always the case with rapid change, there were many unintended consequences.

One such consequence was that the rapid growth unleashed by these inventions used up a lot of resources. And as the economic historian Joel Mokyr points out, productivity growth might have looked much faster in the past, but some of that could be exaggerated when you take account of the full costs:

“the productivity gains from technological progress in the past may have been overstated because of inputs that were used and never paid for, in large part because there were no property rights and markets for those inputs. Of those, the physical environment was clearly by far the largest4.”

We didn’t count the impact of emissions from burning coal, or the impact of prescribing practices on antibiotic resistance, or the depletion of whales, bison or Newfoundland cod. As Mokyr points out, Chinese and Indian growth figures do not deduct an amount to reflect the adverse impact on air quality in Delhi or Beijing.

So one aspect of this rapid rise in incomes which transformed life in the western world was a perception – widespread by the late 20th century – that there was a direct trade-off between economic growth and the natural environment. Whereas today that is much less clear.

With the growth of the service sector and the rise of digital technologies we are seeing, in much of the developed world, some decoupling of economic growth and resource use. This decoupling is in its early days and is patchy across ecological indicators, but it is potentially transformative.

Writer Andrew McAfee invites us to think of all the things that we have effectively replaced with a smartphone5. Here’s my list: a stereo, alarm clock, camera, maybe an additional TV, a torch, newspapers, magazines, a street directory and the encyclopedias which sat on a bookshelf. Maybe one day the home phone. That’s a lot of materials. A lot of resources saved.

The transformation associated with the smart phone is partly the new things it makes possible – like ordering an uber – but partly the old things it makes easier and a lot less resource intensive.

In manufacturing and logistics, there is the concept of a product’s value to weight ratio. The smart phone has a much higher value to weight ratio than all those things it replaced. And when you think about services – including digitally enabled ones – they are weightless, so the ratio approaches infinity.

And that accounts for more and more of the value being exchanged in the modern economy. Hence the possibility that continued growth – even rapid growth – can leave a much lighter footprint on the planet. It’s still early days and the evidence of this decoupling is patchy across ecological indicators.

The latest State of the Environment report (2016) shows that energy usage and greenhouse gas emissions are falling relative to real GDP6.

Our recent draft report on national water reform found that average household water use has fallen from 280 kilolitres in 2000 to about 190 kilolitres in 20197. The real value of irrigated agricultural production has risen over the last decade, even in dry years when water consumption has fallen. That is a result of technology and some public policy innovation in the form of water trading. Meanwhile, increased environmental flows have led to improved native vegetation and wetland condition and protection of biodiversity.

So I am highly optimistic about the ability of technology and innovation to drive higher productivity in a service dominated economy, and cautiously optimistic that this can be done with a lot less strain on the natural environment.

The good news is that there is reason to believe that COVID brought forward the adoption of technologies,

  • Infrastructure Australia reports that 9 out of 10 Australian firms adopted new technology during the pandemic including collaboration tools and cyber security8.
  • In NSW between March and May, 80,000 non-admitted hospital services were provided via videoconferencing9
  • In a survey, 53 per cent of respondents said they would make use of telehealth services after COVID10.
  • Revenue from online education is estimated to increase substantially from this year onwards11.

The challenge is to not only hold onto these gains, but to use them to kick-start an ongoing process further innovation. For example, digital health and education services could become so much more than just a zoom version of the physical service.

I will discuss two instances where technology could open up new opportunities: remote working and regtech.

Working from home is not new. It’s actually very old. Go back 250 years and most people worked from home – whether in agriculture or as weavers, blacksmiths or other skilled artisans. It was the rise of the factory system in the 19th century that brought people together in a central location, such that by 1914 the majority of the labour force worked away from their homes.

There were strong economic forces that brought about the factory and later, office system: large physical capital and the knowledge sharing that colocation makes possible.

Workers gained enormously in higher incomes (though this took time), but they arguably lost some flexibility in determining their hours of work, and their ability to combine work with household duties (like child rearing).

Nevertheless for most of the 20th century, the logic of bringing employees to a centralised workplace got stronger, because those key inventions – the car and bus, electric trains, aviation, and that other much neglected form of mass transit, the elevator – made it ever easier and cheaper to move people around.

Then, in the last few decades, we hit technological limits. Transport stopped getting faster; and, again, we have had to confront the emerging cost that we never accurately priced: congestion. The cost of moving people stopped falling, while the cost of moving information fell spectacularly via the computers, the internet and mobile telephony.

That said, until now, patterns of remote working did not shift much. Based on the specific tasks that form part of different occupations, we estimate that around 40 per cent of jobs could be done remotely. But prior to 2020, census data suggests that only about 5 per cent of workers actually worked from home.

Why? Because prior to 2020 there was uncertainty among both firms and workers as to whether large scale working from home was really feasible. And it would have been costly for most firms to try it on any sort of scale. But COVID forced a mass experiment in remote working. And we learned something.

Admittedly survey evidence based on 2020 is imperfect and you have to take it with a grain of salt. But it appears that on average, workers and firms found the experience worked better than they had expected.

  • A survey of workers in NSW showed around 53 per cent reported being more productive when working from home12.
  • A US survey found 61 per cent of workers reporting higher productivity and 13 per cent reporting lower productivity at home13.
  • Another Australian survey found 71 per cent of respondents saying they would like to work from home more often in the future14.
  • the same survey found that 70 per cent of managers felt their employees were at least as productive working from home.

This is not to say that remote working is for everyone. Employees will need to work out the right trade-off between reducing commuting time, the flexibility of working from home and the loss of social interaction in the workplace.

Firms will need to think about the productivity impact, the potential loss of creativity and culture if people are apart; the potential savings on office space vs. the need for other investments in technology and the skills required to manage work remotely. But the likelihood of going back to pre-existing levels of remote working is, well, remote.

If more people work from home more often, the impact on measured GDP per capita is unclear. It could even fall. But the impact on wellbeing could be very significant, through time savings from the avoided commute and greater flexibility (neither of which is measured by GDP).

But this only became possible because of what we learned in 2020. We found ourselves in a situation where we had to learn new ways of doing things and we stand to reap some benefits into the future.

Again, the challenge is to make this an ongoing, dynamic process rather than a one-off: constantly learning and getting better at working in multiple locations, investing in the technology, creating great physical workplaces and finding new ways to foster creativity and collaboration.

Another area where we could use technology to do things better is regulation, where we see real opportunities in ‘regtech’ – the use of technology to improve the quality of regulation and to reduce compliance costs for business.

Regulation is often necessary – to protect against harms and buttress confidence in various markets. What matters is that it is well designed, enforced in a targeted and proportionate way; that it imposes the minimum necessary costs on businesses and individuals and is reviewed.

Technology can make a difference to how costly and time consuming it is to comply with them. One of the challenges with regtech is how to expand it beyond areas like tax and financial services, which are relatively data rich, into other areas of regulation.

We see four areas where regtech could be highly beneficial15. One is where the regulatory environment is particularly complex, or where there are numerous regulatory requirements relating to a single activity (like starting a business).

Another is where technology could allow regulators to take a more risk-based approach aided by data analytics. This is already being done by the ATO to detect possible reporting errors by taxpayers and by AUSTRAC to detect financial crime and sophisticated fraud.

In many cases, technology can improve the monitoring of activity, in ways that help both the regulator and the regulated entity. The EPA in Victoria has made use of drones to track illegal dumping. The Murray Darling Basin Authority has trialled satellite imagery to measure and track water resources and their use.

In many cases the data collected is a wider public good. One of the success stories of 2020 is the way the ABS used Single Touch Payroll data from the ATO to report timely statistics on employment and wages across the economy – by sector, by age, by gender and state: giving vital insights to policy makers and the public as the pandemic unfolded.

Australia is regarded as a highly prospective market for regtech, given our stable and sophisticated regulatory systems. We are already home to a number of regtech providers. To succeed, we need strong technical skills within our regulators, and often a preparedness to take a pro-active role in standard setting and coordination of an industry wide solution, as the ATO did with its standard business reporting program.

It might also require regulators to cut across traditional silos – something that has proven incredibly hard for the public sector in general – to share intelligence and have a more joined up approach to regulating individual businesses.

The case of regtech reminds us that the public sector can be an important enabler of economic growth – not by running businesses or picking winners – but by doing its core business well.

Enforceable property rights, prudential regulation, the limited liability company, credible monetary policy – these and other public goods have been the silent partner of technological progress in driving growth and higher living standards. They too are ‘weightless’ innovations that support growth. As Nick Greiner’s review of regulation in NSW showed, good regulatory institutions are best seen as an asset16. Bringing 21st century technology into our regulatory systems is just good stewardship.

So there are some grounds for cautious optimism. The pandemic has accelerated the adoption of technology.

It has also highlighted that, if anything, our institutions, our public sector and our social cohesion are stronger than many may have thought.

The question is where to from here? Do we go back to 2019, just with a bit more working from home? Or do we use the disruption of COVID to put ourselves on a different path – one of experimentation, risk taking and ongoing technological adoption.

If we can do the latter, then that would be 2020’s great silver lining.

Footnotes

  1. Productivity Commission, Productivity Insights 2020: Recent Productivity Trends , February 2020 Return to text
  2. Robert J Gordon, Declining American economic growth despite ongoing innovation , Explorations in Economic History, 2018, vol. 69, issue C, 1-12 Return to text
  3. Geoffrey Blainey, Black Kettle and Full Moon , Penguin, 2004. Return to text
  4. Joel Mokyr, The Past and the Future of Innovation: some lessons from Economic History , 2017. Return to text
  5. Andrew McAfee, More from less : the surprising story of how were learning to prosper using fewer resources and what happens next . [S.l.] ISBN 978-1982103576. OCLC 1085159635 (2019). Return to text
  6. State of the Environment 2016 , Commonwealth of Australia. Return to text
  7. Productivity Commission, National Water Reform , Draft Report March 2021. Return to text
  8. Infrastructure Australia 2020, Infrastructure beyond COVID-19. Return to text
  9. Sutherland et al 2020, Impact of COVID-19 on healthcare activity in NSW , Australia, Public Health Research and Practice, Sax Institute, December. Return to text
  10. Infrastructure Australia 2020, Infrastructure beyond COVID-19. Return to text
  11. Infrastructure Australia 2020, Infrastructure beyond COVID-19. Return to text
  12. NSW Innovation and Productivity Council 2020, NSW Remote Working Insights: Our Experience during COVID-19 and What it Means for the Future of Work , NSW Innovation and Productivity Council Research Paper, Sydney. Return to text
  13. Barrero, J.M., Bloom, N. and Davis, S.J. 2020, Why Working From Home Will Stick , University of Chicago, Becker Friedman Institute for Economics Working Paper, no.2020–174. Return to text
  14. Beck, M.J. and Hensher, D.A. 2020, Insights into the impact of COVID-19 on household travel and activities in Australia–The early days of easing restrictions , Elsevier, Transport policy, vol.99, pp.95–119. Return to text
  15. The examples which follow come are summarised and cited in Productivity Commission, Regulatory Technology , Information Paper, October 2020. Return to text
  16. Greiner et al, Independent Review of the NSW Regulatory Policy Framework, February 2018. Return to text

Opening statement

Deputy Chair Alex Robson delivered an opening statement to the House of Representatives economics committee inquiry into promoting economic dynamism, competition and business formation.

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Thank you for the invitation to appear again before this Committee, and for the opportunity to make an opening statement.

When we last appeared before this Committee, our Advancing Prosperity 1 report had not yet been publicly released, so today I will spend a bit of time discussing that. I will also discuss some recent productivity trends, the relationship between productivity and real wages, and some trends in indicators of market dynamism as set out in our submission. I will conclude by touching upon the topic of competitive neutrality.

My main messages today are as follows:

  • Australia’s productivity performance has been anaemic for quite some time.
  • Productivity growth is a key driver of real wages growth.
  • Competition and business dynamism are, in turn, important drivers of productivity growth.
  • Several aggregate indicators suggest that competition and dynamism in Australia may be declining.
  • However, these aggregate indicators should be interpreted with care, particularly when it comes to the menu of policies that might address those trends, and the tradeoffs that might be involved.
  • There is no single policy silver bullet in relation to competition, dynamism and productivity.
  • A comprehensive microeconomic reform agenda – of the kind outlined in our recent Advancing Prosperity report – is needed.
  • Finally, we consider there is scope to improve Australia’s Competitive Neutrality policy and make it fit for purpose for the years and decades ahead.

Recent productivity trends

In March this year we released our 5-year productivity report, Advancing Prosperity. The report emphasised the fact that over the decade to 2020, Australia’s productivity growth averaged just 1.1% per year – the slowest growth rate in 60 years.

Since that report was released, there have been several disappointing data releases on productivity. The recent data underscores our earlier key messages.

For example, the most recent National Accounts data from the Australian Bureau of Statistics shows that over the year to June, Australia’s level of productivity went backwards, declining by 3.6%. 2 That data also shows that productivity has declined in four of the last five quarters. As a result, GDP per hour worked is now at its lowest level since March 2016.

The outgoing Governor of the RBA recently warned that Australia’s living standards could stagnate in the face of our weak productivity performance. 3 Another view is that on current data trends, we would be lucky to achieve stagnation – it could turn out be another optimistic, “glass half full” prediction from the former Governor.

My own view is that Australia’s productivity challenge is urgent – but it did not happen overnight. It has been an urgent problem for many years. We can and must do better, but there is a way forward.

Productivity and real wages

Why does it matter? Productivity is about working smarter – not harder or longer. The recent data underscores this.

If the level of productivity is falling – as it has been over the past year – this means that on average, Australians had to work more hours just to produce and buy the same volume of goods and services.

In other words, over the past year, Australians on average have been working harder and longer – in effect, running to stand still. Real wages have also been going backwards, and this is no coincidence. Indeed, one of the very first findings in Advancing Prosperity is that in Australia, almost all sustained increases in real wages are underpinned by improvements in labour productivity growth.

Productivity Commission research released today 4 confirms this. This research examines so-called ‘wage decoupling’ – defined as average annual labour productivity growth minus average annual producer wage growth. We find that since 1995, only two sectors have exhibited strong wage decoupling: mining (4.9 percentage points) and agriculture (3.4 percentage points).

These two commodity-exporting – and highly productive – sectors account for just 4% of total employment, but around 18% of total value added. They therefore have a disproportionate impact on economy‑wide estimates of wage decoupling.

If we strip them out and examine the rest of the economy, average decoupling since 1995 has been just 0.1 percentage points. And in more than half of the sectors outside of mining and agriculture, decoupling was zero or negative.

In other words, since 1995 the wages of over 95% of Australia’s working population have risen very closely in line with productivity. And the average income gain from a productivity lift is more than eight times the potential gain from eliminating the limited decoupling across most of the economy. So productivity growth remains the main policy game.

Indicators of market dynamism

Given this, what should we do about our weak productivity performance? This committee is rightly focused on competition and market dynamism. 5

In a market-based economy like Australia, it is reasonable to expect that there would be a close link between competition, dynamism and productivity.

Business decisions are driven by the pursuit of profit and the avoidance of losses. Market prices guide those decisions, and are “a signal wrapped up in an incentive”, providing information to businesses about hiring decisions, where it invest, what to produce, how much to produce, when to sell it, where to sell, and to whom.

Well-functioning markets and healthy competition between businesses lead to lower prices, higher quality goods and services, greater consumer choice, and ultimately higher living standards.

However, if competitive forces are dulled or distorted, this can lead to incorrect price signals being provided, and poor outcomes for consumers and workers.

Australia’s economy and our markets are changing. Markets for services – which tend to be relatively labour intensive – now dominate, with 80% of activity and 90% of employment now in services. And many services are delivered without benefit of either the signal or incentives of markets. In many instances, labour is the service – think of health, aged care and disability care.

I will return to these points a bit later.

Our submission to this inquiry 6 focusses on a range of data which are proxies for market dynamism: firm entry and exit, concentration, price-markups, labour market mobility and investment.

Let me highlight some the key points of our submission in relation to these proxies.

  • While aggregate firm entry and exit rates can be an indicator of ‘creative destruction’ in the economy, they are not necessarily suggestive of broader underlying trends regarding dynamism.
  • Measures of market concentration – such as the four firm concentration (CR4) index or the Herfindahl–Hirschman index (HHI) – should be interpreted with a great deal of care, particularly at the aggregate level.
    • Indeed, the proposition that market concentration by itself must be negatively associated with productivity growth and economic well-being has been questioned by economists for at least 50 years. 7 As a matter of economic theory, it is straightforward to derive examples where a higher HHI (an indicator of greater market concentration) is associated with higher – rather than lower – overall economic wellbeing. 8 And in practice, as our submission discusses, the link between concentration and wellbeing greatly depends on the economic context.
    • In any case, at the industry level, our analysis of concentration dynamics shows that most Australian industries are not concentrated, and very few of became concentrated from 2006 to 2021. Moreover, the distribution of concentration measures across industries was relatively stable between 2006 and 2021.
  • Thus, the claim that the Australian economy is as a whole becoming more concentrated does not seem to hold up. Most Australian industries are not highly concentrated, and this has not changed much.
  • Related to this, firm mark ups – the gap between price and marginal cost – are often pointed to as indicators of market power and weak dynamism. There is some evidence that markups have been increasing in Australia.
    • However, this evidence is plagued by measurement issues. And, from a policy perspective, interpreting aggregate evidence on markups is not straightforward.
    • For example, if costs and prices are falling together (so that consumers are better off) but prices fall at a slower rate (so that markups rise), what is the appropriate policy response?
    • Or, to take another example, in the presence of large fixed costs (due, for example, to high up front capital costs), a gap between price and marginal cost may be required simply for a business to break even. In the presence of high fixed costs, higher markups could, in principle, even be associated with lower profits.
  • Some have gone further and claimed that “greedflation” abounds at the aggregate level in Australia, with firms across the economy using the recent increase in inflation to ‘unfairly’ mark-up prices over costs and increase profits.
    • The Commission does not agree with this claim. As our submission notes, overall, aggregate evidence does not suggest that high price margins associated with exploitation of market power have played a significant role in accentuating the higher input costs and supply constraints that precipitated the current inflationary episode.
  • Indeed, some may counter that the greedflation thesis seems to have been quickly overtaken by the facts.
    • Australia’s annual inflation rate appears to have peaked at 7.8% and has now declined to 6%. 9
    • Company profits declined by 13.1% in the June 2023 quarter, and fell by 11.8% over the year to June. 10
    • Some might ask: if there is greedflation, why were firms apparently greedy up until recently, but have now suddenly stopped being greedy?
  • As discussed at our appearance before this committee earlier in the year, an inflationary environment should not give businesses new opportunities for sustained exploitation of market power – if they possess this power, they will exploit it at any time.
    • And, consistent with our work on wage decoupling, our submission to this inquiry notes that stripping mining out of the corporate profits data indicates that profits have been stable as a share of total factor income. In fact, overall profits as a share of factor income declined to 30.2% in the June 2023 quarter, the lowest level since December 2021

To conclude on indicators of dynamism: while there are some indications that dynamism may be declining in Australia, it is difficult to draw specific policy implications from the data.

Advancing prosperity

However, the answer is not to sit back and declare that it is all too hard. On the contrary, there are several policy measures that the Commission believes would stack the odds in favour of greater competition and dynamism in Australia, and which would give us the best chance of meeting and overcoming our productivity challenge.

Some commentators have said that we should focus on a narrow set of policies – climate, technology and supply chains. These are obviously important, but we think the reform agenda is much broader.

In any case, it may come as a surprise to these commentators that the Commission and its predecessors have been thought-leaders in climate policy for more than three decades, with our first publication on the costs and benefits of emissions reductions appearing in 1991. 11

For all the talk about supply chains, as far as I am aware, our 2021 report on Vulnerable Supply Chains 12 remains the only rigorous, evidence-based analysis of that issue in Australia.

And of course, our annual Trade and Assistance Review 13 – now in its 49th year – provides up-to-date and cutting edge analysis of industry assistance and trade policy developments.

Advancing Prosperity sets out 71 policy recommendations across 29 reform directives. Our policy recommendations fall into five general areas:

  1. Building an adaptable workforce to supply the skilled workers for Australia’s future economy.
  2. Harnessing data, digital technology and diffusion to capture the dividend of new ideas.
  3. Creating a more dynamic economy through fostering competition, efficiency and contestability in markets.
  4. Lifting productivity in the non-market sector to deliver high quality services at the lowest cost.
  5. Securing net-zero at least cost to limit the productivity impact caused by climate change.

Our report also sets out a detailed prioritisation framework and implementation roadmap for meeting and overcoming our productivity predicament.

Many of recommendations are directly or indirectly related to competition and market dynamism, particularly given the changing structure of Australia’s economy towards services. For example in a service-based economy, fit for purpose labour market regulation is key, particularly in relation to the gig economy, which can be an important source of market entry, innovation and dynamism.

For the most part, real wages and productivity move together. Finding productivity improvements leads to increases in real wages. So labour market settings need to facilitate and indeed maximise cooperation between parties and encourage innovation, reward aspiration and effort, and preserve fairness.

Shoehorning platform work into other employment categories would put at risk its productivity impacts and its benefits for gig workers. But gig workers have genuine concerns that need to be taken very seriously. Improved safety protection and access to dispute resolution are warranted.

Our migration policy settings should be viewed through a productivity lens and focus on the composition of the intake at least as much as the aggregate quantum. In this regard, we think there is great merit in moving towards a system that places a greater emphasis on employer nomination, and less of a reliance on skill lists.

Reforms to occupational licensing arrangements would also assist with the better allocation and matching of scarce labour resources across the economy.

On digital infrastructure, we think there needs to be better regional internet connectivity, as well as policies in place to ensure that there is more transparency around digital infrastructure funding decisions and evaluation of previous investments.

And the market for internet connectivity may now be sufficiently developed to allow for a more competitive method of allocating funds.

Openness to trade, investment and international migration are key drivers of market dynamism and prosperity more generally. We recommend getting rid of our remaining tariffs, and progressively removing Australia’s anti-dumping and countervailing measures, and subjecting any new measures to an economywide cost benefit test.

We should increasingly accept product standards adopted in other leading economies as ‘deemed to comply’ with Australian standards. And we could bring application fees for proposed FDI into agricultural land assets closer into line with other forms of investment.

On taxation, we recommend a suite of reforms. In addition to abolishing Australia’s remaining tariffs, we also recommend abolishing stamp duty on insurance premiums, moving towards a more system of efficient road user pricing, and moving away from taxes that discourage encourage efficient asset transfers and capital allocation, such as stamp duty on property transactions.

Related to this, our systems of business and industrial planning and zoning could be improved, with an eye towards encouraging greater geographic competition between businesses. And there is scope for state and territory governments to improve public transport pricing arrangements.

Finally, on merger policy: we conclude that overall, there does not appear to be a strong case for the implementation of a new formal authorisation regime, of the kind proposed by the former chair of the ACCC. Instead, we think there may be more value in the ACCC further considering its internal merger review processes; and for government to consider how best to avoid perverse incentives across merger clearance procedures.

Competitive Neutrality Policy

To conclude, I would like to mention one aspect of the Commission’s responsibilities that we believe warrants a close look, and which could benefit from reform: the area of Competitive Neutrality.

It has been 30 years since the Hilmer Report on National Competition Policy – which was introduced by Prime Minister Keating as an “important contribution towards furthering competition policy in Australia”. 14

A key part of the Hilmer report dealt with the principle of competitive neutrality – the proposition that state-owned enterprises and private businesses should compete on a level playing field. Competitive neutrality (CN) policy is also concerned with government businesses that may compete with each other.

It has long been recognised that favourable conditions for government enterprises in relation to their private sector counterparts can distort all kinds of economic decisions – particularly around innovation, investment and hiring, ultimately leading to suboptimal outcomes for consumers and workers.

Those artificial cost advantages can also lead to resources (capital and labour) flowing to government businesses simply because of their government ownership rather than them being the most efficient (productive) users of resources. Where these resource allocation distortions occur, the nation’s productivity suffers.

The principle of competitive neutrality is likely to become increasingly important, particularly given the growth of the non-market sector (for example, in the care economy) and the re-entry of governments into some of the economy’s “commanding heights”, such as energy and telecommunications.

The Government's approach to operationalising CN principles is set out in the 1996 Competitive Neutrality Policy Statement 15 and the Competitive Neutrality Guidelines for Managers. 16 Unfortunately, Australian Government businesses sometimes fail to comply with these obligations and guidelines.

An integral part of competitive neutrality policy and its implementation is a competitive neutrality complaints handling mechanism, which is intended to bring some discipline to the implementation of competitive neutrality and provide ongoing accountability.

The Australian Government Competitive Neutrality Complaints Office – the AGCNCO, a separate unit within the Commission – is that mechanism. It deals with any complaints and provides independent advice to Government following its investigations.

Any individual, organisation or government body with an interest in the application of competitive neutrality may lodge a complaint. While governments are not obliged to accept the AGCNCO’s advice, we think there needs to be a strong cop on the beat in relation to competitive neutrality.

However, although our competitive neutrality policy has served Australia well over the last three decades, it is deficient in several areas. To name just a few:

  1. Australia’s competitive neutrality policy lacks a credible enforcement regime.
  2. There is a lack of guidance on what a public interest test should embody and what it should look like.
  3. There are poor processes to ensure compliance with the policy by start-up government businesses.
  4. There is little guidance or principles on what constitutes ‘government’ in significant government business activities.
  5. There is little guidance on what policy or complaints process should apply for business activities with multiple government owners.
  6. There is no mention of the full range of possible material competitive advantages (other than those relating to tax, debt and regulatory neutrality and earning a commercial rate of return), and poor guidance on methodologies for estimating the value of some advantages.
  7. There is an absence of guidance on whether any identified cost advantages should be addressed by the imposition of a CN adjustment payment, or by directly addressing the source of the advantage.
  8. There is a need to reformulate the commerciality test in CN policy.

Australia recently signed up to the OECD’s Recommendation on Competitive Neutrality. 17 In light of this renewed commitment, and given this Committee’s – and the Government’s – focus on competition and dynamism, it may be an appropriate time to look more closely Australia’s competitive neutrality regime, with an eye to reform.

In this respect we support the earlier findings of the Competition Policy Review 18 (the Harper report), which recommended all Australian governments should review their competitive neutrality policies and complaint handling mechanisms to ensure they remain fit for purpose in the 21st century.

The Government’s recently announced two-year Competition Policy Review may provide a further opportunity to examine competitive neutrality policy.

References

Commonwealth of Australia (2015) Competition Policy Review, Final Report, March.

Demsetz, H (1973) The Market Concentration Doctrine: An Examination of Evidence and a Discussion of Policy, AEI-Hoover Policy Study 7, Washington DC. http://masonlec.org/site/rte_uploads/files/GAI/Readings/Economics%20Institute/Demsetz_Market%
20Concentration%20Doctrine.pdf

Industry Commission (1991) Costs and Benefits of Reducing Greenhouse Gas Emissions, Inquiry Report No. 15, November.

Productivity Commission (2021) Vulnerable Supply Chains, Study Report, Canberra.

—— (2023a) 5-year Productivity Inquiry: Advancing Prosperity, Inquiry Report no. 100, Canberra.

—— (2023b) Submission to the Inquiry into promoting economic dynamism, competition and business formation, Canberra.

—— (2023c) Trade and assistance review 2021-22, Annual report series, Canberra.

—— (2023d) Productivity growth and wages – a forensic look, PC Productivity insights, Canberra, September.

Robson, A (2011) Law and Markets, London: Palgrave Macmillan.

Footnotes

  1. PC (2023a) Return to text
  2. ABS Cat No. 5206.0 https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release Return to text
  3. https://www.rba.gov.au/speeches/2023/sp-gov-2023-09-07.html Return to text
  4. PC (2023d) Return to text
  5. As set out in our submission, economic dynamism is concerned with “the efficient adaptation to new demand and supply trends and re-organisation of resources (labour and capital) across the economy, supported by the creation of new knowledge and its rapid diffusion.” Return to text
  6. PC (2023b) Return to text
  7. See Demsetz (1973) Return to text
  8. See, for example, Robson (2011), chapter 10 Return to text
  9. ABS Cat No. 6401.0 https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release Return to text
  10. ABS Cat No. 5676.0 https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/latest-release Return to text
  11. PC (1991) Return to text
  12. PC (2021) Return to text
  13. PC (2023c) Return to text
  14. Statement by the Prime Minister the Hon PJ Keating MP, 25 August 1993. https://pmtranscripts.pmc.gov.au/sites/default/files/original/00008945.pdf Return to text
  15. https://assets.pc.gov.au/about/core-functions/competitive-neutrality/commonwealth-competitive-neutrality-policy-statement-1996.pdf Return to text
  16. https://assets.pc.gov.au/about/core-functions/competitive-neutrality/2004-competitive-neutrality-guidelines-for-managers.pdf Return to text
  17. The Recommendation was formally adopted on 31st May 2021 at the Ministerial Council Meeting. All OECD members have adhered. https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0462#adherents Return to text
  18. See Commonwealth of Australia (2015). https://treasury.gov.au/sites/default/files/2019-03/Competition-policy-review-report_online.pdf. The Commonwealth undertook a review in 2017. https://consult.treasury.gov.au/competitive-neutrality-review Return to text

Related publications

Promoting economic dynamism, competition and business formation

Advancing prosperity

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