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PC News - December 2017

Shifting the dial: Improving Australia's productivity performance

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The Australian Government asked the Productivity Commission to undertake an inquiry into Australia’s productivity performance and to recommend reform priorities. The review is the first in a series, to be undertaken every five years, of Australia’s productivity performance, with the aim of developing and prioritising reform options to improve the wellbeing of Australians.

The Productivity Commission’s first Review proposes a Joint Reform Agenda across all Australian jurisdictions to shift the orientation of reform and to ramp up the ambition for policy change in Australia. It is not a shopping list of things to do tomorrow in the ‘microeconomic supermarket’, but a coherent grouping of options that take some planning to implement over the medium term and require cooperation.

Governments and commentators should be wary of the seductive claim that something is well under way already in the areas under contention. While the policy issues we raise may seem familiar, Commission analysis shows that the headline recognition is often not supported by reality, or has not yet achieved the cooperation of all of the necessary participants.

The imperative for a new way of thinking about productivity and prosperity stems from two major factors.

First, income growth, particularly for wage earners, has stalled. This has partly been driven by the end of the resources boom, which gave Australians the benefits of high commodity prices. But of more concern is the diminishing role played by multifactor productivity, which measures the benefits derived from doing things better through learning, innovation and diffusion. Notwithstanding that all around us, new digital services and information technologies have abounded, this form of productivity has been weak in Australia, a malaise whose reach is global (figure 1).

Figure 1: Multifactor productivity has fallen away since 2003
Australia’s long-run productivity trends, 1973-74 to 2015-16a

  • Percentage points

    This figure decomposes market sector labour productivity growth into contributions from capital deepening and multifactor productivity growth according to aggregate productivity cycles. It shows that the contribution from multifactor productivity growth, on average, fell since the 1990s, and the average over the past incomplete cycle remains below long run averages.

    a Relates to 12 industry market sector

    b Rate of increase in capital per worker

    Source: Productivity Commission 2017, Shifting the Dial: 5 Year Productivity Review, Supporting Paper no. 1, figure 4

Second, the type and focus of a productivity agenda has to reflect the contemporary structure and emerging directions of the Australian economy. Productivity enhancing reforms undertaken in the 1970s and 1980s (floating the exchange rate, liberalising capital markets, reducing industry assistance, privatising government business enterprises, workplace reforms, and changes to competition policy) underpinned significant productivity growth in the 1990s. While previous reform focused on the market sector, achieving better outcomes now requires a focus on the non-market sector (mainly education and healthcare) and on the quality of the cities, which is where 80 per cent of Australians live. The non-market sector now accounts for around 30 per cent of employment, and will further grow in significance. These areas of the economy matter to all people. Everyone wants an effective healthcare system, good schools and universities, and cities that function well.

The Commission’s key reform priorities are:

  • more integrated healthcare that places the patient at the centre, and that manages, and prevents the onset of, chronic ill health
  • an education system that supports better teaching in both schools and universities
  • cities that ease the costs of moving around and locates infrastructure and services where people most value them.

Better health care to reduce chronic illness and lift participation

Australia faces a rising wave of complex chronic health conditions that will lead to many years of life spent in ill-health and lower involvement in work for many people, and rising costs for the health care system (figure 2). Much ill health is preventable or, if present, could be better managed. For example, 96 per cent of the burden of disease posed by diabetes is preventable, including by stemming obesity levels. More than one in four adults – close to 5 million Australians – are currently obese, with a preventable disease burden only outweighed by smoking.

Figure 2: Australians live more of their lives in ill-health
Years spent in ill-health as a share of life expectancy

  • Share of life expectancy (%)

    This figure depicts years spent in ill health as a share of life expectancy. Australia has the third highest share in a comparison of thirty six countries, indicating that Australians spend relatively more time in ill health.

    Source: Productivity Commission 2017, Shifting the Dial: 5 Year Productivity Review, Supporting Paper no. 4, figure 7

Prevention and management of complex health conditions, by integrating care by GPs and other clinicians with care in hospitals, is a key initiative. Change can be orchestrated locally if the Australian, State and Territory Governments move away from centralised control, leaving much greater scope for local experimentation and flexibility in solutions at the health district level.

There should also be a move to the full adoption of patient-centred care, where the outcomes and experiences of people are the key focus.

Suppliers, rather than patients, are currently the centre of the current system – a cultural anachronism that many people, including some key professional bodies, are challenging – with only partial success. (As just one symptom of this, the costs in unnecessary waiting borne by Australians in doctor’s waiting rooms is around one billion dollars annually.) There are practical steps to change this, such as the systematic collection of, and action on, patient experiences. Getting clinicians to endorse this approach will be critical.

Ensuring diffusion of best practice is also an area inviting immediate action. For example, 75 per cent of acute bronchitis is treated with antibiotics, whereas the clinical evidence suggests a rate close to zero.

Reform of Australia’s health care system will not only improve patient outcomes, but offers the prospects of benefits of up to $140 billion over the next 20 years.

Improved educational outcomes to ensure workforce skills match future job requirements

Falling school results (figure 3) and concerns about teaching quality raise questions about the capacity of workers to adapt to the wave of economic changes predicted in coming decades. It is deeply troubling that a 15 year old in 2015 had the mathematical aptitude of a 14 year old in 2000.

Figure 3: The rising group of left behind
Change in share of students with the poorest maths skills, OECD 2003-2015

  • Percentage points change

    Refer to surrounding text for description of data displayed.

    Source: Organization for Economic Cooperation and Development (OECD); Program for International Student Assessment (PISA)

Instruction in areas where the teacher is unfamiliar with the discipline is widespread in certain subject areas. For instance, 30 per cent of IT teachers in years 7 to 10 have inadequate academic preparation in the field. If there are problems in the schools, these are even worse in the vocational education and training system, which is in disarray.

Universities will soon become the key vehicle for skill formation, yet their teaching function plays a subordinate role to their research role, and the outcomes for many graduates are poor. Many (dissatisfied) students are acquiring major debt to cross-subsidise research that has little or no connection to the quality of their degrees.

The Commission’s recommended reforms in this area include improving teaching quality, re-building the VET sector, providing genuine options for acquiring new skills as people switch jobs and careers, using new technological models for educating people, and improving employment outcomes for university graduates, including through the creation of teaching-only universities, and the potential application of consumer law to the higher education sector.

Better functioning towns and cities

Cities account for most of the nation’s output and employment. Forty per cent of Australia’s GDP is produced in Sydney and Melbourne alone, and with the rapid growth of these cities, this will inevitably grow. (To illustrate this trend, in 2015, Melbourne grew by more people every five days than Hobart added in the entire year.)

Australian cities face increasing pressures as they grow: congestion, poor infrastructure decisions, ad hoc and anticompetitive planning and zoning, and an unsustainable funding basis for roads (figure 4). Stamp duty taxes, while a bonanza in times of rising housing prices, are unfair and inefficient.

Figure 4: Road-related revenues are in structural decline

  • Share of GDP (%)

    This figure shows total annual government road related revenue, expenditure, and the difference between the two as a proportion of gross domestic product from 2003 04 to 2014 15. The figure shows that revenue has historically exceeded expenditure, but revenue has also been falling over the 11 years to 2014 15. Revenue and expenditure levels are now very close, although revenue still slightly exceeds the latter.

    Source: Productivity Commission 2017, Shifting the Dial: 5 Year Productivity Review, Supporting Paper no. 9, figure 1

The Commission’s recommended reforms focus on:

  • planning and land use policies, including the application of competition principles to land use regulation, and better provision for growth through streamlining development assessment systems. These sound like ‘dry’ matters, but having affordable services and housing options where people want them is central to peoples’ daily lives
  • improvements in public infrastructure provision and use. As the Commission noted in its 2014 public infrastructure report – which is still gaining traction – ‘white elephants’ should become an endangered species
  • establishing road funds, based ultimately on user pricing. This recognises that technological change will make fuel excise an ever-diminishing source of revenue for funding roads. Road pricing and consumer input into decisions will finally provide coherence to road construction and maintenance, escaping the present allure of projects with political appeal, but that may not be in the public interest
  • switching from stamp duties to taxes based on land value, which would avoid penalties imposed on those who choose to move (for either work or lifestyle reasons) and provide a more stable revenue source.

Market-based productivity reforms should not be overlooked

While the Commission’s recommendations focus on the non-market (services) sector, many opportunities to address market-based reforms still remain, including the persistent failure of Australia’s energy market, redundant regulations, and flaws in workplace relations. Putting a price on carbon, for example, is an essential requirement for creating a more certain environment for investment in generation.

How can change occur?

Achieving change will require a package of initiatives with buy-in and collaboration from all levels of government – local, state and national – with the States and Territories having significant responsibility. The Commission proposes a Joint Reform Agenda, to be negotiated between jurisdictions in 2018 and submitted to COAG for endorsement. Many of the reforms should be palatable because they have a ‘human face’ and produce no or few losers. No one wants clogged cities or clogged arteries.

The Productivity Review, including detailed recommendations, is available on the Commission’s website:

Shifting the Dial: 5 Year Productivity Review

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