Leaders Sideline Productivity Reform: Here's Why

The federal election leaders' and treasurers' debates last week covered many topics: from Trump's tariffs to the cost of living, energy supply and excise tax.

But one of the most consequential things for Australia's future prosperity was not mentioned - what either a Labor or Coalition government plans to do to kick-start productivity growth.

It's usually at this point - seeing the word "productivity" - that people switch off. So bear with me a minute.

Productivity is a much-maligned term, often thought to mean people working harder or longer. But that's not what it means.

Being more productive means getting more for the same amount of work - working smarter, not longer. For example, in 1901 it took 18 minutes of an average worker's time to be able to afford a loaf of bread.

Thanks to improvements in efficiency (think using a dough hook rather than hand-kneading) and rising wages, today it takes around four minutes of work to afford a loaf.

Why it matters to you

Productivity growth matters. Increasing output and decreasing prices is the main driver of increasing real incomes in the long term. It means you're able to purchase more (or better quality) goods and services as their relative costs go down and incomes increase.

But Australia's productivity growth is languishing. Reserve Bank analysis highlights that labour productivity grew only 0.2% per year over the six years to June 2024. The escalating global tariff war, and associated uncertainty, will threaten this further.

Poor productivity growth also has significant implications for the federal budget. The budget papers showed that a forecast return to a balanced budget in a decade's time is premised on a productivity growth assumption of 1.2% per year - which is optimistic.

Recent analysis from the e61 Institute shows even a slightly more realistic assumption of 1% would increase the budget deficit by 0.4% of Gross Domestic Product (GDP) and push out the return to budget balance.

What about all the inquiries?

So what can we do about it? Fortunately, the Productivity Commission has delivered several reports that deep dive into the problems and potential solutions.

The most recent report, Advancing Prosperity , was delivered to the government in 2023. It provided 29 reform directions and 71 individual recommendations, across over 1,000 pages of analysis.

While a small number of these have been picked up by governments, such as reforms to the temporary skilled migration system, the vast majority remain on the shelf.

There have been some initiatives aimed at stimulating productivity pursued by government outside of the Productivity Commission recommendations, such as the banning of non-compete clauses and nationally consistent licensing for electricians .

These are steps in the right direction, but relatively small ones. We need policies to tilt our economy towards being more flexible and adaptable, allowing us to take advantage of whatever the next world-changing idea or technology is.

Lots of talk, not much action

So why have we seen so little action on productivity reforms, and why is neither side of politics talking about our productivity problem?

There are a few likely reasons.

Firstly, as economists often like to remind people, incentives matter. Politicians are no different to the rest of us in that they respond to the incentives they face. And often productivity-enhancing reforms come with short-term costs (political, economic or social), while the benefits don't tend to materialise until the longer term.

With politicians (understandably) focused on re-election every three years, the prospect of incurring a clear short-term cost for a longer-term benefit isn't always a tempting one.

Secondly, the impact of productivity-enhancing reforms tend to be more uncertain than other policies.

For example, if we increase the level of JobSeeker payments, we can be fairly certain that those on JobSeeker will be able to consume more. While we may be confident about the direction of the impact of productivity reforms - such as improving the ability of the workers to find the firms that they best match with - it is harder to be certain about the size of this impact.

This makes it more difficult to concretely claim an individual policy reform will have benefits that clearly and significantly outweigh the costs.

No silver bullet on reform

Finally, when it comes to productivity-enhancing reform, there is no single silver bullet. Modern productivity reform requires a collection of policies enacted together, which may be politically more difficult due to the larger number of potentially negatively affected groups.

So what can we do to fix this? As constituents if you're door-knocked or approached by politicians in the election campaign over the coming weeks, then make sure to ask them what their plans for reviving productivity growth are.

Longer term, it is incumbent upon researchers and policymakers to create the burning platform for why productivity-improving change is needed, and what this means.

There are many issues Australia faces , and politicians and citizens have limited bandwidth. We should work to better highlight and communicate the benefits and trade-offs, rather than bemoan the lack of action from politicians simply responding to incentives.

The author thanks Aaron Wong, senior economist at the e61 Institute, for their contribution to this article.

Lachlan Vass is affiliated with the e61 Institute.