Why Bullock Sighs: Australia’s Productivity Problem

A note to young leaders.

The RBA Governor, Michele Bullock, started her press conference yesterday with a big sigh.

I sighed too.

The RBA had just lifted the cash rate to 4.6%, the fourth rate rise this year and the highest cash rate in 15 years. All this despite rising unemployment, falling house prices and sluggish economic growth.

The Treasurer blamed the Middle East. Bullock didn’t: “The bottom line is that productivity is doing nothing.”

Every economy has a speed limit. It’s the rate at which GDP can grow without pushing inflation outside the RBA’s inflation target (2-3% pa).

There’s a simple way to think about this:

GDP = Total No. of Hours Worked x Output / Hour

So, it follows that:

Speed Limit for GDP Growth = Annual Growth in Hours Worked + Annual Productivity Growth

Hours worked grow roughly in line with population – in Australia, that’s about 1.5% pa.

So: Speed Limit for GDP Growth = 1.5% pa + Annual Productivity Growth

In the 1990’s, Australia’s productivity grew at about 2.3% pa, so our Speed Limit was 3.8% pa. That number was the dividend of the Hawke-Keating microeconomic reforms.

In the 2000’s, our productivity growth averaged around 1.4% pa, so our Speed Limit fell to about 3.0% pa. Still healthy.

Over the past decade, our productivity growth has averaged close to zero, so our Speed Limit today has fallen to 1.5% pa. Last year, our economy grew at 2.1%. Over the limit. Hence the rate rise yesterday.

That’s like a highway that once had a speed limit of 110km/hr – but is now at 45km/hr. If that happened on our roads, there’d be a national outcry.

This is why Bullock is sighing. The RBA cannot increase the speed limit, it can only enforce it. It cannot approve a mine, automate a factory, train an engineer, simplify a regulation or persuade a business to invest in technology.

That’s the role of the federal government.

Take a look at what Canada is doing. The Carney government recently announced a permanent “Productivity Mega Deduction”. A business will soon be able to instantly write-off the full cost of most new capital investments: software, computers, pipelines, mining equipment, rail, bridges, roads. And the Canadian government is promising businesses a federal decision on any major project within one year. One project, one review, one year.

That’s a government that understands where productivity growth comes from. It comes from capital investment, and capital goes where it’s most welcome.

Australia needs to follow Carney, and fast.

We have a choice. We can either keep handing out speeding fines to people driving at 50km/hr, or figure out a way to raise the speed limit.