2 November 2022

Address to the Business Sydney Federal Budget Briefing, Sydney


How investing in individuals, infrastructure and institutions will boost Australia’s productivity

[Acknowledgements omitted]

I want to talk today about the government’s productivity agenda, because productivity is fundamentally at the heart of increasing living standards. The reason that Australians today earn more in a single day than our ancestors did in a week in 1901 is that productivity has increased. We produce more whether we’re in manufacturing, agriculture or services.

That additional productivity means that Australians enjoy longer lives, healthier lives, we’re able to be more generous to those domestically and overseas. Whether your priority is building more roads or assisting the most vulnerable, you should be in favour of boosting productivity.

And for me as an economist I see productivity as coming down to three key criteria – investing in individuals, investing in infrastructure and investing in institutions. And so I want to talk about those three areas – individuals, infrastructure and institutions – in my remarks today.

First, when it comes to individuals, human capital is one of the chief drivers of productivity. We know that those who get more years of schooling are more efficient in what they do and more likely to be able to teach their co‑workers. Rough rule of thumb: each additional year of schooling boosts earnings by about 10 per cent. Much of that gain is a direct productivity offshoot.

And yet if we look at our schools, over the course of recent decades on the OECD’s PISA tests we’ve been going backwards. Australian Year 9s score approximately where Australian Year 8 students were at the turn of the century. One of the priorities of our government is to get to the bottom of understanding that and to invest in ensuring that we have better school performance.

My sense as an economist who once worked in the economics of education is that improving teacher quality has a big part to play in this, and that attracting and retaining great teachers in our schools will be critical. In Jason Clare, we’ve got an Education Minister who is an unashamed backer of Australian teachers, whose first act when he got the portfolio was to go and see one of his favourite high school teachers. That’s going to be important for us as we seek to work in partnership with Australia’s teachers in order to ensure that teaching is the high‑status profession that characterises many of the world’s best‑performing economies.

We also need to open up places in education institutions. The Albanese Government has announced a couple of hundred thousand fee‑free TAFE places and tens of thousands of additional university places, recognising that it’s absolutely vital in an increasingly technological economy to increase the amount of education. Just as Australians in the post-war era moved from being an economy – society where most people would leave school at Year 9 or Year 10, as my grandfather did, to an economy now where it is the norm to finish Year 12 and to take on some post-school studies. So, too, we need to envisage a future in which post-school education becomes ubiquitous.

That won’t mean universities for everyone; it might involve vocational training. But it needs to involve the kind of training that prepares people for life‑long learning. Think of somebody who’s leaving school this year. That means they were born in the first few years of the 21st century and will likely be in the labour market until the 2060s or 2070s.

We don’t know what the labour market of the 2060s or 2070s will look like, but you can get a sense as to how different it will be from today’s labour market just by rewinding the tape, envisaging what the work forces, what the labour markets of Australia looked like if you go back a generation or two. So life‑long learning is going to be critical to boosting productivity.

Another way in which we need to invest in individuals is ensuring that we’re tapping the economic potential of the 51 per cent of Australians who are women. One of the ways in which women’s labour force participation has been held back is through a childcare system which has often been too piecemeal in order to support combining parenting with work.

In our budget we announced reforms which will benefit some 1.26 million Australian families. It will provide better educational opportunities for kids in care. But it will also ensure that we don’t have that pernicious situation in which too many Australian working mums find themselves saying, “It’s just not worth working day 3, 4 and 5 because of the price of child care.” That’s bad for their productivity but it’s also bad for the firms for which they work. So ensuring that we’re getting maximum labour force participation out of the 51 per cent is a core part of investing in individuals.

Second, there’s investing in infrastructure. We know that the infrastructure of the 21st century will look different from the infrastructure of the 19th and 20th centuries. More investment in the National Broadband Network to facilitate a hybrid model of working which is increasingly becoming the norm. Surveys of Australian workers suggest that many want to continue with some days at home and some days in the office.

But if you’re sitting waiting for a cruddy broadband connection to connect you in to your co‑workers, productivity suffers. So Michelle Rowland is focusing on rolling out more broadband and improving the quality of the NBN around the country.

We also need to be investing also in energy networks of the future. The energy transformation over the course of the next decades is going to be as big as anything we've seen in the energy market before. We're looking at more offshore wind, ideally located at sites which are housing coal‑fired power stations nearing the end of their natural life. That provides jobs and makes good use of the infrastructure and the connecting cables.

We need more wind and solar, a better connected grid through our Rewiring the Nation Plan, and investments in batteries in order to provide greater sustainability of the grid. We’ve seen the challenges that being beholden to international gas prices has imposed on Australian households and manufacturers.

The one thing that we know about renewables is they’re not subject to the vagaries of international markets. Just to give you one example of that, my own jurisdiction of the ACT is now 100 per cent renewables. In the middle of this year the independent regulator announced that electricity prices would be going down by 1.25 per cent. While electricity prices are going up in much of the rest of Australia, pure renewables allows you to be cutting the prices. That’s the potential if we get this electricity transformation right.

We also need to be transforming our transport system, ensuring we’ve got a steady transition through to electronic vehicles and building the charging stations around the country that are essential to ensuring that people don’t suffer the range anxiety that holds back too many people from buying electronic vehicles.

Third, if we want to boost productivity, we’ve got to improve our institutions. In my own area, competition reform is central to how I think about productivity. We know in the 1990s Australia saw the best decade of productivity growth in the post-war era. One of the reasons for that was the competition reforms underpinned by Fred Hilmer’s work in his in 1992‑1993, and the national competition policy reforms that flowed in 1995: bringing all businesses into the ambit of our competition law, getting rid of outdated regulations such as the laws that required that New South Wales bakers only baked bread at certain times of the day, and unlocking a surge in productivity that the Productivity Commission has estimated permanently increased GDP by 2.5 per cent. Put another way, the typical Australian households is $5,000 a year better off as a result of those productivity-boosting reforms.

But the challenge now isn’t to go back and rewind the Hilmer tape; it’s to look at the new blockers to more competition in the Australian economy. We’re just passing through parliament changes to unfair contract terms to ensure that when small businesses are negotiating with large firms they’re not subject to capricious clauses that tell them that they can only cancel with ridiculously long notice periods or allow the more powerful party to unilaterally change the contract.

We’ve seen in Australia over recent decades a decline in the start-up rate. We’ve seen an increase in market concentration. We’ve seen a growth in mark‑ups – the gap between production prices and sale prices. And all of that suggests to me that the Australian economy isn’t as dynamic as it should be. So competition reform will be an essential part of how we think about the institutions that underpin productivity.

Multinational tax is another area where we’re seeking to bring about a level playing field – closing loopholes around debt deductions and royalty payments in the most recent budget in order to not only add revenue to the government coffers but also to ensure that firms, Australian firms aren’t competing with one had tied behind their back. If you’re an Australian firm, you want to be focusing on serving your customers well, looking at your workforce and innovating; not about thinking about finding the next tax loophole or, worse still, worrying that your competitors are getting a competitive advantage on you because they’re exploiting tax loopholes.

We’ve announced a review of the Reserve Bank, a fundamental institution in Australia right now, to ensure that it is fit for purpose. Looking at a range of questions around the Reserve Bank’s governance, the board structure and the way in which its targets are focused. Led by Renée Fry‑McKibbin, the Reserve Bank review is going to look at the learnings around the world, what other central banks are doing and how we can ensure the Reserve Bank of Australia is as strong as possible.

And there’s evaluation. In government we need to be making sure that every dollar makes a difference. And in doing that we need to be finding out what works and what doesn’t. This isn’t an ideological exercise; we know that if you want to get a new drug on to the Pharmaceutical Benefits Scheme you need to show that it works by running double blind randomised control trials. Yet too often we roll out policies which aren’t properly evidence based and aren’t tested.

I’d like to see better evaluation of policies because I’m aware of so many contexts around the world from development economics to corporate strategy in which high‑quality evaluation of policies completely reverses conventional wisdom. The testing of policies ought to be at the heart of a government that wants to best spend public dollars. And you’ll be hearing more from us about our evaluation agenda going forward.

I’m aware that in speaking to Business Sydney I’m following in the shadow of Treasurer Jim Chalmers who addressed your business agenda – breakfast yesterday morning and that you’re in an environment in which you’ve been hearing a lot about the budget. So I’m really keen in this context to learn also from you. And as we have a conversation, as we open it to up Q&A, please do use the chance to let me know the sort of pressures and challenges your facing.

I don’t think in my professional experience we’ve ever faced an economy in which there was so much uncertainty as to what the next year holds. And better understanding that uncertainty is one of the chief challenges for us as economic policymakers. So tell me your stories. Give me your perspectives. It’s really important that we’re getting this next 12 months right, and it’s vital, too, that we have that long‑term productivity focus as we look to invest in individuals, infrastructure and institutions to build a stronger economy and a fairer society. Thanks very much.