Australian economy could miss out on $90 billion if productivity not addressed, report warns

The Australian economy could gain as much as $90 billion in the next five years – but only if the Federal Government implements enough ways to boost productivity in the years after the mining boom ends, a report from research group McKinsey & Co argues.

The recent debates in the business community over higher wages, the GST threshold and the recent Fair Work review have been amplified by the release of the report.

The McKinsey report repeats the argument that Australia’s lagging productivity is a threat to growth and that this blind spot is being overshadowed by China’s hunger for resources.

Business leaders say it’s yet another reminder of why key reforms, including industrial relations changes, should be implemented sooner rather than later.

“This is just another reminder over what’s happened over the past several years with the commodities boom,” says Australian Chamber of Commerce and Industry economics and industrial relations head Greg Evans.

“This report basically says we need to ensure that we embark on those productivity improvements now, otherwise, we’ll pay a heavy price.”

The report says Australia’s income growth could drop to just 0.5% in the next few years, and that $135 billion of 2017 income depends on the continued strength of investment and terms of trade.

“Although they may not always feel it, Australians are more prosperous than ever,” it says, referencing the fact the country stands in sixth place among OECD countries ranked by per capita GDP. “Australia overtook the United States in terms of income per head back in 2005.”

But there are key risks, it says.

“Australia’s reliance on its resources sectors could leave the economy vulnerable to any growth slowdown in China, volatility in commodities markets, and the eventual normalisation of resource prices when supply catches up with demand.”

The report highlights that growth in labour productivity has fallen to just 0.3% per annum in the last six years, compared to 3.1% from 1993 to 1999, and that wage inflation has also grown at 4.4% per year over the same period.

“The amount of capital per hour worked is 25% higher today than it was six years ago – yet workers on average are producing only 7% more output per hour.”

There are some significant drags on the economy, it warns, including capital productivity, which lowered income by $43 billion between 2005 and 2011.

The bottom line, it says, is that “if productivity growth doesn’t recover, Australia may have little or no income growth in the future”.

The potential benefits are significant. Instead of growth slowing to 0.5% in the worst case scenario, the best-case model has income growth at 3.7% – although that’s still below the historical rate of 4.1%.

Business groups say the report highlights why the government should implement key reform, including changes to the Fair Work system.

Peter Strong, chief executive of the Council of Small Businesses of Australia, says the government should use the report as an opportunity to leverage significant change.

“From our point of view, the obvious one is superannuation – it’s a drain on business. Stick that on PAYG. The other area is this shortfall in GST collection. Change that and you can get some significant impact.”

Evans told SmartCompany the benefit of the report is that it highlights an issue that may have been ignored over the past few years.

“It sounds another alarm about the potential risks of ‘business as usual’ and reaffirms we need to address the key drivers of improving productivity including dealing with workplace relations flexibility, tax reform, inefficient energy markets and the high cost of burdensome regulation.”

This article first appeared at SmartCompany.