John Durie: Service-based economy dominates Australia, but productivity growth at lowest rate in 60 years

The Productivity Commission’s warning on the dominance of the services economy conversely plays into the hands of many small businesses which can now access digital benefits that a few years ago were out of reach.

The Commission’s interim productivity report, released on Tuesday, is the first of a series to be issued ahead of next year’s five-year review.

When that review comes, the hope is it makes a bigger policy impact than the Shifting the Dial report issued in 2017, which was warmly welcomed by the previous government before being left on the shelf.

The key message from the latest report is the Australian economy is now 90% service-based, which traditionally is harder to shift in productivity terms, but the key is for government to limit impediments to investment.

To be precise, the service sector accounts for 80% of output and 90% of employment, which is a long way from the sheep’s back or iron ore mines.

This is one reason why Australian productivity is growing at the slowest rate for 60 years.

The report noted: “If over the last decade, productivity had instead grown at an annual rate consistent with the average over the past 60 years (1.7% compared to 1.1%), gross national income per person would have been around $4600 higher (6%) in 2020.”

That is a meaningful change. 

Australians also work longer hours than about 60% of their OECD peers, according to the Productivity Commission.

Australia does well in personal services like hotels, cafes and gyms where it ranks in top five, but not so well elsewhere in the services sector. 

Government inaction is another factor after a decade in which successive federal governments have done little to boost long-term economic performance, particularly if it required talking with the state governments.

The grand push to replace stamp duty with land taxes only exists in the ACT and in a limited way in New South Wales because the federal government has sat on its hands.

The digital revolution

However, the data and digital revolutions that gathered pace during COVID-19 have opened the door for small businesses because Zoom meetings don’t need airfares to cross borders.

Technology has played its part more broadly too, with Netflix resulting in more viewers than the old video stores could have dreamed of and as the Commission noted, “in offices with the uptake of computer word processing power — fewer people are employed as typists or secretaries, but far more pages of documents are produced”. 

Likewise the benefits of cloud computing, taking photographs on your smartphone and telehealth are now within reach of everyone.

Granted, the CBD coffee shop will struggle as the white collar work force adopts to flexible hours permanently, but this should be offset by lower rents.

A GP based in the country should have more patients to choose from to offset the fact more regionally based patients can access top quality healthcare by phone.

The PC said “from near zero uptake in late 2019, General Practitioner (GP) telehealth consults jumped to over 12 million in mid-2020 — close to a third of total GP consultations”.

Productivity is traditionally measured by how many widgets you make an hour, but this doesn’t work so well in a services economy where quality improvements are sometimes as important as lower costs.

That said, the Commission noted you can get a smartphone for 16 hours work on the average wage today, compared to 60 hours back in 2000.

Around the world it noted there are more people with a smartphone than a flushing toilet.

The role of government

To get real change the Productivity Commission said “governments and businesses need to continue to adopt and adapt innovative business models”.

Also, a suitably skilled workforce (and training infrastructure) adept in non-routine tasks is required, along with access to data, much of which is collected through businesses not reliant on government funding.

However, government has a big role to play in the services economy, which was the basis for the now five-year-old Shifting the Dial report.

Healthcare, education, aged care and disability support are just three such behemoths where government can help with better regulation and funding models.  

The Commission noted “the pandemic has highlighted deficiencies in digital infrastructure and how a lack of effective cooperation between governments, businesses and households in Australia can hobble the economy during a crisis”.

“Changing priorities during the pandemic highlighted the need for consistent institutional structures and an adaptable workforce, while the labour shortages in the wake of the pandemic bring a greater focus on investment in labour-saving technology,” it added 

The Australian economy’s reliance on fossil fuels like coal and gas also means it is “highly exposed to downside risks associated with climate change”.

“Decarbonising the economy in line with international commitments over the next thirty years will have a non-trivial bearing on productivity outcomes,” the Commission said. 

The Commission said “the challenge will be to ensure that policy settings are sufficiently flexible and incentives are appropriately calibrated to support continued uplift as the COVID-19 recovery continues”. 

But it also urged caution when it comes to “fortress Australia” aimed at replacing overseas supply chains with high cost local  production just as import controls were applied in the post-World War Two era.