WHEN it comes to Australia's economic prosperity, labour productivity growth leaves everything else for dust.
While many eyes are on the iron ore price due to the billions at stake for businesses and governments, the bigger prize in coming years will be labour productivity.
As a new MP after 20 years in the private sector I am often asked about my first impressions of public life.
My first response is that I am stunned by the self-interest, aggression and resources of some lobby groups walking the halls of Parliament House. This extends well beyond the large, successful companies and industries that are often assumed to dominate political lobbying. Instead, the most aggressive organisations are those dependent on government largesse for their future prosperity. Government programs or subsidies breed well-funded, slick lobbying machines who will say and do anything to keep the largesse alive.
“The silent majority of hardworking and politically disengaged Australians are too busy to turn up on Capital Hill to further their interests”
My second response is related. I see that middle Australia is friendless. The silent majority of hardworking and politically disengaged Australians are too busy to turn up on Capital Hill to further their interests.
But mainstream Australia does have one friend, a friend who looks after them without a lobbyist in sight. That friend is labour productivity growth. A report published by the Parliamentary Budget Office (PBO) lays out this story in stark terms.
If Australia is to service and repay its huge government and far larger household debts it will be more dependent on productivity gains than anything else. Small increases in productivity compound dramatically over time. As Einstein famously pointed out "compound[ing] is the eighth wonder of the world".
Avoiding debt servicing nightmares
The proposition is simple: we know that productivity drives incomes, and if our incomes are consistently rising, debt servicing is relatively easy. However, with flat or stalling productivity and incomes, debt servicing becomes a nightmare.
The PBO compares scenarios for labour productivity, workforce participation and the terms of trade (essentially, commodity prices) and the impact on government debt servicing. The high productivity scenario reflects what we saw in the 1990s (around 2 per cent annual productivity growth), a period of extraordinary growth, whereas the lower productivity scenario is in line with more recent observations (about 1 per cent growth).
The report tells us that a high labour productivity outcome will deliver $288 billion less public debt by 2025, equivalent to 10.1 per cent of GDP. Our deficit position is improved by $20.3 billion in the high productivity scenario. Most of this comes in higher tax revenues paid by employees and businesses. A modest amount comes from reduced welfare expenditure. Wherever it comes from, this is manna from heaven for a cash-strapped government.
While the report doesn't consider our mountainous levels of household debt (primarily mortgages), the same principles apply. With household debt levels approaching $1.9 trillion, this is the most pressing issue of all for most Australians.
In contrast, terms of trade impacts are more modest over the next decade, with differences of $156 billion in debt by 2025 across the scenarios. So iron ore does matter – just not as much as productivity. Labour force participation comes in third, impacting debt by $85 billion.
The big question is where will labour productivity growth come from to simultaneously raise incomes and service our debt?
The answer is investment, infrastructure and innovation.
This is why the federal government's proposed reforms are so critical. Massive and well-targeted investments in public infrastructure (such as road, rail and telecommunications) are essential, particularly when public investments have been well below par in the recent past.
Beyond mining's peak
Private investment targeted at newly-accessible markets in Asia will also add to wages, profits and debt servicing. Whether the markets are in agriculture, high-end manufacturing, resources or services, significant benefits should flow through to mainstream Australia. At a time when mining investment has peaked and is falling, we are seeing early signs of investment growth beyond resources.
Meanwhile, targeted innovation will add to productivity across labour and capital, particularly in government services. Whether it is applying new IT technologies, establishing new management practices or simple measures to increase workplace flexibility (currently blocked in the Senate), innovation is the cheapest lunch of all. Nowhere is this more pressing than the government-funded services that have been insulated from the productivity revolution that has been sweeping across the private sector for decades.
All Australians have an interest in productivity gains, but the incentive to champion them are muted. The benefits from these policies are dispersed across the population and extend to future generations. There are short term costs to some as jobs are shifted to new opportunities.
Fortunately, corporate Australia has much to gain from sensible mainstream policies like these. The fortunes of banks, retailers and many other companies rise or fall with the strength of the underlying economy. And while most chief executives understand this, the support typically falls well short of the vigorous grass roots campaigning we see regularly from opponents.
It is time for the business community to become a strong and consistent champion for productivity growth, and by doing so, stand up for middle Australia.
Angus Taylor is the federal member for Hume. He advised Australian and global organisations on strategy before entering politics.