Upskilling workers and slashing tariffs: key takeaways from the Productivity Commission report
“Advancing prosperity” is the title – and hope – of the Productivity Commission’s major five-yearly inquiry report released on Friday.
Its 1,000-plus pages include “29 reform directives and 71 specific recommendations”. It builds on the inaugural “Shifting the Dial” report released by the then treasurer Scott Morrison in 2017 with little apparent result.
Here are some of its key takeaways.
Why productivity matters
We don’t get wealthier over time unless we can produce more from a given amount of resources.
The decade to 2020 was dismal, with productivity growth sagging to just 1.1% a year.
Instead of doubling output in 39 years, something that would be achieved by the average pace of the 60 years to 2020, we’ll take 64 years to double output if we stay at the pace of the last decade. “The often touted ‘4-day week’ is that much harder to achieve,” the report says.
Why is productivity growth slowing?
A range of factors are at play, particularly a shift in the economy (here and in other wealthy nations) to more services.
Agriculture, mining and manufacturing tend to be easier to automate, and in the case of the latter, simpler to outsource to Asia.
Australia is relatively productive internationally in farming and digging, less so in services.
The “non-market” sector, mostly government, tends not to face much competition or charge according to its costs. This part of the economy is expanding, and on current trends, the share is roughly on track to grow from a quarter now to 40% over the next 40 years.
The private sector, though, is not much of a wellspring of productivity growth. “Some 98% of Australian businesses do not produce new-to-the-world innovations,” the report said.
How can the slide be reversed?
The report singles out five “reform pillars”, including making workers more skilled and adaptable, harnessing data and digital technology, and boosting competition.
One suggestion is expanding the powers of the Fair Work Commission to allow it to revise minimum wages in awards to “expand flexibility for many small businesses”, potentially cutting pay for some.
“[I]t is possible that under this new model, the FWC could make a change to awards that leads to gains for many workers even if some are made worse off,” the report said.
Similarly, “calibrated government intervention” is advised for the so-called gig economy. “Simply imposing employee status in all cases would effectively erode many of the productivity benefits and flexibility for workers,” it said, adding that a mandated baseline insurance might ensure protections exist.
Other ideas include nudging universities to create “nested” qualifications so students failing to complete their courses can still gain recognition for study they have done.
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Australia’s skilled migration should be overhauled so migrants become “an essential source of new ideas and information”. To that end, the government should replace skilled-occupation lists for temporary and permanent skilled migration with wage thresholds for employer-sponsored skilled migration.
Indeed, a better-designed visa for temporary skilled workers “could cut reliance on permanent migration (which typically entails greater fiscal risks related to the older average age of permanent migrants),” it said. The business innovation and investment permanent visas should also be abolished because of “poor fiscal outcomes”.
There should be an end to interventions that cause more economic distortion than they help: import tariffs, for instance, stymie $0.60 – $1.50 in economic activity for every dollar of revenue raised. Accordingly, the government “should unilaterally reduce Australia’s remaining statutory import tariff levels to zero”.
Climate change finally a focus
Unlike the 2017 inquiry, this report devotes a large section to the heating climate. “By some measures, the threat faced by Australia from climate change may be larger than for other major economies,” it says.
However, decarbonising in the next three decades to get to net zero “will be a huge transformation”. How well the transition goes will be “a major determinant of the living standards of all Australians”.
Most efficient would be “a single, explicit carbon price”, a policy the Abbott government scrapped in 2014.
In its absence, the report recommends expanding the federal government’s safeguard mechanism beyond the 200-plus industrial facilities to include electricity generation. That move would mean a bit over half of national emissions would be covered, roughly double the current proportion.
Any action, though, may drag on productivity. “Because the cost of carbon emissions has not been reflected in GDP or business profits, abatement efforts could … increase the cost of production and could put downward pressure on measured productivity, at least in the short term,” it said.
While calling for governments to prepare communities for worsening extreme weather, the commission warned against some policies. Governments, for instance, should avoid expanding climate-related insurance sector interventions and set a medium-term timeframe to ditch the Northern Australia Reinsurance Pool.
Such pools “risk subsidising the movement of individuals, households, and businesses into harm’s way” by masking the price signals.
Submarines offer mistakes to learn from
The treasurer, Jim Chalmers, says the government was already “progressing, in some form, more than two-thirds of the 29 reform directives”.
Chalmers also cited this week’s nuclear submarines deal costing as much as $368bn as part of the efforts to spur productivity. Investments like Aukus would broaden and deepen our economic base, he said.
As it happens, the report singled out submarines as “an example of what can go wrong”. Australia’s 10 Collins class boats were estimated to cost $100m each at their conception in 1982, a sum that ballooned to $850m by 1999. Even then, not one of the five subs in the water that year “were performing adequately”.
“There are strong grounds for re-thinking defence procurement, drawing on advice from those outside defence,” the commission concluded.