The latest five-year review by the Australian Productivity Commission (PC) is a historically weak piece of analysis compared to previous reports, perhaps as a result of government pressure.
If you read between the lines on Treasurer Jim Chalmers’s recent comments, it appears the Commission is to sing its swan song sooner rather than later.
Prosperity and productivity go hand in hand, but what is “more broadly” doing attached to it, as well as to “progress?”
If a concept can’t be expressed in numbers, as “more broadly” certainly can’t, then the PC is not interested in it.
Instead of productivity, it would appear that the treasurer wants a body that goes hunting for things like “happiness,” “quality of life,” “equity,” “inclusiveness,” and “diversity.” This is not the PC as we know it and wouldn’t suit any of its current personnel.
Australia’s Productivity Commission is a little like a black swan when it comes to government institutions—institutions like this “shouldn’t” exist.
It was specifically instituted to speak truth to power on economic issues and has developed a reputation for rationality and bravery (in the Sir Humphrey Appleby sense). It has been a great contributor to the rational economic debate over its quarter of a century of existence.
Where the Report Hit the Mark
There are good aspects to the report. One is that it reminds us that Australia’s performance on productivity has been sub-par for the last two decades, as demonstrated in this graph of the OECD countries.
We are ranked 18th out of 24 for the period 1980 to 2005, while only doing slightly better for 2005 to 2019, where we are slightly above average. However, the total period is very middling, and as with most other countries, it has been declining.
The report remarks that wealth is linked to productivity, and this is neatly illustrated by a comparison of our GDP per capita to that of Ireland, the country with the highest productivity increase over both periods.
Ireland, the poor country that suffered from centuries of colonial abuse by the English and exported huge numbers of its poor to countries like Australia to escape famine and poverty at home, now has an income far above ours as a result of a highly productive economy.
The Productivity Commission quite rightly criticises some of the new government’s policies, such as returning to pattern bargaining and expenditure on infrastructure without proper cost-benefit analysis. These criticisms will be rejected by the government.
It also hides behind something it calls “Baumol’s cost disease,” which is the idea that as some sectors of the economy become more efficient, they will actually become a smaller proportion of the economy, and other less efficient industries will make up a larger percentage, making higher productivity difficult.
Australia has a large service sector, and it is difficult to improve productivity here—how many more patients can a doctor see in a specific period, for example?
Where It Missed
If I were planning my last performance, there are a number of notes I would hit.The biggest problem in the service sector is government services.
Perhaps the commission might have looked at how to reduce the size of the government sector (the Irish government has a share of the economy one-third less than Australia’s and a public service 25 percent smaller).
Taxation also bears down on productivity. What is the justification for taxing companies when their dividends are adjusted for personal rates of taxation, and depreciation is really just a timing issue.
What about the idea of treating companies like trusts and taxing the income in the hands of their owners, thus boosting companies as wealth generators?
But the biggest threat to productivity is the so-called “energy transition.”
While advocates pretend that renewables are clean, green, and cheap, they are none of the above. You cannot easily grow productivity while one of your universal inputs—energy—goes up in price.
The expense of renewables is recognised in the cost of carbon credits. We will all realise it soon as we see not just decreasing but negative productivity increases.
The Commission advocates for extending the Safeguard Mechanism beyond the 215 largest emitters to everyone.
This is crackers and contrary to the thrust of all Commission work to date.
The safeguard emission tells the largest emitters they must reduce emissions by an identical sum each year or offset them using a limited and price-capped pool of carbon credits.
This is Command Economy idiocy on steroids.
It will put the airlines, for example, out of business or out of reach of ordinary consumers in no time because there is no alternative for them apart from fossil fuels. Same for trucks and ships.
The PC could also have drawn attention to the fact that CO2 emissions are not just a factor in energy but also in the processes that produce fertiliser and plastics, to name but two.
Agriculture is supposed to reduce its emissions, but how do you do that without reducing the amount of product you produce?
And who is going to be first in line to lower their calorie intake or close their farm?
The Productivity Commission is about to be swept away. It could have left us with a blueprint for the future that would have echoed down the ages.
Unfortunately, this swan is dying quietly.
