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Australia's Productivity Problem Starts at Home

Australia's lack of productivity growth being due to a lack of business investment is taken as a given. It's assumed that lack of incentives for business investment including franking credits and unwilling lenders are stopping technology from increasing worker efficiency and wages. 

In fact, business investment has paced the overall economy for decades. The real issue isn't lack of investment, but what's driving the rest of the economy.

Who's Down with GDP?

First things first: economies are measured in GDP, against which other measurements are expressed as ratios. Business investment as a percentage of GDP, and so on. 
GDP is composed of:
  • C = Consumption spending
  • I = Business Investment
  • G = Government Spending
  • X = Exports
  • M - Imports 

The GDP formula is: GDP = C + I + G + (X - M) 

Hey Big Spender

You can see from that chart that household consumption has surged. This is due to:

  • Welfare payments. The aged pension and other benefits do not count as government spending. Instead, they’re considered a "transfer" of income to households (8% on average). This is then spent on goods and services, directly boosting consumption. That is, they count as 'C', not 'G'. With an aging population, more money is flowing this way. 
  • Lower Taxes. While taxing to fund welfare mechanically reduces disposable income, welfare in developed countries are now funded by debt, which is why government debt as a percentage of GDP has also soared. Taxes are also redistributed to those with a higher propensity to spend, e.g. those who 'must' repair their only car versus those who may save rather than buy a third, further stimulating consumption. Redistribution thus increases consumption.

  • A secondary wealth effect as homeowners, feeling confident about the rising values of their homes spend more. 

Follow the Money

What does this have to do with productivity?

Business is reactive. It goes where it thinks the money is going to be. It responds to consumer wants and government diktat.

  • Australians want houses, so businesses build them instead of investing in technology. This is a logical choice for investors responding to debt-fueled demand. 

  • Governments want to "support the vulnerable" (particularly since COVID). So business, chasing subsidies, invests in the non-tradable service sector, such as social assistance and care services. These "essential" sectors (for neutralising populists, at least) will not generate the same long-term productivity gains as internationally competitive industries.

In these scenarios, business investment is not a separate engine for productivity; it's a byproduct of a consumption-led economy. It works to support what people are spending money on - housing and domestic services - rather than in areas that can scale into more bang for buck.

Even if business sectors have invested, the pay-off may be well into the future, dragging down productivity numbers within . Think upgrading a mine or 'gold-plating' electricity transmission. 

Hiring more tradies for your reno or funding extra aged care packages doesn't improve productivity. Automating a battery factory does.

You can't blame business for following the money.

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Location: Adelaide SA, Australia

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