Australia's Productivity Problem Starts at Home

It’s claimed that Australia’s stagnant productivity is due to a lack of business investment. That's an easy argument: if companies aren’t investing in better technology and equipment, workers can’t become more efficient. 

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

The Rise of Consumption

Another part of the economy has surged: household consumption. This part of the economy has become a much larger slice of the pie over the last 60 years. So, what's fueling all that spending? A couple of possibilities:

• Welfare payments, such as the age pension, don't count as government spending in GDP. Instead, they’re considered a "transfer" of income to households (8% on average). This is then spent on goods and services, directly boosting consumption. With an aging population, more money is flowing this way. Those who loathe taxes will point out that they mechanically reduce disposable income. However, taxes are 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.

• The debt-fueled housing boom. Australia has one of the highest household debt levels in the world. Most of this debt is for mortgages. While buying a home is an investment, the cost of paying that mortgage and the value of "renting" your own home (a concept called imputed rent) are counted as consumer spending. This creates a powerful link between rising housing costs and rising consumption in GDP.

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 cutting-edge technology or innovative manufacturing. This is a logical choice for investors responding to massive demand fueled by household debt.

• 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 sectors, while essential (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.

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

Ultimately, Australia's productivity 'problem' isn't a lack of business investment. It's about where that investment is being directed, driven by a consumption model reliant on government transfers and household debt.

Written as part of an experiment with Gemini.

Additional References

• Australian Bureau of Statistics: National Accounts 
• Parliament of Australia: Social Security and Welfare
• Trading Economics: Australia Households Debt to GDP 
• Australian Institute of Health and Welfare: Welfare Expenditure