How can Australia navigate an uncertain world? | Insiders: On Background

Key Concepts:

• Productivity: Efficiently marshaling resources (people, capital) to produce goods and services.
• Living Standards: Material well-being of the average person, driven by productivity growth.
• Global Uncertainty: Economic instability due to factors like trade wars and geopolitical conflicts.
• Free Trade: International trade without tariffs or other barriers.
• Future Made in Australia: Government initiative to increase domestic manufacturing and self-sufficiency.
• National Interest Framework: Rigorous assessment process for government investments in specific industries.
• Care Economy: Sectors providing care services, such as childcare, aged care, and healthcare.
• Hybrid Work: A work model combining remote and in-office work.
• Quality Regulation: Standards and oversight mechanisms to ensure quality in sectors like childcare.

Productivity: Definition, Importance, and Current Status

• Productivity is defined as how efficiently resources (people, capital) are used to produce goods and services.
• It is crucial because it drives long-term improvements in living standards. The average Australian today has material living standards that are four times higher than in the 1950s due to productivity growth.
• Australia's productivity performance has been "bumpy" recently. The latest data (year to December 2024) shows a 1.2% decline.
• The decade before COVID-19 saw an average productivity growth of 1.1% per year, the lowest in 60 years (historical average is 1.7%).
• Sluggish productivity growth has led to lower wage growth and stagnant living standards.
• Australia is not alone; many developed countries face similar productivity challenges.

Strategies to Improve Productivity (Beyond Politics)

• The Productivity Commission is developing a productivity agenda for the government.
• The overarching goal is to make Australia a great place to live, invest, and do business.
• Housing: Addressing housing affordability and availability is critical. Lack of housing near high-productivity jobs hinders economic outcomes.
  • The key finding is that excessive regulation across local, state, and federal governments has complicated building processes.
  • Removing red tape and green tape is essential to "build again," not just for housing but also for energy infrastructure.
• Tax and Industrial Relations: These areas are frequently discussed in the context of productivity.
  • Daniel Wood has been an advocate for broad-based tax reform.
  • Industrial relations are a common concern among businesses.
• Broader Productivity Agenda:
  • Ensuring businesses can adopt new digital technologies.
  • Improving the efficiency of the care economy.
  • Ensuring the education system provides workers with the necessary skills.

Global Uncertainty and Australia's Response

• The current global environment is characterized by uncertainty due to trade wars (e.g., potential Trump tariffs) and geopolitical conflicts.
• Australia, as a medium-sized open economy, has benefited significantly from globalization and free trade.
• The government is correct not to retaliate against potential tariffs. Modeling suggests that direct effects on Australia's growth rate are small. Retaliation and subsequent counter-responses would create broader uncertainty for businesses.
• Australia should advocate for free trade on the international stage, emphasizing its benefits and non-zero-sum nature.
• Focus on strengthening Australia internally by making it an attractive place to live and invest.

Future Made in Australia Initiative

• This initiative aims to increase Australia's self-sufficiency through investments in critical minerals, hydrogen, solar panel manufacturing, and quantum computing.
• Daniel Wood was previously critical of some aspects of this initiative.
• The embedding of the National Interest Framework into legislation is a positive development, providing a rigorous framework for these investments.
• The framework should be mandatory for all investments under the "Future Made in Australia" program, with transparent assessments.
• The concern remains that these policies could divert resources from more productive sectors of the economy, especially given current skill shortages.
• Government subsidies can distort the economy, and businesses may become overly reliant on them.
• It is crucial to have "off-ramps" built into these programs to avoid perpetual dependence on government funding.

Energy Costs and Affordability

• Low energy costs are critical for long-term productivity.
• Short-term solutions to lower energy prices are limited, often involving shifting costs to taxpayers through energy rebates.
• Australia's energy system is in transition, requiring significant investment in new generation capacity as coal-fired power plants are retired.
• It is essential to get the right market signals to ensure this transition occurs at the lowest possible cost.
• A review of the National Electricity Market is underway to address the post-2030 system.
• Nuclear power should be considered, but the numbers must "stack up," and market signals should drive investment decisions. Government intervention without market testing should be approached cautiously.

Care Economy Productivity

• Improving productivity in the care economy (childcare, aged care, healthcare) has been challenging due to its labor-intensive nature.
• Opportunities exist in new technologies, such as digital technologies and AI in healthcare, to improve treatment management.
• In aged care, robots can assist with physically demanding tasks, freeing up human workers for more important roles.
• Government policy design is crucial, ensuring appropriate signals for resource allocation, avoiding overpayment to providers, and promoting market competition.

Public Service Size and Efficiency

• Debates about cutting the public service are often symbolic.
• If cuts exclude frontline and care sector workers, the impact on the overall budget and economy is likely small.
• Reducing public service capability could hinder the implementation of reforms.
• The size of the public service, as a share of the population, has decreased over the past 20 years.
• There is no strong evidence that the public service is excessively large.

Work From Home (WFH) and Hybrid Work

• Research suggests that "well-managed hybrid" work models (2-3 days in the office, 2-3 days at home) have small, potentially positive impacts on productivity.
• Hybrid work allows for face-to-face collaboration and mentoring while providing flexibility.
• Fully remote work may negatively impact productivity.
• Hybrid work has been shown to support women's participation in the workforce and greater participation of people with disabilities.
• It expands the potential pool of workers, which is beneficial for the economy.

Childcare Sector Regulation

• Recent reports have raised concerns about abuse and neglect in the childcare sector, particularly in for-profit centers.
• Quality regulation in this sector is critically important.
• The Productivity Commission has recommended more frequent assessments under the quality framework. Current intervals of up to nine years between checks are unacceptable.
• The commission also recommended establishing an early learning and care commission to oversee the national picture, as state governments are primarily responsible for regulation.
• The government is still considering this recommendation.

Synthesis/Conclusion:

The interview with Daniel Wood highlights the multifaceted nature of improving Australia's productivity and economic resilience in an uncertain global environment. Key takeaways include the need to address housing affordability, promote free trade, carefully evaluate government interventions in specific industries, optimize the energy transition, enhance productivity in the care economy, and embrace well-managed hybrid work models. Rigorous regulation and oversight are crucial in sectors like childcare to ensure quality and safety. While global challenges are significant, focusing on domestic strengths and strategic policy reforms can position Australia for long-term prosperity.