Of all the economic challenges facing Australia, the slowdown in productivity growth is arguably the most consequential — and the least discussed in political debate. Productivity is the engine of long-run living standards. An economy that becomes more productive over time can pay higher wages, fund better public services, and improve quality of life for its citizens. An economy where productivity stagnates eventually sees living standards erode relative to those of more productive peers.

The Numbers

Australia's multi-factor productivity — a measure of how efficiently the economy converts all inputs into output — has grown at an average of approximately 0.2 per cent per year over the past decade. This is well below the post-war average of around 1 per cent per year, and below the productivity performance of comparable economies including Canada, the UK, and New Zealand. The Productivity Commission's 2023 report described the situation as a "productivity slump" requiring urgent policy attention.

Why Is Productivity Falling?

The causes of Australia's productivity slowdown are contested but several factors feature consistently in the analysis. The shift toward services — which tend to have lower measured productivity growth than manufacturing — accounts for some of the aggregate decline. Weak business investment in machinery, equipment, and technology has constrained capital deepening. An increasingly complex regulatory environment imposes compliance costs without generating commensurate economic benefits. And the education system's performance, particularly in maths and science, has deteriorated relative to international peers.

What Would Help

The Productivity Commission's recommendations are consistent across successive reports: remove barriers to competition in services sectors, reform planning systems to allow higher-density development in productive cities, invest in early childhood education, and simplify the regulatory environment for business. Many of these reforms are difficult because they create losers — incumbents who benefit from the current arrangement — even as they generate larger aggregate gains. The political economy of productivity reform is forbidding, which is why the problem persists.