How Government Became Its Own Drag On Productivity

Written by:
29 January 2024
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Originally Appeared In

This article was originally published in Australian Financial Review on or about 29 January 2024 and was written by the author in their capacity as a contributor for that publication. 

It has been republished on the IPA website with permission. The views expressed are those of the author alone.

If Anthony Albanese wants to do something about the cost of living, he could start by looking inside his own house first.

Writing in these pages, Australian Industry Group chief executive Innes Willox makes some suggestions on how government can and should deliver productivity-enhancing support to the Australian economy.

It reflects very poorly on Canberra that one of those suggestions is paying its bills on time. No doubt, Canberra isn’t the only government tardy in paying its bills.

There is more, however, that Australian governments can be doing to promote productivity.

That is, to have a long, hard look at themselves and the productivity drag that government imposes on the economy. That drag isn’t just the regulatory burden, the tax burden, and the like, but the activities of government itself.

Bar extreme libertarians, most people accept that there is a role for some government in the economy. Someone has to secure the borders and maintain the rule of law. At some margins, it is cheaper to provide goods and services via a political mechanism than via markets. Society makes these choices via the political system.

While economists and political scientists might quibble over the precise details, the fact is that capitalism combined with democracy has generated what American economist and academic Deirdre McCloskey has described as “the great enrichment”. Since about 1800, human flourishing and welfare have improved on every measure.

There can be, however, too much of a good thing.

For about the last decade, Australia has had (far) too much government and not (nearly) enough value from that government. Of course, I have been arguing for decades – in these very pages – that Australia has too much government. Now, however, over-government has turned up in the productivity statistics.

The Australian Bureau of Statistics reports data on GDP per hour worked on a quarterly basis as an index – this measure is often used as a proxy for productivity. It also reports GDP per hour worked, again as an index, for the “market sector”.

The ABS defines the market sector as everything in the economy excluding “public administration and safety, education and training, health care and social assistance, and ownership of dwellings”. By implication, that is the non-market sector of the economy. Except for the ownership of dwellings, most of those activities are provided by government.

The non-market sector of the Australian economy has grown dramatically over the past 40 years. In 1984, the proportion of hours worked in the non-market sector comprised just over 19 per cent of all hours worked in Australia. By September of last year, that number had increased to more than 28 per cent. Most of that growth in non-market hours worked, however, has occurred since 2001.

Using seasonally adjusted data from the ABS, I have calculated gross value added per hour worked for the entire economy, the market sector, and the non-market sector as a proxy for productivity.

Government has expanded that part of the economy that is less productive at the expense of the part that is more productive.

Looking at overall productivity, there are two worrying signs. First, there appears to be a falling off in growth around 2004. Far more worrying, however, is the absolute decline in productivity growth since 2021. This fall in productivity coincides with the decline in real gross household disposable income per capita that Australians have experienced since 2021.

The data show, however, that market productivity has closely shadowed overall productivity. Non-market productivity has not. For a long time, it plateaued, but in recent years has declined.

Some readers may be a bit perturbed that non-market productivity appeared to be higher than market productivity. There are a few explanations for this: output in the non-market economy is likely to be measured by input prices not output prices; employees in the non-market economy are likely to be paid higher wages, on average, than are employees in the market economy, or this could be Baumol’s cost disease at work, where wages rise with other sectors but with no rise in productivity. Market productivity has exceeded non-market productivity since 2012.

The important point is that non-market productivity has declined since 2004. Just after the non-market economy hours worked started climbing.

In short, over the last 20 years, government has expanded that part of the economy that is less productive and, dare I say it, at the expense of that part of the economy that is more productive.

It gets worse.

The ABS also reports statistics on total CPI and market CPI – alas, it does not report non-market CPI (not that I could easily find). Since 2011, the increase in market CPI has been less than the increase in market CPI, telling us that the non-market sector of the economy (government) is contributing more to inflation than is the private sector.

What does this all mean? Well, it means that Anthony Albanese needs to do more than call a meeting in Canberra and beat up the private sector if he wants to get the economy going again or “do something” about the cost of living.

Rather than beating up supermarkets, Craig Emerson could be tasked with improving public sector productivity. While the government is at it, it could also implement everything Innes Willox suggests.

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This article was original published in The Australian Financial Review and was written by the author in their capacity as a contributor for that publication. It has been republished on the IPA website with permission. The views expressed are those of the author alone.

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