Respected mandarin Michael Brennan has called for some major changes to the way the government approaches public policy if Australia is to fix the productivity challenges it faces now and into the future.
The head of the Australian Productivity Commission used an address on Wednesday to call for better ways to adapt and maximise the S-curve of future growth.
Being well positioned to take advantage of business innovation and technological waves was imperative for Australia to harness the “adaptability and dynamism” needed for the economy to succeed, he added.
“A successful economy is one that catches those successive waves that can be moved from one transformational source of productivity growth to the next, one that might look and feel a bit different, and one which might call for different policy responses,” Brennan told the National Press Club.
“We know [productivity policy] is getting harder. The last decade, as is now well known, has seen the slowest productivity growth in 60 years. As it turns out, that’s a fairly common phenomenon across the developed world.
“Whatever the reason for it, as a society we have been slower at generating new ideas, slowing at diffusing them across the economy about how to produce goods and services that are newer, better, or hitherto unimagined.”
Brennan pin-pointed several areas that could help alleviate the adaptability issues productivity growth in Australia was reckoning with, including regulatory systems that encouraged new business models in the market, and policies to help encourage a healthy risk appetite among investors and entrepreneurs.
For major service areas mainly delivered and funded by government, like health, education and community services, he also said policy thinking should shift away from simply finding the lowest cost-setting for service delivery and pay attention to innovation.
“Technologies like AI, digital communications and robotics could also play a role, but their effectiveness will be blunted if we have rigid rules that hamper their uptake.
“Then there’s a question as to whether the very structures of government can adapt when needed to deliver better outcomes,” he said.
Responding to a question from The Mandarin, Brennan said one key way to transform the culture of system inertia in the APS and the way the government’s fundamental business model was becoming stuck in productivity efforts was to develop better risk appetite.
“In Australia, we have a very high-quality public sector — I think the quality of our policymakers, state and federal, is very, very strong. That’s my experience of it and I think, to be honest, the experience of a lot of senior private sector people when they come into contact with government,” Brennan said.
“Particularly in a crisis … it becomes evident that you’re dealing with some very smart and deeply motivated people. That is the public sector we’ve got, and we’re very fortunate in that respect.
The chair went on to acknowledge that getting better at learning how to do public administration under a ‘fail early and often’ model was easier said than done. But APS approach changes in this way was ultimately what modern times and complex problems called for.
Encouraging more flow of staff between the private and public sectors could be one way to build the capability in the APS, he added.
“A lot of talk has gone on over the years about how we build a bit of risk appetite, a bit of preparedness to fail, occasionally, in the public sector. None of that is easy,” Brennan said.
“At the first whiff of grapeshot, there’s the tendency to batten down the hatches but that is part of it. We have to tolerate a degree of experimentation and failure.”
Brennan’s five-year tenure as chair of the commission will end later this month. Reflecting on his time leading the statutory agency, the chair said the story and pattern of productivity growth had become an abstract concept for many people in modern-day life.
This was especially so in the context of a modern economy, 90% of which comprised service, and is reflected in the ways the remit of the productivity commission has changed from measuring industry assistance to identifying gaps in government service provision.
“There’s a lot of talk of productivity, a little less of the thing itself,” Brennan said.
“The story … of reduced real cost measured in the labour of the average worker, and the time taken to afford various things has very much been the pattern of productivity growth over the last Century.”
The classic productivity concept, designed for a production and manufacturing economy, was difficult to overlay on modern services workforces, Brennan said, capturing how well the health, disability, aged care and finance sectors were running.
“There are a lot of goods and services that have become cheaper, but there are a lot that haven’t,” Brennan said.
“A doctor’s ability to understand, diagnose, and prescribe has been transformed by medical advances, and that’s made us vastly better off, it’s lengthened lives and made them more satisfying. It hasn’t reduced the cost of beds, quite the contrary, and that’s true for many services, partly because of the very significant labour content that’s embedded in the product,” he said.
Using the analogy of effort required to make a loaf of bread and how much work in the economy was required by a customer to afford that loaf, Brennan demonstrated how Australian productivity had improved over time.
In 1901 it took about 18 minutes of an average worker’s output to have enough money to buy a loaf. Today, productivity gains mean the bread now costs the equivalent of four minutes of work.
“[It is] four minutes because that is the amount of time required by someone working at today’s average wage, to have enough money to purchase a standard loaf. It is a measure of how effective our economy has become at bread-making.
“I don’t just mean the process of kneading and baking the dough, I mean the whole bit — it’s ploughing the fields, sowing the seeds, building the fences, harvesting the wheat, milling it, producing the yeast, even mining and manufacturing the oven — all of that performance of working doing whatever an individual worker does best,” he said.
Brennan said the productivity gains between 1901 and 2023 also represented significant shifts in the Australian economy. About 120 years ago, 25% of the domestic workforce was employed by the agricultural sector compared to 5% today. And local wheat production has significantly increased from 1 million tonnes to about 25 million tonnes each year using less land and even less labour.
In Australia, the average hours of work have also fallen over time, by around 13% or 30 hours a week since 1900. But the workforce participation rate has risen substantially.
“That’s a story of replacing human labour with machinery, horses with tractors, the application of all sorts of science [such as] pesticides, fertilisers etc.
“All that combined with the similar productivity growth that occurred in the manufacturing industry and the transport industry over the course of the 20th Century, is all baked into the humble loaf of bread,” Brennan said.
The Productivity Commission chair said that he was interested in finding better ways to explain to government and everyday citizens why Gross Domestic Product (GDP) was an imperfect measure of living standards. It was important to give attention to traditional measures like GDP and other measures around quality services for tracking Australia’s future productivity, he said.
“When we were working on a five-year productivity review, released in March this year, one of my constant admonitions was that we had to talk less about the macro aggregates like GDP per hour worked, like capital deepening, and multi-factor productivity, and more about these concrete instances of productivity growth — what it really means in detail, how it comes about and how it differs in specific cases,” Brennan said.
“But it’s also because an understanding of [the] quality dimension might be more important in services dynamic, just as the real cost reductions for goods sector of the 20th Century.”
