Working-age population growth is running at about 1.7% a year, while potential output growth is only around 2%, largely because productivity growth is close to zero.
That leaves remarkably little room for economic growth. The economy can grow at only around 0.5% per quarter before it begins to outrun potential and add to inflationary pressure. Yet about 1.7 points of that annual 2% is needed just to keep pace with the working-age population.
Here is the ugly arithmetic: above 2%, growth adds to inflation. Below 1.7%, output per working-age person falls. There is less than 0.1% per quarter between the two. To bring inflation under control we need to run below potential for a while, leaving almost no room to do so without falling real living standards.
We are already living it. Growth of 0.3% and 0.4% over the past two quarters was only just below potential, yet slow enough for output per working-age person to fall. And it is barely slow enough to reduce inflationary pressure. At that pace, closing the output gap takes years.
Faster growth risks more inflation. Slower growth means declining living standards. Lower migration eases one side of the equation but brings economic and fiscal trade-offs. Higher productivity is the clean way out, but Australia has conspicuously failed to deliver it.
The trade-offs are horrible however you resolve them. Doing nothing is its own trade-off: bouncing between inflation and falling living standards.
It occurs to me that greater competition has some role in driving productivity. Keating was very big on competition. howard much less so and the same in following governments
ReplyDeleteYes. Competition is an important part of the productivity story. Keating certainly pushed hard in that direction, nonetheless the National Competition Policy reforms continued under Howard.
DeleteIt isn’t the whole answer, but stronger competitive pressure is one of the more plausible ways of lifting productivity and escaping the arithmetic above.
Howard was poor because the National party did not like competition. some of us were around then. Indeed Howard campaigned heavily against the national competition policy of Keating
ReplyDeleteI agree that Keating deserves enormous credit for National Competition Policy. But I think the Keating-good, Howard-bad distinction is too simple.
DeleteThe policy was agreed under Keating in 1995, but much of its implementation occurred under Howard. Indeed, all of the roughly $4.9 billion in National Competition Policy payments to the states and territories was paid under the Howard government. Howard also continued competition reforms in electricity, gas and telecommunications, pursued waterfront reform, established the Productivity Commission and later participated in the National Reform Agenda.
There certainly was resistance within the Coalition, including from the National Party. But there was also resistance from unions and other groups whose members bore concentrated costs from increased competition. That is one of the enduring difficulties with competition reform: the benefits tend to be widely dispersed while the costs are concentrated among existing producers, workers and other incumbents.
So I would give Keating considerable credit for designing and establishing National Competition Policy without concluding that competition reform stopped with him. It didn’t.
And on the original point, I agree: greater competition is one of the things Australia should be looking at if we are serious about lifting productivity.