A federal plan to boost lacklustre productivity has been welcomed by experts, who say a $900 million fund encouraging states to cut red tape will lift economic growth.

A suite of reforms addressing stagnating living standards were unveiled in a major policy speech by Treasurer Jim Chalmers on Wednesday, including “streamlined” regulations in big industries.

That includes the construction sector, where state and territory governments will be provided with incentives to change zoning and planning laws to encourage developers to build more homes and buildings.

It will form part of a wider National Competition Policy that the Treasurer says will make families better off, even if not all the reforms are actually implemented.

“The Productivity Commission found a revitalised National Competition Policy could boost GDP by up to $45 billion a year and reduce prices by 1.45 percentage points,” Chalmers claimed.

“That GDP boost represents about $5000 per household per year.”

Economists were supportive of the direction of the speech, saying poor productivity is to blame for a stagnation in living standards over the past decade and, more recently, stubborn inflation.

“While paying the states to undertake reform sounds expensive, we’ve done this before and it’s worked,” Council for Economic Development of Australia (CEDA) senior economist Melissa Wilson said.

“Under the National Competition Policy in the 1990s, these payments averaged around $600 million a year while making the economy up to 5.5 per cent bigger over the long term.”

But while the reforms may work, they’re also unlikely to be enough to deliver a marked turnaround in broader productivity trends.

Productivity growth averaging just 1.1 per cent annually over the decade to 2020 according to Productivity Commission data, the lowest rate in more than half a century.

Economist Saul Eslake said the fund will encourage state governments to pursue reforms they should have passed themselves, but opted against for political reasons.

“If this is really the only way to get states to reform their planning laws then my view is: Fair enough,” he said.

Productivity dilemma

Economists point to a wide range of reasons for stagnation in productivity growth over the past few decades and the even more sluggish recovery in output per hour worked since Covid-19.

Oxford Australia head of macroeconomic forecasting Sean Langcake said a large part of the problem is structural.

Changes in the composition of the labour market and broader economic development make further productivity growth harder to come by, he explained.

That includes a colossal shift in the labour market towards services industries such as health care and education, which are among the most labour-intensive jobs in the economy.

The output of these industries isn’t necessarily entirely captured in economic output though, and so in some senses the dividends of labour in these industries isn’t being reflected in productivity.

Source: Jim Chalmers

There is still a clear imperative to try and turn around productivity growth though, because that’s the only way Australian families are going to see their living standards increase over time.

Otherwise increases in wages are more likely to be eaten up by a matching increase in the prices of goods and services (inflation) – something that’s playing out in the economy today.

In fact, inflation across industries with lower productivity such as health care and education has emerged as a key concern for the RBA in the battle to start interest rate cuts in 2025.

ABS data on Wednesday showed wages growth remains about 3.5 per cent in annual terms, which Langcake said is still too high to consider mortgage relief while productivity remains so low.

“It’s a perfectly fine place for wages growth to be if productivity growth is ticking along,” he said.

“But the RBA will look at this [situation] and say they’re doing the right thing to be holding rates.”

Productivity agenda

Chalmers recognised many of the fundamental productivity challenges Australia faces in his speech on Wednesday.

“Already here we are abolishing almost 500 nuisance tariffs; introducing comprehensive competition reforms including the biggest overhaul to merger settings in 50 years, and improving competition in the supermarket sector,” he said.

The agenda was headlined by an effort to improve the performance of the construction sector, in which productivity has plunged.

“Twenty years ago productivity growth in construction was about the same as the average for all industries,” Eslake explained.

“Now it’s 16 per cent below the all industry average.”

The idea is that cutting red tape at the state level and preventing local councils from preventing the installation of prefabricated housing, output in the industry will grow relative to hours worked.

Property developers have welcomed the approach, though it remains to be seen how far states will go in accessing the new federal fund by passing sweeping changes to their regulations.

“This housing crisis demands we pull every lever, and making our planning systems fit for purpose is the golden lever,” Property Council boss Mike Zorbas said on Wednesday.

Elsewhere, Chalmers said the federal government will also reform product safety regulations and introduce a “right of repair” for consumers who want to extend the life of their devices.

Langcake said that “small improvements” can have meaningful productivity impacts, but that Australia will find it difficult to replicate the productivity gains it enjoyed in past decades.

This is partly because many of the easier productivity-enhancing reforms have already been pursued, including the slashing of tariffs Australia embarked on in the late 20th century.

“The low-hanging fruit, as many consultants like to say, have already been picked,” Eslake said.

“There are other reasons [too], such as we haven’t had politicians who are as willing to spend political capital as Hawke, Keating and Howard were.”

In some cases, politics has even encouraged governments to pursue policies that can lower productivity growth, Eslake said.

Manufacturing, for example, is an industry that drags on productivity growth.

“Policies which encourage labour and capital to move into manufacturing, otherwise known as Future Made in Australia, will all other things being equal result in lower productivity,” Eslake said.