AI, investment and regulatory reform key to lifting Australia’s flat productivity

Australia’s productivity slowdown reflects a mix of global trends and domestic factors, including structural shifts, weaker investment and slower gains from technology, according to Productivity Commission Chair Danielle Wood.

Speaking to CommBank Chief Economist Luke Yeaman on the latest episode of CommBank View: Economics & Markets, Wood said productivity growth has been “pretty disappointing” over the last two decades, noting Australia’s slowdown became more pronounced in recent years.

“Our really big slowdown happened post-2016… that’s where we essentially flat-lined,” Wood said.

Why has productivity flat-lined for the past 10 years?

Wood pointed to structural changes in the economy, including a shift toward services, particularly labour-intensive care services, alongside weak business investment that has not recovered since 2008.

“Investment just hasn’t really recovered anywhere post GFC… that means less technology, less capital per worker,” Wood said.

Weaker business dynamism was also highlighted as a factor weighing on productivity.

“If you’ve got fewer people switching jobs, fewer new businesses… fewer disruptions in markets… [productivity] tends to be lower,” she said.

AI could deliver a meaningful productivity boost

Artificial intelligence could deliver a meaningful boost, though outcomes will depend on how widely it is adopted and implemented across the economy.

“Our estimate… was that AI could add 4% to labour productivity over the decade,” Wood said. “It is meaningful and… not much else is going to give you something of that magnitude.”

Wood added that productivity gains will depend on how businesses embed the technology into operations, with Australia lagging its peers in the US, UK and Canada on adoption.

“The benefits obviously only come once you adopt it… but it’s also about moving past the shallow adoption of AI, from using it to write better emails, take meeting minutes, to using it for the fundamental reconfiguration of businesses, processes and products,” she said.

Housing and regulatory reform remain key priorities.

Wood said lifting productivity will require a broad reform agenda, with housing, regulation and business investment key priorities.

“We’ve known for a long time, supply matters… planning reforms are a big barrier,” she said.

According to Wood, addressing regulatory burden would be critical to improving productivity outcomes, particularly as businesses face increasing compliance costs.

“You need that leadership piece… to say we are really serious about this,” Wood said.

“Once you get that message… it starts to filter through all the government departments and regulators,” she said.

She also pointed to the need for clearer accountability.

“We recommended a target, in the manner of a fiscal target… to create accountability,” Wood said.

However, she acknowledged reform is challenging, with ongoing pressure to add more regulation.

“There’s always going to be pressure to add more regulation,” she said, adding governments need to be willing to “prune what’s already there… and let things go.”

Budget measures and tax reform in focus

Discussing the Federal Budget, Wood said much of the public debate has focused on tax changes, despite a broader set of productivity measures being introduced.

She pointed to measures across housing, migration and competition policy, while noting implementation will be key to delivering outcomes.

“There’s a reason some of these things haven’t been done… some of it’s pretty hard to implement,” Wood said, adding that “doing that type of reform in a revenue neutral way is really hard.”