Two reports released last month provide glimpses into the prospects for our nation’s future prosperity, and how this is being affected by the pandemic.
Two reports released last month provide glimpses into the prospects for our nation’s future prosperity, and how this is being affected by the pandemic.
The federal Treasury’s ‘Intergenerational Report’, released approximately every five years, looks at the outlook for the economy and federal budget for the next 40 years.
The bad news from the recent 2021 report is that real GDP is now projected to grow at 2.6 per cent per annum over the next 40 years, markedly slower than the 3 per cent pa achieved over the past four decades.
On top of plunging the country into its first recession in 28 years, and the hit to the budget bottom-line, COVID-19 will have a lasting impact.
The most enduring effect is the expected reduction in overall population growth, due to falls in fertility and immigration, which together will contribute to population ageing.
Treasury projects the Australian population to reach 38.8 million by 2060-61. The more important measure of our wealth is real GDP per person, rather than total GDP. On this basis, the revision to the outlook is less severe, with real GDP per person expected to grow at 1.5 per cent pa to 2060-61, marginally lower than the 1.6 per cent pa over the past 40 years due to a lower participation rate associated with that older population.
The key driver of our standard of living is labour productivity: how much we produce with each hour of work. Treasury assumes this will continue to grow at its historic trend of 1.5 per cent pa, but the Productivity Commission’s June ‘Productivity Insights’ offered mixed signals.
Unexpectedly, labour productivity rose during the pandemic because hours worked fell more sharply than output. Another contributing factor was low-labour productivity industries shedding labour while high-productivity industries, including mining, maintained or increased their share of the workforce.
However, those effects won’t continue. Even ignoring 2019-20, productivity growth in the past decade was the lowest in 60 years, reflecting slowdowns in global productivity growth and our own mining investment boom.
A major challenge to maintaining productivity growth and, thereby, rising living standards is the increasing output share of the services sector that characterises all maturing economies.
Like other advanced economies, Australia’s services sector now accounts for around 80 per cent of output and nine in 10 jobs. A feature of some services is that they are labour intensive: when we purchase services we are, in large part, purchasing hours of other people’s time.
As we become wealthier, each hour of labour time also becomes more expensive, limiting scope for productivity growth.
There are also challenges to measuring productivity changes in services. Unlike the goods sector, there are often no standard units of output to ‘count’. Many services are also provided outside of the market sector, such as health and education, meaning there is no ‘market price’ to use as a signal of the value of output.
Australia’s pace of recovery out of recession has been remarkable, and productivity growth remains a wildcard for the longer-term outlook.
While GDP growth projections have been revised down, those future Australians are still projected to be substantially better off than we are today, with real incomes in 2060-61 85 per cent higher than ours.
So, even allowing for a considerable margin of error, there’s no reason to despair.
• Mike Dockery, principal research fellow, Bankwest Curtin Economics Centre
