While the Government grapples with ways to address our budgetary problems, a much more profound and urgent challenge befalls us – Australia has a productivity crisis.

While we can’t underestimate the severity or seriousness of Australia’s budget position, the productivity of Australian business poses one of the most difficult and long term challenges for our ongoing prosperity.

Australia has enjoyed an unprecedented period of growth. Our Gross National Income (GNI) has risen steadily over the last decade. According to the Productivity Commission and Australian Bureau of Statistics (ABS), Australia’s long term growth rate in labour productivity from 1973-74 to 2011-12 stands at an impressive 2.2%. Our overall growth in income or our prosperity as a nation has been buffered by a heavy reliance on our trade boosted by a demand for minerals. However, the forecast paints a much gloomier picture. Australian Government Treasury forecasts that the composition of our growth in income per capita will change dramatically in the next decade.

The economic stop-gap will be productivity. In the next decade, we will become significantly more reliant on local businesses producing goods and services faster, smarter and cheaper. The reliance on productivity to just maintain our national income levels requires a seismic shift in policy that drives productivity of small business up which in turn ensures ongoing growth in prosperity.

So how do you unleash the potential of small businesses to produce goods or provide services that are faster, smarter and cheaper?

Faster:

We don’t just need to look at the cost of regulation, which is of course important; we also need to recognise that one of the greatest resources a small business owner has is time. We should be prioritising the unnecessary regulations that cost businesses time and remove them. This time can be reinvested into the business to enable it to grow and enhance productivity by boosting output.

Smarter:

Immediate concessions should be granted to small businesses to enhance their research and development capabilities with a specific focus on deployment of technology to improve production processes, streamline operations and leverage data. Consideration should also be given to direct assistance to ensure small businesses are positioned to capitalise on online commerce.

Cheaper:

Consideration should be given to provision of tax concessions to small businesses that undertake innovative practices, deliver a productivity dividend or develop an innovative strategy to employ and up-skill employees. This will lower the input costs and provide a greater productivity yield.

The Government should be setting a goal of turning Australia into the best place to start and operate a small business globally. This means a preferential taxation system, long term investment in technology, simpler industrial relations and a focus not just on barriers to entry, but on barriers to exit. That is, ensuring the competition parameters are set to enable a greater level playing field between large and small entities and where possible preferential procurement and swift dispute resolution. The relative success of the competition reforms which created the National Access Regime for access to important infrastructure could be considered as a mechanism to support small business sustainability and to prevent early exits.

By international comparison Australia has no option but to act swiftly to boost productivity through the small business sector. For the last few decades, Australia has lagged in productivity performance, compared to other developed countries. Despite a very small but welcome lift in our labour productivity in the three years to 2013-14, the most recent update from the Productivity Commission (July 2015) confirms a continuation of weakness on the broad measure of multi factor productivity (MFP).

Even though this increased by a mere 0.4 per cent in 2013-14, some industries recorded negative figures. Measured over a six year period to 2014, annual MFP growth in the market sector remains at negative 0.1 per cent. This is significantly below what is required to maintain our living standards. According to the ABS, Australia’s MFP has contracted consistently since 2007: -1.2% from 2007-2011, -1.3% in 2012 and 2013.

Whilst it may be difficult in the short term to address many of the input costs (with the exception of tax reform), reductions in regulatory time, increased incentives to use technology and enhanced competition protections would greatly assist in boosting output and in turn our nation’s productivity.

Andrew Conway, FIPA FFA, is the IPA’s CEO