McKinsey Says Australia’s Weak Economy Now a ‘National Emergency’

Recession-level business investment, dropping productivity, and declining living standards means Australia now faces a “national emergency,” says consulting giant McKinsey and Co.

Australia has had zero labour productivity growth since 2016, which flows through the economy to create higher costs for businesses and consumers, weaker real incomes, and declining competitiveness for investment, McKinsey said in its latest report, “Reviving the ‘golden goose’ of Australia Inc.”

At the same time, people are facing the steepest decline in living standards in 50 years, and without urgent reform and a robust private sector, that indicator could deteriorate further, warned McKinsey senior partner Chris Bradley.

The Productivity Commission estimates that for the three decades before the pandemic, productivity—how efficiently labour produces goods and services—contributed more than 80 percent of income growth.

Partly as a result, real household disposable incomes have also stagnated over the past eight years, in stark contrast to countries like the United States, which has seen a 15 percent rise in incomes due to productivity gains.

Since 2016, only Italy, Finland, France, and Luxembourg have recorded lower rates of productivity than Australia.

Low Productivity in Government Sectors

McKinsey blames Australia’s economic challenges on two main factors: inefficiencies in “non-market sectors”—areas in which government dominates, such as aged care and public services, which have shown no productivity gains for over 20 years; and weak business investment, which remains at the same level seen during the 1990s recession.

In recent years, government expansion has outpaced private sector growth by a factor of three.

Federal government spending reached a record 12.3 percent of nominal GDP in September, and state and federal government demand collectively added 0.6 percentage points to quarterly GDP growth.

Australian Treasurer Jim Chalmers has defended increased government spending in social sectors, crediting it with underpinning recent GDP growth.

“A lot of it is about the care economy, a lot of is about defence spending,” he said. However, he conceded that the private sector was the only sustainable driver of economic growth.

More Work Needed to Make Australia Attractive

The report also highlights regulatory burdens and the high effective corporate tax rate of 27 percent, both of which it says have deterred foreign investment.

McKinsey Managing Partner Wesley Walden said the U.S. regulatory environment is conducive to business growth, in contrast to Australia’s significantly more complex frameworks.

The number of clauses in federal law that contain words like “shall,” “must,” “may not,” “required,” and “prohibited” has grown by 50 percent since 2007.

“Everything from infrastructure through to tech, they say that the regulatory context at every level in the US is simpler and easy to navigate, more supportive of deploying capital than what is in Australia,” Walden said.

From Poster Child to Problem Child

The report said Australia had gone from being an “economic poster child” with 33 years of economic growth to an “economic problem child.”

“Our work suggests that over many years of prosperity, first underpinned by hard-won reforms, and then by a terms-of-trade boom, we have developed a sense of complacency and largesse, and the broad movement of policy has been to sap rather than unleash productivity.

“The golden goose that produced our fair and prosperous society is gasping for air,” it warned.

The report calls for bipartisan reform, as happened in the 1980s and 90s, to turn the tide in productivity and secure long-term prosperity.

Responding to the report, Shadow Treasurer Angus Taylor warned, “Productivity is essential to deliver sustainable higher real wages and lower inflation. Real action on productivity is essential so the next generation can enjoy a better quality of life than the one before it.

“The OECD and experts are clear: governments need to rein in spending, reduce debt, and deregulate their economies to boost investment, innovation, and economic growth.

“The latest OECD Economic Outlook confirmed there is no light at the end of the tunnel for the economy under Labor, with Australia’s economy growing below the world and G20 average over the next three years and forecast to have higher inflation than Germany, Spain, Japan, France, Canada, Korea, and the United States next year.”

Last week economic data was released that showed annual Gross Domestic Product (GDP) growth had fallen to 0.8 percent in September from one percent in June—the weakest rate of annual GDP growth since the early 1990s recession (other than during the pandemic) and the seventh straight quarterly decline in GDP per person.