Australia is an "economic problem child" and our declining living standards are now a “national emergency,” according to a new report from McKinsey.
The global consulting firm says the country is on a concerning economic trajectory, having recorded zero labour productivity growth since 2016, following decades of sustained growth.
The report, Reviving the ‘golden goose’ of Australia Inc, underscores our declining productivity — how efficiently labour produces goods and services — and stagnating business investment as critical issues threatening living standards.
No longer the economic poster child
The Productivity Commission estimates that for the three decades before the pandemic, productivity contributed more than 80% of income growth, but Australia’s productivity growth has since dropped to 30th out of 35 rich countries.
Real household disposable incomes have also flatlined over the past eight years — in stark contrast to the United States, which has seen a 15% rise in income due to a productivity surge.
McKinsey attributes Australia’s economic challenges to two primary factors:
- Non-market sector inefficiencies: Government-dominated industries, including aged care and public services, have shown no productivity gains for two decades. These sectors are expanding at nearly three times the pace of the market economy.
- Weak business investment: Investment levels in tools and equipment remain at 1990s recession levels, hindering labour productivity.
The report also highlights regulatory burdens and Australia’s high effective corporate tax rate of 27%, which have deterred foreign investment.
McKinsey managing partner Wesley Walden noted that the US regulatory environment is more conducive to business growth, contrasting sharply with Australia’s complex frameworks.
Walden said: “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.”
Treasurer Jim Chalmers defended increased government spending in social sectors, attributing recent GDP growth to government investment.
He noted that “A lot of it is about the care economy, a lot of is about defence spending”.
However, McKinsey senior partner Chris Bradley warned that without urgent reform and a robust private sector, Australians’ living standards could deteriorate further.
The report calls for bipartisan reform, reminiscent of the 1980s and 1990s, to reignite productivity and secure long-term prosperity.