It’s productivity, stupid

This week’s Reserve Bank U-turn on lower interest rates stems from poor policy settings that the Centre for Independent Studies has been warning about, long and loud.  

These are undermining the market-based incentives that reward businesses and entrepreneurs for coming up with better ways of doing things. That is, to become more productive.    

Australia’s productivity drought is restricting how fast the economy can grow before hitting capacity constraints and generating inflation, as Michele Bullock explained after lifting the RBA’s benchmark cash rate on Tuesday.  

That is why annual CPI inflation jumped to 3.8% in the past three months of 2025 and is forecast by the Reserve Bank to accelerate. That would further intensify the cost-of-living squeeze and push up the economy’s cost structure.    

It’s why the central bank now judges that Australia’s sustainable annual economic growth rate has weakened to not much more than 2% in real terms.   

As I suggested in an oped for The Australian Financial Review, we’re becoming a high-cost and low-growth economy. Less than a year ago, Treasurer Jim Chalmers was crowing about Australia’s economic ‘exceptionalism’.  

The reason? Start by blaming the ratcheting up of overall government spending in Australia since before the pandemic — from 34% to 39% of GDP —  which CIS senior fellow Robert Carling warned of in July last year.   

Much of this is less-productive, non-means-tested care economy spending, such as on the NDIS, that is crowding out private spending and encouraging a culture of dependency.  

As Robert pointed out in November, Australian governments lack basic ‘fiscal rules’ that can help anchor budget spending expectations.  

A looming decade of federal budget deficits has left the federal government more reliant on incentive-dulling taxes, such as bracket-creep income-tax increases on workers and an uncompetitive 30% tax rate on bigger companies.  

Then there is energy policy. As CIS energy analyst Zoe Hilton demonstrated late last year, the forced shift to renewable power has robbed Australia of its traditional cheap energy advantage, which is now posing a threat to an already weakened industrial base. It’s also showing up in higher household power bills.   

 

The planning and zoning restrictions highlighted by CIS chief economist Peter Tulip are the main cause of Australia’s housing crisis, pushing up inflation through higher housing and rental costs. At least governments have started to listen to the case for boosting housing supply through less supply-side regulation.    

As I outlined last year, Australia’s uniquely prescriptive system of workplace regulation — including the Byzantine award system — has escaped serious policy reform over the past four decades. That is undermining productivity at the very places where most of the economy’s output is produced.    

At the same time, education outcomes are falling.  As education research fellow Trisha Jha pointed out last month, the decline in Australian student learning is reducing the nation’s stock of ‘human capital’, even as tens of billions more taxpayer money is poured into the school system. This absolute  failure in education productivity will show up in lower incomes for students when they enter the workforce.   

For our 50th year, CIS is working on a new project to expose how an ever-growing burden of regulation and compliance is smothering enterprise, business dynamism and the economy’s overall productivity.