How to navigate the productivity crisis in Australia through strategic governance

With Australian productivity lagging by every measure and our continued growth in doubt, it’s time to lift the hood and fine-tune the economic engine to boost performance. 

Productivity means output divided by input — the measure of how efficiently inputs such as time, labour, capital or materials are converted into outputs such as goods or services. It has been the single most important contributor to the growth in our living standards.

“One hundred years ago, Australians worked longer hours,” says Productivity Commission chair Danielle Wood. “They obviously had less income, so less capacity to buy goods and services. They were far less healthy with a much shorter life expectancy. They worked in more dangerous conditions. They didn’t have indoor plumbing. Most people would say that unambiguously means we have easier lives than people a century ago. That has been driven by productivity.”

Over the past 15 years, Australia’s annualised labour productivity — the amount of output obtained from each employee — averaged 1.1 per cent, the second-highest among comparable advanced economies. Yet zero productivity growth since 2016 and negative growth since 2022 have dragged Australia down to 18th of the 69 nations ranked by the IMD World Competitiveness Yearbook 2025. For corporate use of digital tools and technologies Australia ranked 54th. For entrepreneurship, Venezuela was the only country to rank lower. Meanwhile, according to McKinsey and Co’s Five big tests for Australia’s productivity agenda, countries including the US, South Korea and Poland are forging ahead, accelerating productivity through capital investment, innovation and regulatory reform.

Why the fall?

Treasurer Jim Chalmers believes a number of long-standing factors have contributed to the productivity slowdown. These include reduced dynamism and competitive pressures, the relatively slow uptake of technological innovations and the changing nature of our economy — including population ageing, rising demand for care and support services, technological and digital transformation, climate change, net zero transformation, geopolitical risk and fragmentation.

“Eighty per cent of economic activity and 90 per cent of jobs are now in the services sectors,” says Wood. “Particularly in human services, labour is the product. It’s hard to do a haircut or to look after an old person in a nursing home with fewer people. It’s hard to deliver productivity growth in the traditional way — using new technologies — in those services sectors.”

Many business leaders are responding to the economic, social and strategic importance of productivity by prioritising growth. McKinsey’s report suggests applying five tests to new initiatives, to help business leaders focus on activities that really count.

Test 1

Does it unlock $130b in incremental investment per year?

The report concludes that lack of investment in Australia’s market sector is responsible for around 70 per cent of the decline in productivity.

Test 2

Does it make Australia a great place to build, energise and finance?

Construction, utilities and financial services stand out as the Australian investment economy’s three big inputs that are also lagging in terms of productivity. They are obvious targets for reform.

Test 3

Does it create a regulatory environment where standout firms thrive and invest?

A study by MGI Research shows that a small number of large and highly dynamic firms are responsible for the lion’s share of national productivity growth. Analysis of the ASX 100 showed that Australia has far too few productivity standouts.

Test 4

Does it strike the right balance in the non-market sector?

The non-market sector exhibits almost no productivity growth. The key is to get the balance right, at least to remove the productivity drag. This would require some combination of slowing the growth in non-market hours and increasing their productivity.

Test 5

Does it forge a compact that prioritises productivity?

The report identifies one ultimate root cause of Australia’s current productivity stagnation — a lack of commitment to prioritising productivity growth among the panoply of other goals.

“Getting productivity to fire again will require tough choices, and tough choices require a compact between the players in the system to make things better for everyone,” they write.

“Our hope is that the recent 2025 Economic Reform Roundtable in Canberra will result in an aligned national plan that a broad coalition of policy, business, social and union leaders can rally around. Australia will only pick up speed when business and policy leaders start attending to productivity as the engine of prosperity, instead of taking its propulsion for granted.”

The AICD submission

In June this year the AICD lodged a submission to the Productivity Commission in response to its invitation for feedback to the five pillars of productivity. Drawing on input from directors and other stakeholders, the submission focuses on issues of the greatest relevance to Australian directors and areas where the AICD has deep knowledge of the particular policy.

A major concern for members is that Australia has become an increasingly difficult place to do business — including making capital investments and driving innovation. However, the submission strongly supports the view that targeted and measured long-term reforms have the potential to drive genuine improvements in productivity.

Rebalanced regulation

Another concern is that the cumulative weight of federal, state and local regulation is crowding out the capacity of organisations to focus on strategy, growth and long-term value creation. While the cost of regulation is often difficult to quantify, it imposes real and compounding burdens on organisations — costs that are ultimately passed on to Australians in the form of higher prices, lower-quality goods or services, or reduced productivity in service delivery.

The AICD believes that in a number of critical areas there is a need to rebalance regulatory settings through measured adjustments to existing and proposed regulations. This would not reduce key regulatory controls or weaken individual protections, but rather adopt a more proportionate, risk-based approach to ensure regulation supports rather than stifles business, investment and innovation. A well-balanced regulatory system is critical to an efficient economy, creating appropriate guardrails within which to do business.

Policy certainty

AICD members also consistently identify policy uncertainty as a key barrier to growth and strategic planning. Policy certainty is a critical enabler of both productivity and Australia’s transition to a net zero economy and overdue action to improve federal environmental laws. Clear, stable and consistent policy settings give businesses and investors the confidence to make long-term decisions, allocate capital effectively and invest in innovation and low-emissions technologies.

Other AICD recommendations include:

■ Streamlining administrative processes and reducing unnecessary compliance burdens to significantly enhance business dynamism and resilience

■ Supporting a more dynamic, responsive jobs market

■  Prioritising immediate steps to de-identify directors’ personal information on the ASIC companies register

■  Implementing proposals from the 10-year roadmap Not-for-profit Sector Blueprint delivered in November 2024

■  Encouraging the government to prioritise national policy certainty to improve the cost effectiveness and alignment of emissions-reduction policies across the economy.

The Productivity Commission’s five pillars for growth:

In 2023, the government set out five pillars for a productivity growth agenda. It has now asked the Productivity Commission to conduct an inquiry to identify each pillar’s highest-priority reform areas with potential to materially boost Australia’s productivity growth.

1. Creating a more dynamic and resilient economy

How can we foster entrepreneurship and innovation, a productive business environment and ongoing competition between businesses to lower prices, boost wages and improve products and services, to achieve higher standards of living for all Australians?

2. Building a skilled and adaptable workforce

How can we build a more skilled and adaptable workforce, and support Australians to engage in lifelong work and learning, making sure our education system is producing productive, highly capable graduates, and enabling employers to use the best local and international talent?

3. Harnessing data and digital technology

How can we enhance our use of data and digital technology across the economy to boost productivity growth, accelerate innovation and improve government services for all Australians?

4. Delivering quality care more efficiently

How can we ensure a more sustainable and productive care and support sector that delivers better outcomes and high-quality services in areas such as health, aged care, community and veteran’s services, services for people with disability, and early education and care?

5. Investing in cheaper, cleaner energy and the net zero transformation

How can we achieve net zero, enable Australia to take advantage of clean energy opportunities and prepare for climate change risks?

This article first appeared under the headline 'Red tape reset’ in the September 2025 issue of Company Director magazine.