Statement 4: Boosting Australia's Productive Capacity:
The Role of Infrastructure and Skills
Introduction
The Australian economy is in its 17th year of expansion, with average growth of 3.6 per cent per annum over this period. This robust performance reflects the boost to productive capacity from the microeconomic reforms of the past quarter‑century, the economy soaking up spare capacity, and a rise in aggregate labour force participation to historical highs, reflecting, among other things, the 'baby boom' generation moving into the 'prime working age' cohorts (Australian Government 2007).
However, the economy is now pushing up against its 'full capacity' levels of production and employment and this has been associated with an acceleration in inflation and more rapid wages growth in some regions and industries. Sustaining the economy's growth rate in the future will depend on increasing its productive capacity, rather than any further soaking up of spare capacity. This statement examines how Government policy can help to expand Australia's productive capacity and support growth over the medium term.
The ultimate test of economic reforms is in their effect on the wellbeing of the Australian people. A more efficient economy, with high levels of productivity and participation, provides the means to deliver higher incomes and a more equitable society.
It is now widely recognised that the comprehensive reforms to labour, capital and product markets and improved frameworks for macroeconomic policy introduced over the past quarter‑century underpinned the length and stability of the current growth cycle. The challenge for economic policy now is to build on those reforms by expanding the productive capacity of the economy and to operate it as closely as possible to that capacity. An important issue for policy is to assess whether there are areas in which capacity constraints are more binding or restrictive than others, and how to improve policy or institutional frameworks to ensure investment contributes to stronger economic growth with low inflation over the medium term.
The impact of a once‑in‑50 years boom in Australia's terms of trade at a time of little 'spare' capacity in the economy has highlighted the importance of the microeconomic response to shocks. As noted in Statement 2, there has been a substantial rise in business investment, particularly in mining and construction, in response to the rapid rise in the terms of trade. On the other hand, questions have been raised over the response of the economy's physical infrastructure and the skills of the workforce to these changed circumstances.
Accordingly, in this statement the main focus is on the scope for improved policy and institutional frameworks for infrastructure investment, and investment in skills and training, as these are areas where there would appear to be significant scope to lift Australia's productive capacity.1
1 In this statement, the term 'infrastructure' refers to the underlying physical capital in a society, including roads, transport systems, communications, water and sewerage, electricity, gas and ports. These facilities are often collectively termed 'hard infrastructure' or 'economic infrastructure'. The important contribution of 'soft infrastructure' or 'social infrastructure', such as schools, universities, research facilities, hospitals, and libraries to the development of Australia's human capital is addressed in the context of the discussion on skills, education and training.
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