As Prime Minister Anthony Albanese and Treasurer Jim Chalmers look to boost productivity in the economy, it will be intriguing to see what ideas the business sector presents at a summit scheduled for August.

Labor productivity, which measures output per hour, has shown minimal growth throughout this decade.

While discussions have largely centered on the workforce and labor relations, the issue of weak business investment is often overlooked.

Workers can achieve more when they have better tools and technology at their disposal. The concept of “capital deepening,” or giving workers more capital resources, is essential for improving productivity in the long run.

However, business investment relative to gross domestic product (GDP) is currently at its lowest since the mid-1990s.

Both mining and non-mining industries are seeing reduced investment. Recent national accounts data for the March quarter revealed that business spending on machinery and equipment decreased by 1.7%.

On average, workers today are using less equipment—like computers and machinery—compared to ten years ago, as investment has failed to keep up with job growth.

Why is investment so low?

A potential reason, as suggested by former Reserve Bank governor Philip Lowe in 2023, is that during the COVID pandemic, many companies shifted their focus to survival rather than seeking efficiency. Now, even after the pandemic, companies appear hesitant to refocus on enhancing productivity.

Another factor could be that wage growth has not kept pace with rising costs of goods and services, which may discourage firms from investing in new equipment to improve productivity.

Typically, businesses draw from their profits to fund investments rather than taking on debt. Even though corporate profits have been high, this alone does not explain the downturn in investment.

A Lack of Business Confidence

Another critical factor is business confidence, often referred to as “animal spirits” by economist John Maynard Keynes.

Share prices in both Australia and globally have surged recently, with the S&P/ASX 200 index nearing its historic highs. This indicates a generally optimistic outlook for Australian businesses.

However, surveys conducted by National Australia Bank reveal that current business conditions and future confidence are around average for the long term, which doesn’t explain the low investment rates.

One reason may be that firms are setting their expectations for returns too high, known as “hurdle rates,” which have not adjusted to the current lower borrowing costs.

The Productivity Commission has noted that companies may also be more cautious in taking risks since the financial crisis of 2007–08.

Additionally, the dominance of a few companies in certain sectors may be leading to complacency rather than innovation.

High Levels of Uncertainty

The Reserve Bank recently highlighted two indicators of uncertainty in the market, one based on stock market movements and another on media coverage of policy uncertainty. Both indicate that current uncertainty mirrors that of the early days of the global financial crisis and the COVID pandemic.

In uncertain times, businesses often delay major investment or hiring decisions until the situation stabilizes. A study by the Reserve Bank found that heightened uncertainty does tend to lower investment, though the extent of this impact is also uncertain.

What Can Be Done?

Business groups frequently blame low investment on “excessively high” corporate tax rates. However, at 30% for large firms and 25% for small ones, these rates are relatively low compared to historical norms.

While some multinational corporations may be deterred by Australia’s higher tax rates compared to other countries, it’s difficult to gauge how much this affects investment. Corporate tax is just one of many factors influencing Australia’s appeal as an investment destination.

Currently, the Productivity Commission is exploring ways to improve the efficiency of corporate tax rather than simply reducing rates.

In the meantime, businesses might feel encouraged to invest more with a more stable economic environment. Inflation is now within the Reserve Bank’s 2-3% target range, and employment levels are near record highs. The recent election has also lessened some political uncertainty with a decisive government majority.

It’s time for businesses to stop complaining and start equipping their workforce with the tools they need for greater productivity.