Productivity is having a moment. Soon after Labor’s landslide re-election victory, Treasurer Jim Chalmers set the scene for the government’s second term, announcing productivity would take the front seat. The forthcoming Economic Reform Roundtable aims to build consensus on improving productivity, enhancing economic resilience and strengthening budget sustainability.

It is important to remember why productivity matters in the first place. In his 2023 essay in The Monthly, Chalmers wrote, “The type of economy and the type of growth matters – and its distribution matters.” This is equally true of productivity growth.

As the Centre for Policy Development (CPD) argues, productivity should be a means to an end, not an end in itself. Pursuing productivity without thought of its ultimate goal will only lead to an acceleration of the trajectory that got us to the current polycrisis: climate breakdown, inequality and housing shortages.

Rather than striving for abstract targets or simply producing more goods and services, it should be about improving people’s lives: lifting wages, freeing up time, enhancing services and enabling greater wellbeing and sustainability.

We have to ask: productivity of what, for whom and to what purpose?

Getting the most out of public money

When it comes to using resources productively, our current approach to public service investment leaves a lot to be desired. Currently, the vast majority of social services spending is oriented towards crisis response. Whether the issue is crime, poor health, poverty or homelessness, the pattern remains the same: money is channelled into managing the consequences rather than addressing their underlying causes. This reactive approach not only results in higher long-term costs but also fails to deliver sustained improvements in wellbeing.

For example, modelling by CPD suggests that the impact of child poverty on government expenditure in Australia is $16 billion every year. This includes costs such as child protection, health services, legal system costs and homelessness services. Adults who experienced poverty as children are also more likely to rely on support payments such as Jobseeker and the Family Tax Benefit.

When governments delay action until problems escalate, the associated social and economic costs multiply, exacerbating inequality and perpetuating intergenerational cycles of disadvantage. Instead, governments could get more out of public money by looking upstream to address the root causes of these issues.

Investment in prevention can save money over the long-term

By investing in prevention, governments can boost productivity and fiscal sustainability – but also achieve better outcomes for people. This is because such investment not only prevents issues from occurring, but also avoids the costs associated with treating those issues down the line.

For example, raising the rate of income support payments – as the Economic Inclusion Advisory Committee recommends – would help to avoid the various negative physical and mental health impacts of poverty, plus their associated costs. This boosts productivity because it results in better outcomes (improved health, education and employment outcomes for payment recipients) with similar or fewer resources (reduces spending on services that respond to the negative effects of poverty, such as health or child protection services).

Beyond avoiding future costs, improving social outcomes also improves our overall productivity as a society. This is because healthier, better educated and more financially secure people can achieve more with the resources they have. This is especially true with social services such as early education.

CPD modelling shows that a truly universal early childhood education and care system –  where families can access three days of care at no or low cost as soon as they want it – would generate up to $44 billion a year in extra tax revenue, additional GDP growth and associated savings from reduced spending on crime, welfare and healthcare.

The Prime Minister has signalled his ambition to make universal childcare a defining legacy of his government, with concrete steps already underway including removing the activity test, introducing a three-day entitlement for all families, committing $1 billion to build new early learning centres, and delivering a 15 per cent pay-rise for educators

While investment in prevention can improve productivity and outcomes for people, governments are always working with limited resources. This means not only investing more in prevention, but also investing better. We need to understand which initiatives are going to have the biggest pay-offs for people, the environment and productivity without jeopardising fiscal sustainability.

Calculating avoidable costs

 While it is challenging to predict the long-term costs and savings of policies, there are already examples of good practice. The Victorian Government’s Early Intervention Investment Framework (EIIF) requires new policy proposals to be accompanied by an estimate of the policy’s long-term savings. If successful, 50 per cent of the anticipated savings are “banked” in the budget. Banking only 50 per cent of savings provides flexibility for public servants to fine tune their forecasts and come to learn was triggers savings in difficult to calculate policy areas. The actual savings of that initiative – for example, a homelessness prevention program resulting in fewer emergency visits – are tracked annually, and the budget is adjusted accordingly. This provides an explicit vehicle for investment in prevention, while ensuring that investment is fiscally responsible.

CPD has recommended changes to the federal budget rules that, similar to EIIF, would enable potential costs and savings to be banked. Importantly, we recommend allowing this regardless of whether the benefits accrue within the same portfolio or budget line, which is often a barrier to creating effective policies that have a genuine positive impact on wellbeing outcomes. For example, approximately one third to more than half of health outcomes are due to factors that lie outside of a health department’s remit. For instance, housing, socioeconomic status, education, social support networks and transportation.

We also suggest extending the timeframe for considering the impacts of policies from 10 years to 25 years, where these impacts can be reliably estimated. A longer timeframe is particularly important to accurately assess the costs and savings of interventions that build human capital (e.g., education and health) and interventions intended to break intergenerational cycles of disadvantage.

All Australian governments should start estimating, tracking and banking the long-term costs and savings of their policies. We recently recommended establishing avoidable costs units in the treasury departments of the Commonwealth, state and territory governments, to develop the capability required to model the long-term costs of late intervention and identify avoidable public expenditure. It is important that these units are placed within treasuries so that they are close to fiscal decision-making and have access to data across portfolios.

Pursuing productivity with purpose

While these approaches help us track the financial benefits of prevention, they should not simply be a way of cutting government spending. Rather than grow productivity aimlessly, we should use it as a tool to improve quality of life for all Australians. This means balancing productivity gains with social progress. For example, the savings gained by investing in prevention could be put towards improving essential services such as healthcare or early childhood education and care.

If productivity growth is the economy’s turbo engine, government should be its navigation system. Effective use of government money, directed towards activities that deliver the kind of society we collectively value, is where it starts.

Starting with the Economic Reform Roundtable, the government must ask not just how to grow productivity, but also why and what type of growth supports a values-based economy. Embedding more purpose-driven reforms of this kind should be a central ambition of the productivity agenda.

Adelajda Soltysik is a Senior Policy Adviser at the Centre for Policy Development. She has extensive experience working across Aboriginal community-controlled organisations, peak bodies, non-profits and government, with a focus on early childhood, justice, health and child protection law reform and policy.

Ryan Martin is a Policy Adviser at the Centre for Policy Development. He brings strong experience in translating lived experience into practical policy recommendations, including through his work as a researcher for the Royal Commission into Defence and Veteran Suicide. Ryan also teaches at the University of New South Wales and the Council on International Educational Exchange.

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