Weak business investment is eating into productivity and forcing down wages, according to ANZ bank.

Businesses are trapped in a vicious cycle of weak investment feeding into lower wages and reduced household spending, which in turn is discouraging firms from investing.

ANZ head of Australian economics David Plank said the government should consequently introduce policies that encourage businesses to up their spending – echoing calls made by business lobby groups.

But John Quiggin, Australian Laureate Fellow in Economics at the University of Queensland, told The New Daily such policies missed the point and would likely fail to boost wages.

According to Dr Plank, weak productivity growth will see Australia’s trend rate of growth over the next decade fall below Reserve Bank and Treasury estimates, to somewhere between 2.0 per cent and 2.5 per cent per annum.

That marks a step down from average growth over the last decade (2.6 per cent), and from average growth in the 1990s (3.3 per cent) and 2000s (3.1 per cent).

Mr Plank said this was because reduced investment had weighed on productivity and consequently slashed wages and cut household spending.

“In turn, that feeds back to weak investment, as the soft demand outlook deters firms from investing,” Mr Plank said.

Weak productivity is the bigger story

Broadly speaking, economic growth can come from three places: Population, labour participation, and productivity.

Focusing on the first two suggests that economic growth should have been stronger over the last decade than it was in the 1990s and 2000s.

But Dr Plank said such an analysis fails to take into account the growing number of people working part-time, with the reduction in average hours worked since 2010 offsetting increases in the overall participation rate.

Nonetheless, “weaker productivity is the bigger story”.

“We can see the impact of this in the fact that growth in GDP per capita has slowed materially since 2010,” Dr Plank said.

“It has been more than 1 percentage point lower than the average per capita growth experienced in the 1990s and more than 0.5 percentage point below the annual figure in the 2000s (1 per cent versus 1.7 per cent).”

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Economists expend a lot of energy analysing productivity growth as, over the long term, it’s widely regarded as the main driver of higher wages and improved living standards.

Lifting it to 1.5 per cent a year would give workers an extra $3000 a year, according to Treasurer Josh Frydenberg.

Technology has failed to deliver

But despite rapid technological progress, productivity has fallen off a cliff in recent years – and economists don’t quite understand why.

“Perhaps it takes more time than we think for such [technological advances] to have a positive impact,” Dr Plank said.

“Or perhaps it is simply not as transformational as earlier innovations, such as electricity or the combustion engine.”

Dr Plank said that lower productivity only tells half the story, though, with reduced demand affecting economic growth as much as lower productivity.

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Debt won’t fuel growth for too much longer

While government spending over the past five years has been relatively high, consumers have cut back on discretionary spending in response to weak wages growth.

And because the Reserve Bank only has a few more interest rate cuts up its sleeve, the days of debt-fuelled growth could be numbered.

This means the recent low level of household consumption could be the new normal, which makes a pick up in business investment and wages unlikely.

But, if domestic factors are the main drivers of lower investment, then Dr Plank said the government has the power to fix the problem.

“In particular, anything that will lift investment growth is worth considering,” he said.

“Not all such policies are equal of course. The costs, as well as the benefits, of various policy options need to be considered.”

Increased bargaining power more important

Dr Plank’s analysis comes after Ai Group chief executive Innes Willox wrote in an op-ed for The Australian the government must revive the ailing economy by introducing “a generous investment allowance to bring forward and increase business investment”.

Dr Quiggin dismissed Mr Willox’s proposal, though, telling The New Daily past experience demonstrated that such policies “don’t seem to deliver the goods”.

“We’ve had business tax cuts, investment allowances … lots of union-busting policies which are supposed to increase productivity,” Dr Quiggin said.

“We’ve had lots of stuff in which the agenda set by business has been followed … and obviously ANZ is calling for more of the same because that benefits them. But there’s no evidence that that’s going to achieve what’s needed.”

If the government is serious about lifting wages, it could reverse recent union-busting policies and increase the bargaining power of workers, Dr Quiggin said.

“Everything the government has done has been with the aim of weakening unions and driving wages down,” he said.

“So it’s not surprising that that policy has succeeded.”