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Productivity Commission

CHAIR —I welcome the officers from the Productivity Commission. Thank you for coming in this afternoon. Dr Kirby, would you like to make an opening statement?

Dr Kirby —I would like to bring you up to speed with where the commission is at at the moment in terms of its work program. Since we last met, several reports and reviews have been finalised. The latest instalment of our annual review of regulatory burdens on business was released last week in fact. Prior to that, we have released the final report on gambling and also our trade and assistance review, which is one of our annual report series of products. We have also finished our inquiry into wheat export marketing. That report has been given to government and is awaiting tabling.

In addition to that, we have many projects still underway. In fact, nine commissioned projects at the moment are underway. Three of those have actually commenced since we last met—one on the urban water sector and reform there, the early childhood development component of our education and training workforce study, and also our estimation of the COAG reform benefits. In addition to those new ones which have started, major projects still underway include an inquiry on disabilities and on aged care. We are due soon to put out a draft report on the vocational education and training component of the education workforce project. A draft report has been released of the rural research and development corporations inquiry. A final report will be delivered next year. We have also released a draft report on the study into bilateral and regional trade agreements. Again, that project will be finalised towards the end of this year. Currently we have underway the latest instalment of our benchmarking work. This time it is on planning, zoning and development assessments. That project, because of data issues, has actually had to be extended. So a draft report for that will now be expected in February.

In addition to that suite of government commissioned projects, our other major block of ongoing work relates to our work as a secretariat to the COAG Steering Committee for the Review of Government Service Provision. So the report of our major annual review of government service provision will be released in late January. Also, in the middle of next year will come the next instalment of our biannual Overcoming Indigenous disadvantage report. In addition, we have been doing a lot of work for the COAG Reform Council in terms of reporting on national agreements and national partnerships as well as work on Indigenous expenditure reporting. The final thing to note is that before the end of this month our annual report is due for release as well. So it is quite a full and varied work program, and it is quite a wide range of meaty policy issues which the government and COAG have entrusted to us.

CHAIR —Thank you, Dr Kirby. Senator Bushby has some questions.

Senator BUSHBY —I thank the Productivity Commission for assisting us today, and congratulations on what sounds like a very busy workload that you appear to be delivering very well. In the view of the commission, what is the biggest contribution that this government has made to increasing Australia’s long-term productivity?

Dr Kirby —I do not think we have actually made an assessment of this government’s particular contribution to delivering productivity. From time to time we have undertaken studies relating to productivity growth and productivity potential for the Australian economy. We have certainly highlighted the broad sorts of policy issues which are relevant to enhanced performance in that area. Some years ago we did a major study on the potential for reform and what that may contribute. In the broad, we would emphasise things like having good regulations and good regulatory processes. We emphasised good industry policy and also we have emphasised the need for or the potential in terms of the human capital agenda.

Senator BUSHBY —Dr Kirby, you have outlined a lot of things that should happen in terms of the advice that you have provided. Can you point to anything that has happened in the term of this government that would substantially have added to the productivity of the nation?

Dr Kirby —We have not done such a stocktake. However, a government commissioned project which we have on our books at the moment, which is to estimate the economic impacts and benefits of the COAG reform agenda, will provide an opportunity for us to address the issue which you are alluding to.

Senator BUSHBY —But at this stage you have not?

Dr Kirby —The first instalment of that work is actually due pre-Christmas, but that report will be very much a sort of framework and methodology report and then we will be analysing progress and what has happened in particular areas in the subsequent reports.

Senator BUSHBY —So there is a formal framework that may well identify changes in productivity, but nothing comes to mind sitting here in front of us today?

Dr Kirby —That project is still ahead of us.

Senator BUSHBY —But in terms of what the government may have done over its first term of government to add to the improved productivity of the nation, nothing comes to mind at this point?

Dr Kirby —We have not analysed that question.

Senator BUSHBY —Okay, that is fine. I will leave it at that. I guess on that basis you would not care to venture an opinion on what might be the least good contribution to productivity.

Dr Kirby —Probably not.

Senator BUSHBY —Why has Australia’s productivity been declining in recent years?

Dr Kirby —I think there are several issues at work, and in fact one of my colleagues may be able to help me out here as well. There are some very specific factors which have been going on. In fact, we recently made a submission to a House of Representatives committee on this issue and will be discussing it perhaps more fully or in a more up-to-date fashion in our annual report, which will be coming out in coming weeks.

Senator BUSHBY —Unfortunately not in time for today.

Dr Kirby —That is correct.

Senator Sherry —That is reasonably standard, I have to say.

Senator BUSHBY —It is reasonably standard.

Senator Sherry —For all portfolios of all governments.

Senator BUSHBY —Not all of them. Tonight we will have the AOFM and I have had the benefit of seeing their annual report, which came out this week. That is no criticism of you, but it is possible.

Dr Kirby —Yes. In the analysis we have done we have also looked at the contribution to Australia’s productivity performance of different industry sectors and it seems clear that there are some special events—I guess you would call them—which have been taking place. For example, a lot of the productivity performance in recent times can be attributed to what has been going on in the mining sector, in the agricultural sector and in some of the utilities sector as well. We have published research on the mining sector specifically already. The main things which are going on there seem to be the very strong investment surge which has taken place in that industry, and the reality is that there is a fairly lengthy lag between investment and increases in output when it comes to large investments in the mining sector.

The other issue in the mining sector, too, is that over time the quality of our ore bodies just tends to decrease because the high-quality, readily accessible ones tend to be used first. I guess the other thing which has been going on in the mining sector in recent times, as you would be aware, is that mineral commodity prices have been very strong which means that the set of potentially profitable projects has expanded. That means that what were previously relatively low productivity projects are now profitable.

Senator BUSHBY —So they do not have to try as hard to—

Dr Kirby —So even though productivity may be declining, profitability has been expanding and Australian incomes have risen as well.

Senator BUSHBY —But is that just masking a problem because of the high prices maintaining profitability when those prices are no longer there? If we have not made gains in productivity, then that will be exposed, will it not?

Dr Kirby —In fact it is a good news story, because what it means is that ore bodies which previously were unprofitable, which previously were low productivity—

Senator BUSHBY —Certainly at that micro level it is a good news story, but in terms of the more macro aspect of Australia’s economy it could potentially leave us exposed if as a nation, so to speak, we relax because the profits are still coming but they are coming for a specific reason and in the meantime we are not making productivity gains. When that reason no longer exists we could be exposed.

Dr Kirby —I think that is a separate issue. The reality is that it is a great time of opportunity in that we can utilise those ores where previously we could not and we can raise the income of the Australian economy whereas previously we could not.

Senator BUSHBY —You mentioned earlier a number of recommendations, and publications that you have put out talk about where we could go to improve Australia’s future productivity. What stands out to you as the main changes that a government could make or parliament should focus on in order to achieve some of those?

Dr Kirby —Again, when we did our analysis of the potential areas of reform for our report on the national reform agenda a few years ago, it was clear that there were several areas of potential activity or benefit. One was the traditional area of regulatory reform and industry policy. The other big, perhaps untapped, area was the area of human capital development, and that went to the heart of education and health type issues, although, in the case of that, we were cognisant of the fact that those sorts of gains do not necessarily come costlessly. So the costs of increasing educational standards et cetera really needed to be taken into account as well.

Senator BUSHBY —So those are the things that stand out from your perspective as to where parliament could go, looking forward?

Dr Kirby —Regulations or characteristics of the workforce which were inhibiting participation in the labour market and which were inhibiting the productivity of individual workers.

Senator BUSHBY —Okay. So in that sense you are talking about education rather than government regulation that might be inhibiting the workforce to adapt to the demands?

Dr Kirby —Certainly in the case of education, for instance, yesterday we released a staff working paper, which is not a formal commissioned product but is a research product by some of our staff, on the impact of literacy and numeracy on labour market outcomes. That research strongly indicates that enhanced literacy and numeracy skills really do contribute to the potential for participation in the workforce and the potential for higher wages as well.

Senator BUSHBY —In terms of regulation, which you mentioned, the Department of Finance and Deregulation is obviously tasked with deregulation. In your view, what progress has been made on deregulation in the last three years?

Dr Kirby —Again, I think the department could probably better answer that question. We have not undertaken a stocktake of deregulatory—

Senator BUSHBY —So you have not done any formal analysis, but nothing comes to mind once again? You cannot think of any major strides that have been made by that department in achieving deregulation in government?

Dr Kirby —I think the department could better answer that question.

Senator Sherry —Senator, as I think I indicated yesterday when we got into this area, I am more than happy to talk extensively about that issue here and now, but it is not the appropriate place. But, as has been mentioned, the PC has been charged with carrying out the COAG agenda of deregulation and an assessment of that—

Senator BUSHBY —Delivery of government services—

Senator Sherry —And the impact, and that is to come, of course.

Senator BUSHBY —You mentioned before that you had not done a stocktake on it, but through that body—you are the secretariat, I believe—

Dr Kirby —Yes.

Senator BUSHBY —Through that body you will be looking at this in the future?

Dr Kirby —We will be looking at the COAG reform agenda and the impact and the benefits.

Senator BUSHBY —So that is for all state and federal governments’ approaches to the issues of service delivery and how regulation may impact on productivity?

Dr Kirby —Yes.

Senator BUSHBY —I presume you would agree that it is a given that there is scope for further deregulation in terms of achieving productivity improvements?

Dr Kirby —I think there is scope for continual improvement in the regulations in the Australian economy.

Senator BUSHBY —Okay.

Dr Kirby —It is a matter, I guess, of picking the priority areas and working out which are the best ones.

Senator BUSHBY —Which was very much my next question. Where would you think the priorities should be?

Dr Kirby —We will be examining what the achievements have been and hence what the residual priorities are.

Senator BUSHBY —So the Productivity Commission has not put out any papers or Mr Banks has not given any speeches where he indicates where some priorities could be?

Dr Kirby —We have over recent years been undertaking studies of the regulatory burdens imposed on business by Commonwealth legislation and we have been undertaking studies which benchmark the different regulations in specific areas across the various jurisdictions in Australia. So that information perhaps will be useful to policymakers to make an assessment of where things may change.

Senator BUSHBY —That is fine, but in any of those fora have you actually identified areas where you think there would be significant benefit to Australia if certain things were tackled?

Dr Kirby —Those reports identify differences and areas of imposition of costs and I guess by implication a reader may be able to make conclusions as to how they might want to respond.

Dr Gordon —It is worth saying that the not-for-profit sector report made a number of recommendations with regard to regulation that effectively got embedded in contracts. So through the contracts a whole bunch of requirements added significantly to the costs of operating not-for-profit services, many of them funded by government. There were explicit recommendations about actions that could be taken to reduce those costs.

Senator BUSHBY —That is a good example. How big a job would it be to identify the types of issues that you might have put together over the last three years in various reports, speeches or papers—without the detail, just the headline; this is what it was?

Dr Kirby —We could go back and look at our—

Senator BUSHBY —If you could take that on notice and, without placing an unreasonable requirement on you, that would be appreciated.

Dr Kirby —Sure. That information would be available through our website, where there is a complete listing of all the projects and inquiries that we have done. That is fairly straightforward.

Senator BUSHBY —As a general principle, do you think it is advisable that large public infrastructure projects are preceded by a cost-benefit analysis?

Dr Kirby —I think the commission has always been a supporter of strong policymaking procedures. Some of the key steps in terms of good policymaking involve considering the objectives that one is seeking to achieve, considering the full range of options which may be conducive to those objectives, considering the impacts, the costs and the benefits of the various alternatives and making a selection based on the policy option which leads to the greatest net benefit to the Australian community. At the end of the day, having a fairly strong post-evaluation process in train to check and finetune policies after the event in terms of what impact is actually achieved is supported.

Senator BUSHBY —So in summary the answer is yes? You are not Robinson Crusoe in that respect. Dr Henry is also of that opinion. The red book advised the incoming government that it is a valuable thing to do and it should be done, particularly for large projects—infrastructure and so forth. Tell me if I am putting words in your mouth, but in general you are saying yes?

Dr Kirby —Strong consideration of all the alternatives, the costs and benefits and careful selection is the way to go.

Senator BUSHBY —Is it a reasonable argument to say that some projects are so big or so visionary that they cannot be assessed by a cost-benefit analysis? Could you foresee that a job could be too big or too visionary to actually conduct an analysis of it?

Senator CAMERON —I think this is really a hypothetical. If there is a question about a project or a type of project I think that is fine, but to ask in a general way like that just leaves—

CHAIR —I will leave it up to Dr Kirby to answer it.

Senator BUSHBY —I can rephrase it and ask him if he was asked to do the cost-benefit analysis on the NBN, for example.

Senator CAMERON —But why would you?

CHAIR —I think Dr Kirby is quite capable of responding.

Dr Kirby —If we were given by the government of the day the job of doing a cost-benefit analysis of any particular project then basically we would do the best job we could of that. We would examine the characteristics of the project. We would examine the information which was available relating to the impacts and the costs and benefits. We would address the government’s terms of reference as best we could.

Senator BUSHBY —And ultimately, regardless of whether some impacts or potential benefits may be known or not, you would come up with a result which said, ‘Well, on the basis of the information that we can ascertain, this is our consideration of the costs and the benefits,’ and a conclusion.

Dr Kirby —Oftentimes what one finds is that one has good information on a subset of the costs and benefits—information which is readily available. So in principle we would document that. But then there may well be a broader range of issues which cannot be so readily calculated, so to speak. We would tend to mention them qualitatively, and I guess there would be an element of judgment involved on the part of readers of the analysis as to what decisions they come up with.

Senator BUSHBY —Nonetheless, you could have a crack at it and come to conclusions based on that level of information that you had available to you?

Dr Kirby —We would undertake whatever projects the government of the day requested us to do.

Senator BUSHBY —What do you think about the proposition or the argument that because a government policy has already been decided upon there is no point in doing a cost-benefit analysis?

Dr Kirby —Well, again, the Productivity Commission is happy to do tasks which the government asks us to do.

Senator BUSHBY —Regardless of whether it is a policy already or not, you would take it on because that is your job?

Dr Kirby —Yes, that would be an issue of government prioritising of our work program.

Senator BUSHBY —I will move on to a slightly different topic. In your most recent annual review of regulatory burdens, one of the recommendations is to increase the monthly income threshold for superannuation, which is still at $450. Why do you think the threshold was set at $450 in 1992?

Dr Kirby —I understand that that threshold was set at $450 in 1992. It was essentially, I think, at the time a question of balancing the need to ensure superannuation was received by workers versus the costs of administration and compliance. So essentially it involved balancing those two issues and that is what led to the $450 threshold.

Senator BUSHBY —Do you know how many workers were excluded from the guarantee in 1992 because of that threshold?

Dr Kirby —I could not tell you that.

Senator BUSHBY —You would probably have that information, though, as part of your examination of this issue somewhere in the commission?

Dr Kirby —We could take that question on notice and see if we do have that information.

Senator BUSHBY —Thank you. In real terms, how much has that threshold fallen?

Dr Kirby —Again, I cannot give you the exact number but, clearly, because of inflation, because of increases in wages, that threshold now captures more workers than it previously did. So to an extent there has been regulatory creep through the nonindexation or nonincrease of the threshold. I think that was part of the rationale in our most recent report, which suggested that that threshold really needed to be looked at, needed to be increased and maybe should be subject to regular review in order to maintain the original policy intent.

Senator BUSHBY —That balance that you spoke of is no longer necessarily there in the same way it was when it was introduced?

Dr Kirby —Correct.

Senator BUSHBY —What impact would this dramatically lower threshold have on employees’ wages and business costs?

Dr Kirby —I cannot give you a specific quantitative answer, but clearly it is capturing more workers. Clearly there is a cost there. There are probably also increased administrative and compliance costs.

Senator BUSHBY —Okay. In your recent trade and assistance review you write:

While tariff assistance has declined significantly in recent years, budgetary assistance to industry has been increasing.

Can you elaborate on the budgetary assistance you are referring to?

Dr Kirby —The budgetary assistance—and, again, maybe my colleagues can help me a little bit on this one—relates to direct expenditures and also relates to the various tax concessions. In the report there are various areas of expenditures, various tax concessions, which are documented and costed.

Senator BUSHBY —What is the impact of this assistance on the Australian economy, in your view?

Dr Kirby —Obviously the direct impact of assistance is to enhance or to favour those particular areas of activity. The broader impacts of it through the economy would need to be examined.

Senator BUSHBY —What are the potential broader effects?

Dr Kirby —In the case of budgetary assistance, the most obvious one is that taxpayer revenue has to be raised in order to finance it.

Senator BUSHBY —Yes, or diverted from other programs.

Dr Kirby —Yes.

Senator BUSHBY —What about distortionary effects in the economy?

Dr Kirby —To the extent that one area of activity in an economy is favoured through regulation, through protectionist measures, through subsidies and through a range of possible assistance measures, that area benefits. That area attracts resources of labour and capital. Those resources come from other areas of the Australian economy.

Senator BUSHBY —This is my final question on this particular point. Did you come up with the total value of the assistance that the federal government is providing to industry in Australia?

Dr Kirby —I have not got that number off the top of my head.

Senator BUSHBY —I think it was $17-point-something billion. I do not have it in front of me either, but I quoted it yesterday before the industry department and I think the industry minister made some comment about how they might calculate assistance to industry different to what the Productivity Commission does. Could you just confirm what that figure is and provide a break-up of how it is comprised and from which departments? Is that possible? Where it is sourced?

Dr Kirby —Certainly where it is sourced or where it goes to. Whatever is in the report we will get to you.

Senator BUSHBY —Okay. As much detail as you can in terms of the break-up of that figure. Thank you.

Senator RONALDSON —Dr Kirby, I am pleased that you made reference to the staff report yesterday about the links between literacy and numeracy skills and labour market outcomes, because I suspect that the staff and I are the only ones who have probably read this at this stage. But there were some very interesting outcomes from it. Just for the benefit of others in the room, what the staff report found was that it was estimated that an improvement in literacy and numeracy skills from level 1 to level 3 would increase the likelihood of labour force participation by about 15 percentage points for women and about five percentage points for men and increase hourly wage rates by about 25 per cent and 30 per cent for women and men respectively, which was a very significant improvement clearly. What I found of great interest was the next part of this report, and I will quote from it:

Improving educational attainment was also estimated to have a positive statistically significant effect on labour force participation and on wages.

If improving the opportunities for educational attainment has that positive effect on labour force participation or wages, I would assume that reducing the opportunities for educational opportunities would have a negative effect potentially on labour force participation and on wages.

Dr Kirby —The analysis I think is specifically in terms of educational attainment, so I am not quite sure how that relates to opportunity, per se. The interesting thing about this research is that it did try to disentangle the effects of educational attainment—for instance, year 12 or degrees or whatever—from the specific skills which individuals have in terms of their literacy and their numeracy.

Senator RONALDSON —That is right, so overall it was educational attainment that was being looked at in the global sense. Indeed, presumably cost is a trigger factor in people’s decision to improve their educational attainment. Would it make sense that that would be a trigger?

Dr Kirby —Costs but also I guess the expected return on their investment.

Senator RONALDSON —Yes, but costs would certainly be one of them you just said?

Dr Kirby —Yes. One of the obvious costs in terms of future educational attainment is the income which is forgone in the time in which you study. So for many of us who have done three or four years of university study, we were not earning income in that time period and that is probably a major element of the cost involved in that decision.

Senator RONALDSON —Or the cost of living away, or the cost of transport—all of those sorts of things.

Dr Kirby —Yes.

Senator RONALDSON —On the back of that, are you aware that last year the current government made some very dramatic changes to the independent youth allowance?

Dr Kirby —I am aware of some media comments on it.

Senator RONALDSON —Are you also aware that these changes effectively allowed the government to discriminate against students from areas classified as ‘inner regional’?

Dr Kirby —The commission has not looked at that issue specifically.

Senator RONALDSON —Are you also aware that this new policy divides regions and electorates with arbitrary lines or maps determining student eligibility for independent status? Are you aware that two towns in the same area on different sides of the line will have potentially different educational outcomes and that students may come from the same class in the same school but be discriminated against based on which side of the line their home sits?

Dr Kirby —I personally am not aware of the specific details of the policy or its implementation.

Senator RONALDSON —Are you aware that in the House of Representatives—on Monday, I think it was—there was a motion moved by Ms Marino, the member for Forrest, who moved:

That this House:

(1) requires the Government:

(a) urgently to introduce legislation to reinstate the former workplace participation criteria for independent youth allowance, to apply to students whose family home is located in inner regional areas as defined by the Australian Bureau of Statistics instrument Australian Standard Geographical Classification;

Senator CAMERON —Point of order. First of all, there does not seem to be a question coming. Secondly, Dr Kirby has indicated that he is not aware of the issues that Senator Ronaldson is raising. Yet Senator Ronaldson is continuing on as if Dr Kirby can respond to these issues, even though he has indicated that he does not have a detailed capacity to respond.

CHAIR —Yes, that did occur to me as well, Senator Ronaldson, but I will allow Dr Kirby to make that decision himself.

Senator RONALDSON —Just on the point of order, Dr Kirby—

CHAIR —The point of order has gone. I am allowing you to continue, Senator Ronaldson. I do not see any point in dwelling on the point of order.

Senator RONALDSON —I was hoping that you might let me elaborate on the point of order.


Senator RONALDSON —To avoid me asking another question. I will leave it there. I thank you for the answers that you have given me, Dr Kirby.

CHAIR —Thank you.

Senator CAMERON —Dr Kirby, you are aware that Professor Stiglitz did a series of seminars in Australia?

Dr Kirby —Yes.

Senator CAMERON —One for the Productivity Commission.

Dr Kirby —Yes, I think it was a joint Productivity Commission and the Economics Society of Australia lecture.

Senator CAMERON —What issues did the professor raise in the seminar that interested the Productivity Commission?

Dr Kirby —One of my colleagues can help me out a little bit on that, but the main issue which I heard him talking about was the issue of wellbeing in an economy and measuring wellbeing in an economy.

Dr Gordon —The talk was on the work that Stiglitz, Sen and Fitoussi did with the commission that had been put together by President Sarkozy and he was reporting on the measurement framework that they had been developing to try to develop other measures of wellbeing that go beyond some of our current economic measures. We have always known that the economic measures are very limited—partial measures of wellbeing. There is an OECD-led international program to try to expand some of those measures. The commission has been talking to the ABS and watching that space very closely.

Senator CAMERON —So were there, firstly, any lessons for the Productivity Commission in this seminar and, secondly, for government?

Dr Gordon —What was interesting is the extent to which we do not have good general national level measures, we do not have good longitudinal data on a lot of the sorts of things that matter for wellbeing. So we are very interested in assisting to get the sorts of information that we would like when we do our inquiries so that we have a better database to work with because, as was mentioned earlier in response to a question on how you can try to measure some things that are very hard to measure, often we find that we can measure economic things well but we really struggle to find good measures of social outcomes and often environmental outcomes. So we are very supportive of any program that tries to build better databases for future analysis.

Senator CAMERON —In relation to your current inquiry into productivity, would you be taking any of the lessons or ideas from Stiglitz and applying them in that analysis?

Dr Gordon —If an inquiry is into productivity, measuring multifactor productivity, we are actually talking about outputs. So the concept of productivity as measured currently is very well defined. But, when we do our analysis in a cost-benefit framework, we do look at a much broader set of benefits and costs. In many ways the commission uses our inquiry process and calls for submissions to identify what those are and to ask people for evidence on those kinds of things.

Senator CAMERON —So the wellbeing of the community could be a factor in this inquiry?

Dr Gordon —In any inquiry that we do we are actually tasked with looking at the community wellbeing. Sometimes we are asked to specifically look at the economic ramifications, and other times, particularly inquiries like parental leave and aged care, we do have to look at those broader wellbeing issues.

Senator CAMERON —You might want to take this on notice, but maybe at the next estimates you will be able to advise us how you use the Stiglitz analysis in your inquiry, if you use it at all. I will be seeking some answers on that.

Dr Gordon —I think it is a very useful piece of work.

Senator XENOPHON —I have a question that follows on from what Senator Cameron was asking on these broader issues and from what Senator Bushby was asking in relation to the NBN and the cost-benefit analysis. Does the commission have the capacity to undertake a social cost-benefit analysis of something like the NBN in terms of the economy-wide effects and the issues of, for instance, what some would perceive as a market failure with respect to broadband in regional Australia? There is an element with broadband of the blue-sky type issues in terms of we do not know what the technology will bring, although I suggest that you can extrapolate from what has occurred in the last few years. Is that the sort of thing the commission could usefully do—not just a strict cost-benefit analysis, as I think Senator Bushby was referring to, but broadening it to the social impacts of broadband?

Dr Kirby —I think the commission is well placed to do such work. It has the expertise to do it. It has had plenty of experience in applying such an approach—for instance, the work that we have done on gambling, on non-profit organisations, on disabilities, on aged care. These are important social issues which do have that social dimension. So we have plenty of experience at doing it. Also, I think the commission’s public hearing processes are very suited to bringing those issues to the fore in the discussion, in the debate, in the analysis. That information is certainly taken into account in putting together the final analysis of the issues.

Senator XENOPHON —Would that include issues or perceptions of market failure?

Dr Kirby —Certainly we examine market failure issues.

Senator CAMERON —Given this productivity inquiry that is taking place, when I was the secretary of the union I had some work done by a Dr Jim Stanford, a Canadian economist. He outlined a number of failures in the Australian economy in the decade from 1996 to 2006. He said that there was a failure of using ABS statistics and OECD analysis, that there been had been a failure of investment, a failure of innovation, a failure of productivity, a failure of development, a failure of competitiveness, a failure of balance in the economy and a failure to deal with the issue of sustainability. Does that correlate with any of the issues that you have looked at over the last decade?

Dr Kirby —I am not familiar with the piece of work, but it sounds like a fairly gloomy assessment of the Australian economy.

Senator CAMERON —It is actually an analysis of ABS data and OECD data in terms of where we are, because it is not gloom; it is facts.

Senator BRANDIS —Not opinion, Senator?

Senator CAMERON —No, factual. I can take you to it. And it is not a Brandis to Brandis.

Senator BRANDIS —Economists do have different opinions, you know, Senator Cameron.

CHAIR —We really only have a couple of minutes, so Dr Kirby might like to respond. Please go ahead, Dr Kirby.

Dr Kirby —Well, I guess what I am hearing from the question is a fairly gloomy assessment of the status and the progress of the Australian economy in that particular time period. I guess my experience suggests that it has not been quite as gloomy as that, so I am surprised at the depth of the gloom there. I think the Australian economy internationally has not been doing too bad in a relative sense either. I think undoubtedly some of the broader studies and some of the specific studies that we have done indicate that there is plenty of scope for improvement. That is what we are about as a commission—trying to find those areas for improvement.

Senator CAMERON —On the international tables over that period, we were at the bottom of the tables for research and development. We were at the bottom for investment. That is the facts as they are laid out in the OECD and in ABS statistics.

Dr Kirby —Well, on the research and development, perhaps I can turn to my colleague to my right who, in fact, was involved with our major study on innovation.

Dr Lattimore —We did look very closely at Australia’s innovation system in a report several years back. It is very difficult to make these comparisons of R&D across countries and it is quite easy to get the impression that Australia is a low performer. However, we have a particular industry structure. When you adjust for that industry structure our position is not at the bottom of that.

Senator CAMERON —I am not saying the bottom; we are below average.

Dr Lattimore —Okay, and some people turn it around and say we are above average in R&D productivity, if you like, too. But we looked at a whole broad range of aspects of our innovation system at that time, which encompasses the public sector as well as the private sector, and we did identify some issues, but there were also some very positive features of the Australian system. We had very positive words to say about, for example, the role of the public sector in R&D.

Senator CAMERON —Does the Productivity Commission say that it is not a gloomy picture when you look at the failure of investment in public facilities and infrastructure? PEO and ABS statistics from 1990; it reduces from six per cent of public fixed investment as a percentage of GDP down to under four per cent. Is that a great achievement for this economy?

Dr Kirby —I think when it comes to public sector investment or investment generally there is no magic number. There is no magic per cent of GDP which is the right number. Essentially what you want is to make sure that your investment makes sense in that it makes a decent return to the community either in terms of a profitable investment if it is a private sector undertaking, or the other returns, the other social and economic and community returns which come from major infrastructure investments.

Senator CAMERON —But Dr Kirby—

CHAIR —Sorry, Senator Cameron, we are at time now. If you want to put questions on notice please go ahead. I would like to thank the Productivity Commission for coming in again this afternoon.

[2.19 pm]