The Role and Consequences of Investment in Recent Australian Economic Growth

By international and historical standards, Australia does not appear to be under-capitalised. Nevertheless, the past decade has seen a clear reversal of the steady upward trend in capital intensity; this reversal was most marked after the short-lived increase in capital spending associated with improved prospects in Australia's resource-intensive industries in the early 1980s. Since then, there has been a sharp decline in investment relative to GDP, as reductions in real labour costs relative to capital costs encouraged the substitution of labour for capital. The existence of excess capacity in the early 1980s meant that substitution of labour for investment in new capital was possible without a major slowdown in growth of economic activity or employment. The prospects for continued economic growth depend, in part, on the resumption of investment spending to complement the growth of labour. It will be important for investment to occur in those industries where recent gains in competitiveness have been greatest. Prospects for achieving these outcomes will be enhanced if government policies are directed towards further reducing distortions in investment incentives, encouraging the expansion of technology and providing a mix of overall stabilisation policies that reduces pressures on capital markets.