Why is investment so low?

The recent economic round table was based on the premise that private investment was too low and as a result productivity growth was too sluggish. The round table was too late to influence the June quarter results, but those results certainly reinforce the view that investment has been flat.

In the June quarter itself total private investment in non-dwelling construction, machinery and equipment was down 0.7% and for the year to June was down 1.6%. That certainly confirms a failure of business to invest.

What about our history? Are present levels of investment anything to worry about? The following graph puts that in perspective by showing private investment as a proportion of GDP.

Private investment to GDP %

Source: ABS Australian National Accounts: National Income, Expenditure and Product

There is a lot going on in this graph with the inflation of the 1970s, the “recession we had to have” in the early 1990s, and the mining boom from the early 2000s. But whatever way you look at it, the last decade witnessed a steady fall in private investment as a share of the economy. This then stabilised at these historically low levels.

Private investment has settled at about 6% of GDP lower than the high levels seen in the 1960s.

The round table could have asked what was different about the 1960s. The 1960s had

• higher company taxes,
• centralised wage fixing,
• a heavily regulated financial system,
• controlled interest rates and exchange rates, and
• governments actively involved in nation building