Productivity, Living Standards and Wellbeing: Comparing the UK and Australia

Why is it useful to compare the UK to Australia?

World Bank data show that real GDP per capita, adjusted for purchase power parity (PPP), for the UK and Australia, follows very similar patterns. In fact, from at least 1990 up until 2008, they differed by less than £700, the UK GDP being the highest. The Great Financial Crisis (GFC) affected the UK more severely, causing its GDP to drop about £2,100 below that of Australia. Nonetheless, this gap gradually shrank after 2008 to £1,340 in 2019, suggesting that the UK was growing faster than Australia.  The onset of the Covid-19 pandemic, however, caused this gap once again to open up to almost £3,225 in 2021.

Despite these recent discrepancies, the UK still produces very similar wealth per capita to Australia and has demonstrated its capacity to catch up after the GFC.  Therefore, we could expect these two countries to achieve similar values of economic, social and health indicators. If they do not, one probable reason is distribution differentials, and thus policy lessons can be learned from Australia’s performance.

What indicators could exemplify their performance across these dimensions?

The OECD Better-Life index is a good starting point for this, since it considers many different areas that contribute to a good quality of life. These include 11 indicators: housing, income, employment, community, health, education, environment, civic engagement, life satisfaction, safety and work-life balance.

The latest edition of the index shows that Australia outperforms the UK in almost all indicators, with the largest gaps appearing in housing, health, education and environment. In housing the UK scores 6.5 and Australia 8.2; in health, the UK scores 7.8 and Australia 9.3; in education, those numbers are 6.7 and 8.6 and in environment, 6.8 and 8.9, respectively. There is also evidence that Australia performs better than the UK in various health outcomes, such as cancer survival rates, despite spending less as a percentage of GDP.

To begin to understand the causes of these discrepancies, we can look at tax revenue and its main sources. Data from the World Bank show that Australia has had a slightly lower tax rate as a percentage of GDP than the UK since the 1970s, around 3 percentage points. Nonetheless, it is in the composition of taxes that the two countries depart from each other. In Australia, taxes on income, profits and capital gains have gone from 70 per cent of revenue in the 1970s to 75 per cent after 2020. On the other hand, in the UK, those percentages start at around 60 per cent in the 1970s and decrease to just under 50 per cent in 2020. Taxes on goods and services have oscillated between 20 and 25 per cent in Australia and have risen from about 27 per cent to 35 per cent in the UK over the same period.

In terms of the minimum wage, the UK has made great advances. In 2001, the annual real minimum wage, adjusted for PPP, was just over £11,200. In 2022, it had risen to almost £16,250. Yet, these values have not reached those of Australia, which had a minimum wage just below £16,800 in 2001 and just under £17,550 in 2022.  The hourly minimum wage for the UK was £5.32 in 2001 and £7.48 in 2022. For Australia, it was £8.89 in 2001 and £9.43 in 2022.

Furthermore, Australia has had lower government debt than the UK since the end of the 1990s. In 2022, for example, OECD data show that its debt represented 70.8 per cent of GDP, while the UK had debt levels of 104.5 per cent. This is important because it results in expensive interest payments, which diverts resources from productivity-enhancing spending such as public investment.

What lessons can the UK learn from these?

For some time, UK policy has tried to improve productivity growth, and one of the most pressing concerns is the high rate of working age inactivity. The recent growth in working age inactivity is mainly due to long-term sickness. When wages cannot keep up with important expenses such as housing, and public services are precarious, it is not surprising that many have become too ill to work.

Rather than superficially designing policies based on blaming people’s eating and drinking habits for their sickness, the UK government should recognise that it could do more to improve those outcomes. The comparison between the UK and Australia suggests that one potential avenue for improving living standards is to make taxes more progressive, allowing the lower and middle classes to retain more of their income. This could be done by reducing tax rates on goods and services and increasing taxation on the wealthiest.  This would also make benefits less attractive and likely bring more people into work.  Furthermore, Australia’s experience in healthcare should also be studied in order to determine which of its elements could be implemented in the UK and improve the NHS’ outcomes.