What would a budget that genuinely addressed Australia’s long-term economic challenges look like? Long-term fiscal sustainability is important — but remember that the budget is merely the means to an end, a reality that has been overlooked in the relentless focus on the deficit of late. The focus on the deficit treats the economy as just one input into the budget, rather than the other way around.

A key economic challenge question that we should be addressing in this budget is how to fill the gap in the labour market that our demography is going to deliver us. And that’s not just a quantity question, but a quality question.

The Reserve Bank hasn’t missed this question, judging by recent comments from RBA governor Glenn Stevens.  At a speech in April, Stevens said:

“… cyclical things aside, the more likely problem in the medium-term future won’t be one of not enough jobs, but instead, not enough workers. At present the number of new entrants to the labour force after finishing education each year exceeds the number retiring. Ten years from now those numbers could be roughly equal, absent a further rise in labour participation in the older cohorts. The question will be less ‘where will the jobs come from?’ and more ‘where will the workers come from?’ It’s true that migration adds to the workforce as well, though migration also adds to the number of people not working and retiring.

Stevens went on to discuss issues such as improving productivity (which is linked to improved education opportunities), higher workforce participation (which has been dipping in the past three years here and in other major economies as the workforce ages and retires). He concluded:

“The answer, the only answer, is growth. To some extent we will, hopefully, be able to lessen the problem through higher labour participation, for longer. But most of all we will need higher productivity of those working. That means making the system as flexible as possible and as encouraging as possible to innovation.”

We’ll return to the productivity question in a moment.  But nearly as critical to this challenge is the mix of skills our workers have, to accommodate a dramatically changing workforce. Overall, the big growth in employment in recent years has been in service industries. In 2012, RBA deputy governor Phil Lowe noted that in the five years since 2007, the overwhelming majority of new jobs created in the economy had come in the service sector, specifically:

“… around 300 000 net new jobs have been created in the healthcare sector, 200 000 jobs in professional and scientific services and around 130 000 jobs in each of the mining and education sectors. In contrast, the number of manufacturing jobs has declined by around 70 000, and the number of jobs in retailing is largely unchanged.”

As Lowe noted, the growth has been in particular kinds of service industries. About four-and-a-half years ago, Crikey noted that health and social care had quietly become Australia’s biggest employing industry. It was 11.1% of the workforce at that point. It has kept growing since then, and is now 12.3% of the workforce — one in eight of us work in health or social care. As recently as 1995, that sector was less than 9% of the workforce. If the growth rate of the last three years is maintained for another decade, in the early 2020s more than 15% of the Australian workforce will be in that sector.

(You can look at the way the workforce has changed over the last 30 years in this table, which Crikey will keep updated, showing the respective proportions of the total workforce each major industry holds).

Where will future health workers come from? What sectors will shrink to accommodate health, as manufacturing has in effect shrunk to make way for service industries since the 1980s? And how will we attract workers into health and aged care when so much of the sector is government funded and unable to respond as flexibly to the challenge of attracting workers (a reason why aged care, which pays nurses less than health bodies, struggles to attract skilled staff)? Manufacturing, almost certainly, will continue to shrink — although, unusually, that sector, despite all the lamentation, ended 2012 with 10,000 more workers than it started with. The other rapid growth sector in recent years has been professional services, although it slowed a little in 2013. It’s just under 8% of the workforce.

As Stevens notes, maximising our productivity in health services will be critical to minimising the disruption that an ageing population will cause to our workforce. The problem is, however, this is one of the sectors that is hardest to measure for productivity. As the Productivity Commission said in its first annual report on this subject in June last year, measuring labour productivity in health isn’t that difficult, but measuring broader productivity is difficult:

“Market sector industries are those where the exchange of goods and services generally takes place in markets at observable prices. The non-market sector comprises the three largely government service areas of health, education and training, and public administration and security. MFP (multi-factor productivity) estimates are not able to be produced for these industries primarily because of a lack of data.

But the rapid growth in spending by governments and the private sector in health, especially on technologies and new facilities, has to be measured in some way to see if it is cost-effective. What’s needed to enable us to maximise productivity in government services sectors is more performance information. That was a big thing for former prime minister Julia Gillard, who drove the establishment of much greater performance information requirements in education and (following the lead of ex-PM Kevin Rudd, admittedly) health.

Coalition MPs are less enthusiastic about performance information requirements. They see it as mere red tape; so unenthused are they about performance information for education that they won’t even bother checking that state governments are spending extra education funding in schools. The Commission of Audit goes further and proposes that all performance information requirements for health funding be abandoned. But that’s at least based on the approach that maximising productivity is about letting the market into as many sectors as possible and letting the market drive productivity. For the Coalition, it’s just about the sugar hit of “deregulation”, the sort of thinking that mistakes abolishing lighthouse acts from the days of yore for clear thinking about the long-term needs of the economy. Given it is very unlikely to embrace the full “let the market rip” ethos of Tony Shepherd and his cronies, the Coalition risks being stuck with a growing, critically important health sector while unwilling to measure it properly.

A budget that took seriously these challenges not just of asking where the workers will come from, but what skills they should have and how we can best measure and maximise their productivity, would be one worth any number of deficit levies. Whether the Coalition is up to that sort of intellectual challenge, however, isn’t clear.