Australia needs a national agenda around productivity to create wealth, McKinsey and Company, Managing Partner, Michael Rennie has told a CEDA audience in Sydney.

At the event that drew together four speakers for the final CEDA productivity series event for 2012 to examine national productivity, he said the capital boom is starting to slow and productivity is not moving; if nothing changes, the national income in Australia will decline.

Income matters because it comes into people's pockets, it comes in as profits and therefore into taxes, he said.

"The first thing we are going to see in this inevitable decline is enormous pressure on government budgets," Mr Rennie said.

He said in McKinsey Global Institute's report, Beyond the Boom: Australia's productivity imperative, they break the Australia's economy into four sectors in productivity terms:

• The mining sector;
• Resource riders;
• Local services; and
• Manufacturing.

We have a lag effect in the mining sector which is dragging down productivity and there is pressure on the mining services sector, he said.

"Australia's capital productivity matters, and how fast and well (resources) projects come online is important," he said.

Despite the Federal Government focusing on iron ore and metallurgical coal, 75 per cent of capital goes into LNG projects and in 10 years' time the focus will shift to LNG, he said.

If these projects slow down by a couple of years, then billions of dollars in earnings per project in taxes will be lost forever, he said.

Mr Rennie also emphasised capital productivity and labour productivity are not separate because 50 per cent of the cost of these projects are labour.

Of the four sectors mentioned above, he said manufacturing had the best productivity at 2.4 per cent growth in labour.

Although manufacturing has reasonable productivity performance, Australian Industry Group, Chief Economist, Julie Toth said this is due to its reducing workforce as 136,000 jobs have been lost between 2008 and 2012.

In a survey undertaken by the Australian Industry Group of drivers of productivity performance, Ms Toth said a high proportion of businesses said regulation - environmental, labour and compliance regulation - had a negative effect on their productivity performance.

She said between 2010 and 2011, unit labour costs in Australia rose by an average of 2.5 per cent which is among the fastest rates of growth in the OECD.

University of Technology Sydney, Dean of the Business School, Professor Roy Green said Australia is experiencing an 80 per cent decline in multifactor productivity which is due to:

• An increase in investment in mining which has not been met by output;
• The drought in agriculture; and
• The over investment in utilities.

He said governments haven't invested sufficiently in innovation as we have become complacent due to the commodities boom and we aren't keeping up with competitors such as Canada.

"Innovation is not just about science and technology, it's about non-technology forms of innovation, such as new business models, system integration, high performance work and management practices," Professor Green said.

"Innovation is driven by collaboration not silos…and modern academia should be about engagement between businesses and universities."

Compared to other developed countries, Australia's management is behind on quality, he said.

"Australia is held back by low levels of educational attainment among managers," he said.

"We need to have management which is capable of making transformational change and is engaged with employees in a partnership context.

"Improving management practice is associated with large increases in productivity and output."

University of Melbourne, Melbourne Institute of Applied Economic and Social Research, Honorary Professorial Fellow, Professor Judith Sloan said industrial relations (IR) regulation must be conducive and flexible if innovation is to occur.

She said IR issues for big and small business differ and worker engagement is needed.

She said compliance and regulatory issues are increasing the burden on business and can distract from running businesses.

To address the productivity challenge Professor Sloan said allowing businesses who are laggards to die will improve productivity.

Professor Sloan said a review of the Fair Work Act was needed to assess the impediments to flexibility and innovation.