Australia’s productivity downturn may not be as sharp as it seems, and a slowdown in the government sector’s rapid growth could help improve results, according to Bloomberg Economics (BE).

James McIntyre, who tracks Australia and New Zealand for BE, noted in a research report on Tuesday that recent sluggish performance has largely been driven by the mining industry and the significant structural expansion of government-influenced sectors such as education and health.

Australia’s productivity growth, a key driver of living standards, remains one of the slowest among developed nations, raising concerns for policymakers. Last month, the Reserve Bank lowered its medium-term productivity growth forecast from 1% to 0.7%, aligning it with the 20-year average for non-farm productivity.

The RBA also revised down its projection for Australia’s potential economic growth to 2% and cautioned that ongoing weak productivity is likely to keep unit labour costs, and consequently, inflation, high.

The government is aiming to slow the rapid growth of social programs, including the National Disability Insurance Scheme (NDIS), which had been expanding at nearly 20% annually. Officials are targeting a reduction to under 8%, with the relevant minister recently suggesting a goal of 4%–6%.

McIntyre expects that curbing growth in programs like the NDIS will generally slow the expansion of government services, freeing up resources for a rebound in the private sector. He added that this could help lift economy-wide productivity over the coming decade.

Australia has long enjoyed a reputation as “The Lucky Country” due to its strong economy, but that fortune may be waning. While the nation as a whole isn’t in recession, many Australians are feeling the economic strain.

“Reviving Australia’s weak productivity growth may be easier than it looks. A crucial step would be to slow the breakneck expansion of non-market sectors of the economy,” McIntyre said.

He expects that slowing the growth of government services would also redirect workers toward the more productive private sector.

“A stronger flow of workers into market-based industries, helped by firmer productivity growth and slower non-market expansion, should ease the RBA’s concerns about weak productivity growth and cost-push inflation, allowing it to focus on bolstering demand,” McIntyre said.

The Reserve Bank of Australia is scheduled to meet on 29-30 September, and the majority of economists and market participants anticipate that it will hold the cash rate steady at 3.6%.