The Albanese government has slashed the forecast of future gains in national productivity, saying the Coalition had relied on unrealistic predictions that hoped “no one would notice”.
The move cuts the estimate for future annual productivity growth by a fifth, from 1.5% to 1.2%. The revised forecast is in line with the average over the past 20 years and could lop billions of dollars off the size of future economic output.
“Australians are up for hearing real talk about where our country is positioned, so we can have an honest and serious conversation about where we need to go next,” the treasurer, Jim Chalmers, said. “This wasn’t the previous government’s approach, but it will be our approach.”
The previous forecast, relied on for wider predictions in the Intergenerational Report and the budgets of the Morrison government, was unrealistic, he said. Productivity measures how much economic output can be generated from a given set of resources.
“They never got near it but budget after budget, they pretended they would and hoped no one would notice,” Chalmers said.
The revisions have already been plugged into the forecasts Chalmers used in this economic statement last week which predicted slower GDP growth and higher inflation before it starts to subside next year.
The Productivity Commission on Wednesday also released the first report of its latest five-year reform series, showing productivity growth is at its slowest in 60 years. At 1.2%, though, the government’s revised target is higher than it has been in more than a decade.
As per the latest Productivity Commission report, here's how we're tracking - and why the 1.5% growth rate used in the final Morrison-Frydenberg budget was more than optimistic... pic.twitter.com/ccSu4KU3N8
— Peter Hannam (@p_hannam) August 3, 2022
John Hawkins, a senior lecturer at the University of Canberra and former senior economist at Treasury and the Reserve Bank, said the lower productivity growth estimate is “a welcome step towards more realistic forecasts”.
The 1.5% growth may have been in line with the average over the past 30 years but that period included the “golden age” of economic reform during the Keating era and the early Howard/Costello years, Hawkins said.
“In the past two decades productivity growth has been much lower and there is no reason to expect an imminent surge,” he said. “Even 1.2% would represent a small acceleration.”
The challenge for accelerating productivity growth, though, is that most policies can take a long period to implement and to take effect.
“Improving education, making the tax system more efficient, reforming regulations, restructuring the health system and improving infrastructure are long-term projects,” Hawkins said. “Many of the 1980s reforms were one-off. You can only float the dollar once. You can only get rid of tariffs once.”
Making childcare more accessible may be one helpful policy to the extent it makes it easier for more people to join the workforce, boosting national income and tax revenue in the process, he said.
Shaving off 0.3 percentage points from current tax revenue estimates for 2023-24 would create a $25bn-a-year shortfall by 2033-34, with cumulative losses of $120bn for that decade, Hawkins estimated.
The impact of a lower productivity growth rate over time is significant. As noted in the Intergenerational Report, real and nominal GDP will be down almost 10% out to 2060-61 when a 1.2% rather than 1.5% is assumed. pic.twitter.com/VhhOaRXB7p
— Peter Hannam (@p_hannam) August 3, 2022
According to sensitivity analysis contained in the Intergenerational Report, real and nominal GDP are both projected to be about 9.5% lower by 2060-61 if the 1.2% productivity growth rate is applied, rather than 1.5%.
“Nominal gross national income per person is also projected to be $32,000 lower by the end of the projection period compared with the baseline,” it said, adding that wages would also be 9.25% lower and tax targets reached two years later.
