Economic growth ‘very weak’ but better days around the corner

Australia’s economic growth will be “very weak” over the first half of the year, the Treasury boss has warned as consumers continue to pull back on spending, but he expects the labour market to remain resilient as employers cut hours rather than jobs.

Steven Kennedy also argued that any major tax reform should be revenue-neutral and warned against unaffordable cuts to company tax rates, which could lead to higher interest rates and a potential debt crisis.

Treasury secretary Steven Kennedy warned any company tax reforms needed to be revenue-neutral.Credit: Alex Ellinghausen

Speaking at Senate estimates on Monday, Kennedy said economic growth had slowed considerably and, in 2023, the contribution of household spending to that growth was the weakest it had been in the past decade outside of the pandemic.

“The run of recent weak retail trade data suggests consumption is expected to remain subdued into the first half of this calendar year, as households continue to prioritise essential spending,” he said.

“More broadly, we expect activity to be very weak in the March quarter GDP to be published on Wednesday this week.”

The latest GDP figures showed the Australian economy expanded by just 0.2 per cent in the last three months of 2023. Annual economic growth was 1.5 per cent for that year.

Economists expect another subdued quarter of growth, but some expect it to be worse – NAB economists are forecasting no growth at all for the quarter, which would take annual growth to just 1 per cent.

Kennedy said that conditions for the economy and household budgets should start looking up in the second half of this year.

“The expected moderation and inflation, higher nominal wage growth and tax cuts are expected to bolster real household disposable incomes, which we expect will support a recovery in household spending from the second half of 2024,” he said.

The Treasury secretary also noted that the labour market remained strong despite the economic slowdown, with the current unemployment rate of 4.1 per cent a full percentage point below pre-pandemic levels.

“In response to weaker growth, firms have mostly chosen to reduce hours worked rather than their headcount, which has delayed the expected increase in the unemployment rate,” he said.

Kennedy said employment had grown even after accounting for population growth and Australia enjoyed the strongest employment growth of any major advanced economy over the last two years.

“We’re expecting that labour market conditions will continue easing over the year ahead and for the unemployment rate to rise to 4.5 per cent by June [2025]. This rate of unemployment is still well below pre-pandemic levels,” he said.

Within the Coalition, there is debate about whether to follow through with its early 2010s policy of cutting the company tax rate, which is 30 per cent for businesses with a turnover of more than $50 million a year. There is also pressure to index personal income tax thresholds with inflation, a practice last used in Australia under Malcolm Fraser in the late 1970s.

Kennedy said there was scope for a debate about the nation’s tax settings but stressed that any tax cuts should not lead to a deterioration in the budget, noting that this would cause major economic problems.

“Company tax cuts that lead to an unsustainable fiscal position would clearly be bad. So that’s why it always needs to be set in a broader context,” he said.

“I would not want to be in the position that other countries are with fiscal deficits in the order of 6 per cent [of GDP], rapidly rising debt to GDP ratios and potentially much lower tax rates than us – that is an unsustainable and productive position to be in.

“[In the] longer term, it will lead to higher interest rates [and] the potential for debt crisis. Australia will try to avoid it.”

Kennedy warned that indexing tax thresholds would add to inflationary pressures if money was pumped back into the economy during a period of supply-driven price shocks.

“I would have thought about looking at how strong household consumption has been, for example, in the US, it’s probably been unhelpful in managing the cycle,” he said.

Kennedy said the current tax structure had not been a “significant drag” on the overall economy and, by international standards, Australia was not overly taxing residents and businesses.

“We should all remember, particularly from a Commonwealth perspective, that Australia still remains a relatively low-taxing jurisdiction, mostly because it has a fairly targeted welfare system,” he said.

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