Budget to take $58bn hit from lagging productivity

The Coalition accuses Jim Chalmers of using ‘fantasy forecasts’ in the budget, with experts warning the government's projections are far too optimistic.

Opposition productivity spokesman Andrew Bragg, left, and Treasurer Jim Chalmers. Pictures: News Corp/iStock

The budget will suffer a revenue hit of nearly $60bn if productivity growth averages 0.5 per cent over the next four years – a rate backed as credible by leading economists – piling pressure on Jim Chalmers to pull the trigger on reforms that will improve living standards.

With the Coalition aiming to bring political debate back to the economy after a month of infighting, opposition productivity spokesman Andrew Bragg accused the Treasurer of using “fantasy forecasts” in the budget assuming average productivity growth of 1.2 per cent a year.

Productivity growth was 0.2 per cent in 2024-25, averaging 0.1 per cent in the past eight years.

Senator Bragg asked the ­Parliamentary Budget Office to analyse the impact of productivity growth averaging 0.5 per cent over the next four years. It calculated the hit to revenue would be $58bn.

While the 0.5 per cent is below the Reserve Bank’s recently downgraded productivity growth assumptions, HSBC Australia chief economist Paul Bloxham said it was in line with his forecasts. Mr Bloxham said Treasury’s 1.2 per cent productivity growth assumption was “unrealistically high” and the RBA was being optimistic in assuming productivity growth would hit 0.7 per cent by December 2027.

“Our working assumption is actually that productivity will potentially be even weaker than that (the RBA’s assumption),” he said.

Mr Bloxham said he believed the long-term average for productivity growth wiykd ve about 0.4 per cent – below the PBO figure that showed a near $60bn budget hit .

“What we have averaged over the past decade is about 0.1 per cent,” he said. “The RBA … revised down their forecast in August (but) they harked back to a working assumption that was a 20-year average. But our view is the earlier period had a lot more reform that was done and was still holding up productivity. We think the last decade is more representative and we are still assuming a stronger profile than that decade’s average.”

Independent economist Saul Eslake said the 0.5 per cent assumption was credible, arguing this would “represent a pick-up” in productivity growth.

Treasury assumes productivity growth will sharply pick up to 0.98 per cent by the end of this financial year, rising to 1.4 per cent in 2026-27, before steadying at 1.08 per cent in 2027-28 and 1.23 per cent in 2028-29.

Senator Bragg said the PBO analysis showed a “$60bn black hole in (Dr Chalmers’) budget”.

“Labor’s budget reads: ‘In the long run, underlying productivity is assumed to grow at 1.2 per cent per year’,” he said. “In reality, Australia’s average labour productivity growth rate is just 0.1 per cent over the past eight years. Since Labor came to power, productivity has fallen by 5 per cent. These are the facts. Chalmers is padding his budget with fantasy forecasts. A more realistic 0.5 per cent productivity rate – halfway between the historic average and Labor’s guesswork – shows the budget is in far worse shape.”

Anthony Albanese and Dr Chalmers put fixing productivity on the agenda immediately after the May election win, unveiling plans for an August roundtable to address the issue, attended by representatives of industry, unions and civil society. Little has come from the Economic Reform Roundtable, with the government investigating an overhaul of red and green tape while also keeping an open mind on future tax reforms to increase business investment and improve intergenerational outcomes.

An Albanese government spokesman said the former government had “delivered the worst decade for productivity growth in half a century”.

“Over the decade to 2020, average annual labour productivity growth in Australia was the slowest in 60 years, falling to just 1.1 per cent compared to 1.8 per cent over the 60 years to 2019-20,” he said. “Our productivity challenge didn’t appear overnight, it won’t be quickly fixed, but we are working hard to turn it around over time. That’s the motivation behind our substantial productivity agenda including important competition policy reforms, investments in skills and technology, and the work from the Economic Reform Roundtable.”