A strong economy is central to the welfare and wellbeing of all Australians. It provides the material basis to deliver the sort of society we want to live in.
If GDP growth averages 3.5 per cent a year over the next few decades, average real incomes would be around $40,000 higher ($160,000 in today’s dollars) than projected in the Intergenerational Report (IGR). Tax revenues would be some $290 billion higher (in today’s dollars).
On the other hand, if GDP growth were to slow to 2.5 per cent a year then tax revenues would be $100 billion lower (in today’s dollars) and income per person would be around $108,000, not $122,000 as in the IGR.
Without stronger economic growth, Australia will sleepwalk into a state of fiscal weakness, slower growth in living standards and heightened vulnerability to economic shocks.
Arguing about how the economic pie is divided up does not offer an enduring solution to Australia’s low income-growth predicament.
The only way to improve living standards for all Australians is by growing the size of the economy, not increasing taxes to fund ever-growing spending.
The government and the Parliament have an overriding obligation to give the community the best value for the over $400 billion in federal taxes it currently pays.
Productivity growth is not about making people work harder or paying them less. It is about businesses, and governments, investing, innovating and working smarter to create greater value.
Labour productivity growth has been averaging around 1.3 per cent over the decade to 2017-18.
Treasury’s confronting arithmetic shows that for real gross national income growth per person to return to its long-run average of 2 per cent per year, annual labour productivity growth will need to increase to around 2.5 per cent.
Achieving this would be unprecedented in modern history – higher than the “golden decade’’ of productivity growth in the 1990s when it averaged around 2.2 per cent.
It will require a renewed focus on business investment and innovation.
A strong fiscal position enables investment, funds the services the community expects, and also provides strength to defend against economic shocks.
While the budget is now likely to return to surplus, federal net debt is at its highest in over 50 years.
Delivering a strong fiscal position requires a strong economy, as economic growth drives revenue growth.
Spending per capita increased by 35 per cent in the decade leading up to the GFC. That structural increase in spending then combined with the revenue impact of the GFC and lower commodity prices to produce a string of budget deficits.
Disciplined fiscal policy helps underpin an attractive environment for businesses and allows firms to make investment decisions with greater confidence.
Australians are still not getting the most value for the money government spends on its behalf.
The Intergenerational Report projects a widening fiscal gap approaching 6 per cent of GDP by 2054-55.