Budget measures reliant on Australia lifting its productivity fortunes

Brendan Rynne, KPMG Chief Economist said:

“At a broad level the economic forecasts contained with the Budget seem reliant on Australia lifting its productivity fortunes.

With the Treasurer forecasting real GDP growth of around 2.75 percent and 3.0 percent in the short to medium term respectively, while assuming no change in the participation rate and population growth of around 1.7 percent per annum, then multifactor productivity growth of between 1.0 percent and 1.2 percent would be sufficient for those GDP growth forecasts to be achieved

Yet recent history tells us MFP has been sliding downwards, with capital productivity virtually flat and labour productivity growth also falling – in fact it looks like labour productivity has been negative in Australia’s market sectors in the second half of last year.

Some of the measures in the Budget should aid that productivity increase. The Government’s enhanced and expanded policy towards accelerated depreciation for small to medium businesses should help, at least to some degree, assuming the nearly 3.5 million SME’s take the incentive on offer and purchase new assets.  We also know that if those SME’s spend that allowance on new high tech capital then labour productivity is likely to be boosted further.

Increasing productivity, lifting the capital-labour ratio and employing more high tech assets should also lift real wages in the process.

It is true that MFP is not the only cause of GDP growth – there can be a lift if workers get more hours or if there is a change in the composition of the economy towards higher productivity sectors. A healthy pipeline of infrastructure investment is also slowly starting to deliver.

But the key question for the Budget is whether the proposed policies reach deep enough across the whole economy, and also whether business has the confidence to take the money and run with it.”


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