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Treasurer Jim Chalmers has warned the pace at which the economy can grow without inflation pressures has dropped, with the coming budget to reveal a substantial slowdown.
Speaking to the Australian Business Economics organisation in Melbourne this afternoon, Chalmers revealed growth over coming years has been downgraded by between 0.25 per and 0.5 per cent. In an economy of almost $2.8 trillion, the downgrade is worth between $10 billion and $20 billion each year.
The budget will confirm that an assumed improvement in productivity has been trimmed. Instead of productivity returning to 1.2 per cent annual growth within the next two years, the budget will assume it getting to that level over five years.
The budget will also confirm that Treasury believes there is less spare capacity across the economy, suggesting more pressure on the Reserve Bank and interest rate settings. Jobs figures out today showed that while unemployment lifted in February to 4.3 per cent, almost 50,000 jobs were created.
A big lift in the participation rate – the proportion of people in work or looking for it – was the reason for the increase in unemployment.
Chalmers said there was increased uncertainty over Australia’s productivity challenges and what that would mean for the broader economy.
“Australia’s two-decade productivity average is higher than most major advanced economies and despite a welcome recent tick-up in last year’s data it has, like other countries, slowed over time,” he said.
“Treasury thinks there is now more uncertainty over the long-term direction of productivity than there has been in the past.
“There are downside risks, including climate change and rising barriers to trade, but there could also be significant upsides from AI and technological developments. Pandemic-related and broader cyclical volatility has also made underlying trends harder to interpret.”
Chalmers said the slowdown in expected growth was not being driven by demand but was a supply issue, with the economy struggling to provide the goods and services wanted by Australians.
“Our economy is running close to its speed limit,” he said.
Chalmers revealed the budget would also contain a reduction in the assumed fertility rate for Australia, saying this was due to lower expected births.
The treasurer said in pre-released remarks that the budget would have three key reform packages to address the nation’s difficulties, saying that despite global uncertainty, now is the time for change.
Those packages, covering tax reform, budget repair and boosting productivity, will form part of a supply-side strategy that suggests Chalmers and the government are prepared to use some of the political capital provided by their overwhelming 2025 election victory.
“If the main constraint we are collectively facing is capacity, these packages will help expand it. More savings to make even more room for the private sector to grow, while building fiscal buffers,” he said.
“Productivity-enhancing reforms to boost supply, generate higher living standards and unlock more investment in the process, to help the economy grow without adding to price pressures.
“And tax reform to drive more productive investment, while supporting budget sustainability and equity, and helping to rebalance the system.”
Government sources have already revealed that tax reform, including changes to capital gains tax, negative gearing and electric vehicle subsidies, is being considered. Chalmers said that any tax changes will depend on how far the government can improve the budget, international developments and yet-to-be-held cabinet discussions.
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