Budget too optimistic about productivity, says KPMG

KPMG modelling shows Australia’s sovereign debt will continue to climb if productivity fails to improve on recent performance – contrary to what the federal budget has suggested.

According to a report by the professional services giant, preliminary modelling shows that if the annual growth in multi-factor productivity is 0.25 percentage points below its trend growth, the budget balance will deteriorate by almost $11 billion over four years.

Furthermore, real GDP would be about 1 per cent lower and per-capita gross national income (GNI) – a more appropriate indicator of Australians’ economic wellbeing – would be about 0.9 per cent lower, KPMG said.

“The recent budget assumes that future productivity growth will match its performance over the past 30 years, which includes the golden years of the 1990s,” KPMG national managing partner John Somerville said.

“Our modelling shows that if, instead, growth in multifactor productivity is more like its recent performance, then the budget deficit will be greater and living standards will be lower than the budget suggests.”

The report also said that globally, economies of developed countries are suffering from a lack of investment and consumption spending, which stems from fears about future growth and job prospects.

Moreover, routine manual jobs such as clerical, accounting and advisory will be replaced by robots, “hollowing out” the middle classes.

Jobs will continue to be created, but will often be lower paid and part-time, which will threaten social cohesion as well as the government’s anticipated income tax receipts.

“Whichever party forms the next federal government after July 2 must confront the challenge of weak productivity growth head-on if Australia’s quarter century of recession-free growth is to be extended,” Mr Somerville said.

“KPMG research has shown that over the past 20 years, in many sectors higher labour productivity created much of the increased value, while in others capital played a bigger role. So a more sophisticated approach is needed than just assuming people have to work harder.

Mr Somerville said the research highlights the importance of governments focusing on policies that stimulate multifactor productivity growth, particularly in an economic environment where structural budget deficits appear to be entrenched and global growth prospects are subdued.

“We advocate a comprehensive program of productivity-raising reform, including tax reform, a new round of competition reforms, and improved educational attainment for disadvantaged students to achieve inclusive growth and maintain social cohesion,” he said.

[Related: ‘More work’ needed on regulating alt-fi market, says KPMG]

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