Deficits will climb and growth will suffer without productivity revival

Deficits will climb without productivity revival

Australia’s sovereign debt will continue rising, budget deficits will widen and the economy will languish if productivity growth fails to improve on its recent performance, a KPMG Economics report published today, argues.

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Australia’s sovereign debt will continue rising, budget deficits will widen and the economy will languish if productivity growth fails to improve on its recent performance, a KPMG Economics report published today, argues.

Preliminary modelling by KPMG highlights the importance of multifactor productivity, which reflects technological progress, for the performance of the Australian economy. If the annual growth in multifactor productivity is 0.25 percentage points below its trend growth KPMG estimates indicate the budget balance deteriorating by almost $11 billion over four years.

Further, real GDP would be about 1 per cent lower and per-capita Gross National Income (GNI) – a more appropriate indicator of Australians’ economic well-being – would be about 0.9 per cent lower.

John Somerville, KPMG National Managing Partner – Advisory 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. 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.”

Globally, the report points to subdued future growth prospects, especially in developed economies. Multifactor productivity growth has been flat for the last three years, compared with an annual average of more than 1 per cent from 1999 to 2006 and 0.5 per cent from 2007 to 2012. Australia’s performance has been flat-lining since 2004.

This year the IMF, World Bank and the OECD have all adjusted down their growth forecasts – as they have done in every year since the Great Recession of 2009.

Craig Emerson, adviser to KPMG Economics, and author of the report said: “Since the turn of the century the best-known technological advances have mostly produced consumer and entertainment devices like smartphones and I-pads. So not only is global economic demand weak but the supply side is too.”

The report finds that the economies of developed countries are suffering from a lack of investment and consumption spending emanating from fears about future growth and job prospects. Compounding this business and consumer pessimism is a set of powerful forces pushing against growth – including massive accumulated government and private debt, population ageing, widening inequality and the need to deal with climate change.

In the coming Digital Age, the report argues that routine manual jobs will be replaced by robots possessing artificial intelligence. Routine cognitive jobs, including clerical, accounting and advisory positions, will also go, which will hollow out the middle classes. Jobs will continue to be created but will often be lower-paid, part-time and precarious. This threatens social cohesion as well as the government’s anticipated income tax receipts.

The coming Digital Age will challenge existing business models; businesses that fail to adapt to it will be swept aside.

John Somerville said: “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. 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.”

He added: “Our 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.”

Further Information

Ian Welch
Senior Communications Manager, KPMG
T: 02 9335 7765 / 0400 818 891

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