Opinion article

Budget 2019: Money in people's pockets but the need to enhance productivity remains

In a follow up piece analysing the Federal Budget, Jeremy Thorpe writes the Government should be congratulated for being responsible with its announcements. He argues, however, that a need for a true productivity enhancing reform agenda remains. 

Twelve years ago Apple announces the release of its very first iphone, seven wonders of the modern world were announced based on over 100 million votes from people in 200 countries, the new Wembley stadium in the UK was completed, the seventh and final Harry Potter book was published selling over 11 million copies in the first 24 hours and John Howard was PM.
This Budget allowed the Treasurer to claim the first surplus in 12 years, a $7.1 billion forecast, thanks to some prudent economic management and a bit of luck. But these announcements were always going to be shaped by the political reality of a Federal election only weeks away. I’m not sure what AC/DC would think but the Government screamed out that they are ‘back in black’. 
In my pre-budget post I spoke of the need of a delicate balancing act between short-term sentiment and long- term concerns, and the Government needs to be congratulated for being relatively responsible in its announcements.

The forecasts are that net debt will be eliminated within a decade but there are ongoing challenges. Despite robust employment, the macroeconomic environment painted in the Budget reflects an Australian economy with modest growth ambitions.

The country is in an extended period of low wages growth so putting more money in the pockets of 10 million low- to middle-income Australians through personal tax cuts was an important announcement in this environment. A country of low wages growth, rising costs of living, with job security concerns, and with house prices falling; we are seeing some instability, reduced consumer spending and a fragile market. 

The hope is that with the extra money in people’s pockets consumers will go and spend which is good for retailers and business; this will be a stimulus the country needs, and a step in maintaining forward economic momentum. However, even with this stimulus the projected economic growth is relatively modest (and even then relies on a number of questionable labour market assumptions). 

Plus the country is facing some domestic and international headwinds – including a slowing China, likely lower wages growth than projected in the Budget, the house price correction – and so the challenge to facilitate improved productivity still remains. Indeed improved productivity is the only really sustainable path to higher wages.

The Budget addresses some issues associated with improved productivity – skills, congestion, etc – but they are piecemeal and in any case will take time to come to fruition.

The need for a true productivity enhancing reform agenda remains. While politically challenging, tax reform (road pricing, land tax, GST, corporate taxes) remains a priority, as does ongoing regulatory reform to reduce red tape across all levels of government, as well as making our cities work more productively.

While not politically palatable, the national interest requires us to continue to press for these reforms.

To watch PwC’s budget insight event on demand, plus detailed visit https://pwc.to/2HXrlka
About the authors

Jeremy Thorpe

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Jeremy is a Partner in PwC’s national Economics & Policy team and is the firm’s Chief Economist. He formerly worked at the Commonwealth Treasury and the Productivity Commission.

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