Treasury head Martin Parkinson says last week’s budget tackled head-on the sustainability challenge of Australia’s economic prosperity.
“Restoring Australia’s fiscal sustainability cannot be wished into being, nor can we rely on growth to drive us to (budget) surplus,” he told a business economist function in Sydney.
He says the 2014-15 Budget is a significant step towards meeting Australia’s fiscal challenges, placing government finances on a sustainable path and raising productivity and creating jobs.
Parkinson also says the budget shifted government expenditure from payments feeding consumption to support for infrastructure investment.
Based on current forecasts, by the end of 2015-16, the economy will be growing slower than that of seven of the past eight years.
Parkinson says the government’s infrastructure initiatives will support growth at a time when there is expected to be excess capacity in the economy, particularly in the engineering construction sector as large resource sector projects reach completion.
“This new investment will be financed in the context of an improving budget bottom line by reducing spending in areas that have lower fiscal multipliers. This infrastructure investment is good for economic growth in the short term and can help support higher productivity over time.”
One of Parkinson’s key themes in his public speeches is that sustaining growth in living standards in the context of a declining terms of trade and an aging population will require a significant improvement in productivity.
“One way to think about the link between productivity and living standards is through real wages,” he says.
“Real wages are the wages workers receive, adjusted for the prices that they pay for goods and services. It is a measure of the real purchasing power of our wages and hence movements in the real wage are closely associated with changes in material living standards.
“As you can see from the chart, Australian real wages over the past decade have grown faster than our productivity, after having grown at roughly the same rate over the previous decade.”
He says rising prices for Australia’s key commodity exports supported strong wage growth in some parts of the economy and the appreciation of the dollar increased the purchasing power of all households.
“What we’re seeing now though is a turnaround in these trends as the terms of trade decline,” he says.
“This will depress, in aggregate, the prices Australian businesses receive for their production and lead to slower nominal wage growth (or even declines) in the resources and related sectors.”
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