‘Bollocks’: forecast for higher living standards panned

AUSTRALIANS face a hefty blow to their living standards by 2066 if the government’s heroic assumptions about productivity fail to materialise.

Economists panned the government for projecting productivity growth to bounce back from the 0.3 per cent it has averaged over the past decade to 1.2 per cent in the nation’s latest Intergenerational Report, released by Treasurer Jim Chalmers on Monday.

The rosy assumption underpinned projections of economic growth and rising living standards.

The report forecasts Australia’s economy to be more than twice as large in real terms in 40 years’ time, while income per capita is expected to be 55 per cent higher.

But under a more pessimistic forecast that productivity will grow by 0.8 per cent per year – still above the Reserve Bank’s 0.7 per cent medium-term assumption – the average Australian’s income is projected to be $20,000 lower than the baseline projection of $149,500.

Treasury’s forecast was based on productivity returning to its long-term assumption of 1.2 per cent, which it downgraded from 1.5 per cent in 2022.

Productivity – the main driver of living standards over the long term – was falling across the developed world, due to structural shifts towards a more service-based economy, an ageing population and slower diffusion of technology.

But Treasury was banking on artificial intelligence, as well as the government’s recent tweaks to regulation and competition policy, to turn around Australia’s productivity malaise.

The AI revolution would be “the biggest economic transformation of our lifetime”, Dr Chalmers said.

“AI will play a pivotal role in reaching long-term productivity growth of 1.2 per cent and higher if productivity gains accelerate over time,” the treasurer said in a speech at the Australian National University.

HSBC chief economist Paul Bloxham questioned Treasury’s assumption that productivity would bounce back so quickly, given it has averaged at 0.3 per cent over the past decade and most recently declined 0.2 per cent in the June quarter.

So far, there has been little evidence to justify pinning Australia’s productivity hopes on AI.

“Our take is that Australia’s economy is largely ‘supply constrained’ due to a lack of housing and cheap energy – AI seems unlikely to fix these problems,” Mr Bloxham said.

Independent economist Chris Richardson said the assumption was “bollocks”.

“The rise of AI is being used as a terrible toupee to try to hide the ever-larger bald spots evident in the Australian economy and the Australian budget,” he wrote on X.

Under the 0.8 per cent assumption, real GDP growth would be 1.2 per cent instead of 1.6 per cent, and GDP per capita would be $136,000 instead of $157,300.

Real gross national income per capita, a measure of living standards, would be $129,800 under the 0.8 per cent assumption instead of $149,500, but still higher than the current level of $96,500.

The federal budget will also be in worse shape. 

Under the low-productivity scenario, the deficit would be 4.2 per cent of GDP instead of 1.8 per cent, while gross debt would be 55.9 per cent of GDP instead of 27.4 per cent.

AUSTRALIA IN 2066

* Population to reach 39.3 million people, growing by about 0.9 per cent a year, according to the Intergenerational Report.

* The report gives a snapshot of how Australia might look decades from now, and is published by the Treasury every three years

* Economy to be 2.25 times larger, growing by an average of 2 per cent a year

* Productivity to rise 1.2 per cent a year

* 1.34 babies per woman on average, median age 45, number of Australians over 85 to triple

* Real incomes to be 55 per cent higher

* Crop yields down 3.6 per cent, natural disaster spending to triple due to climate change

* More spending on health, defence, aged care and the national disability insurance scheme to increase government payments relative to the economy to 27.7 per cent

* Spending on age and service pensions, education and welfare payments as a proportion of the economy to fall

* Demand from AI data centres to have made up almost 10 per cent of the National Electricity Market by 2050, household energy costs to have plummeted 40 per cent by the same time

* Coal production to have fallen 71 per cent by 2050

* Fuel excise revenue more than halved due to electric vehicle adoption, slimmer alcohol and tobacco excise takings due to lower consumption

HOW THE PREDICTIONS HAVE CHANGED

* Forecasts for the size and growth of the population, the size and growth of the economy, fertility rates and government spending have been revised down since the last report in 2023

* Reforms to the national disability insurance scheme and aged care are projected to have put the brakes on government spending increases on those schemes

* Predictions of Australia’s average age and real income per person were revised up, while the forecast for productivity was flat

* The latest iteration of the report was handed down by Treasurer Jim Chalmers on Monday