OPINION: I hope the Treasury is right but potential growth of 2.5 percent looks lofty in the current environment and years ahead.
The Treasury is taking a glass half full view of the economy over the coming years.
It is projecting growth in real growth domestic product of 3.3 percent per year on average between 2021 and 2025 and 2.5 percent between 2020 (including the Covid-19 downturn) and 2025.
Core crown tax revenue was $21 billion higher in total between 2021 and 2025 relative to the Half Year Economic and Fiscal Update. More money in the door meant more money out with core expenses up more than $10bn over the four years in the Budget.
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The government jumped at an opportunity to spend more. They would not have cut spending if growth had been weaker though, and nor should they if that scenario unfolds.
Inflation is tame. The Official Cash Rate is on hold until 2024/25.
It is a nirvana combination post Covid-19 and I hope they are right. Unemployment gets down to 4.2 percent.
Underpinning the Treasury’s projections is an expectation that potential growth for real gross domestic product is 2.5 percent per annum. The trend defines what the economy cycles around.
That is close to the pre-Covid-19 rate and basically assumes little scaring or structural changes on the economy post Covid-19.
The economy manages to get back on the same trajectory as it was in late 2019, albeit just with a mid 2020 hick-up followed by a V-shaped recovery.
The Reserve Bank’s estimate for potential growth is below 2 percent.
The difference between the Treasury’s and Reserve Bank’s view of potential growth is worth $500m in tax revenue per year and $2bn over four years.
Potential growth is unobservable and involves many variables including growth in labour supply, improvements in workforce quality, growth in the capital stock, technology advances and availability and use of natural resources.
We know some labour supply is being knocked around by border restrictions and will continue to be via the migration reset. The Reserve Bank’s February Monetary Policy Statement said we were close to maximum sustainable employment.
Growth in the capital stock is being impacted positively by government investment but negatively by money being hoarded in banks. Firms are running more conservative balance sheets rather than deploying cash.
The Treasury downgraded their trend estimate of labour productivity growth in the Fiscal Strategy Report, based on historical performance.
I hope the Treasury is right but potential growth of 2.5 percent looks lofty in the current environment and years ahead.
There is a growing danger we are sending out the cheques before banking the ones (growth) coming in.