Budget preview: productivity and capacity to lift paradoxes in Australia’s economy

In the lead up to tonight’s federal budget, which is expected to be a tight budget with an underlying deficit, Australian Industry Group chief executive Heather Ridout has issued a statement calling for greater priority to be given to building, productivity and capacity in the economy.

"It is critical that the upcoming Federal Budget gives priority to building, productivity and capacity in the economy," said Ridout.

This Ridout explained is because Australia’s is an economy of paradoxes.

“The boom in the mining sector contrasts starkly with the severe pressures on non-mining trade-exposed sectors including manufacturing, tourism and education: a contrast that is putting us at risk of developing an unbalanced and narrowly based economy. 

“Aggregate growth is below trend and consumers and businesses are cautious, yet interest rates
are currently set to constrain activity and are widely anticipated to rise further.”

Yet Australia’s mineral resources are attracting record prices, national productivity has flatlined, she added.

The Slump in productivity growth over recent years has also deflated Australia’s national competiveness, which has largely stemmed from the marked rise in the value of the Australian dollar.  

One budget challenge the government is facing is to implement a fiscal policy that appropriately deals with significant divergences across industry sectors.

While the mining and associated industries are strong, export-trade based sectors including are tourism, services export and manufacturing industries are struggling.

The reason for this is that mining companies are somewhat more immune to these pressures as much their funding comes from retained earnings, which said to be more dependent on commodity prices.

Ridout said the way around these paradoxes in Australian industry is to lift our productivity and capacity.   

"In an economy that is testing the limits of its capacity, there is little spare to build new capacity and invest in developing skills, capabilities and productivity without taking away from resources  in use elsewhere or adding to inflationary and interest rate pressures,” she said.

“We need capacity to build capacity.  This calls for a Budget that delivers a major reprioritisation of effort in favour of measures that build productivity and capacity by building skills, innovation and business capabilities. 

“It calls for a Budget that adds to immediate capacity by raising net migration. And it calls for a Budget that ensures we maintain a balanced and diversified economy that is not overly reliant on a small number of commodity exports to a handful of countries.”

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