Australia is in the middle of the longest period of sustained low growth since the early 1990s. The high level of inflation and requisite tight monetary policy settings of the last three years has dragged on the economy, with household consumption, industry output and exports all showing sustained weakness.
Business profitability has been crimped by surging input and wages costs, and the rate of business investment growth is stalling. The labour market is a sole economic bright spot, but its resilience has been dependent on government spending as the private sector pulls back on hiring.
Consumer inflation finally eased towards normal levels in late 2024, providing much needed relief to households. However much of this result was achieved through price suppressing fiscal measures (such as household energy subsidies), and it is too soon to determine whether inflation will sustainably remain within target range.
Recent volatility in global financial and currency markets, and uncertainty regarding the effects of new economic policies emanating from the US, mean there remains significant risk to the inflation outlook.
During this period of economic weakness, rapid increases in spending by both Commonwealth and state governments have provided a lifeline. With much of the private sector facing very subdued conditions, this fiscal stimulus proved critical in staving off the risk of recession.
This fiscal path is not sustainable in the medium term, given the growing gap between spending and revenue and structural deficits facing the Commonwealth and many state governments.
In this context, the immediate priority for the 2025-26 budget should be to restore growth conditions in the private sector. Ai Group therefore welcomes and concurs with the Treasurer’s recent assessment that “as growth recovers in our economy, the best kind of growth is private sector-led growth.”
However, there remain many barriers to the types of private sector growth needed to deliver stronger economic outcomes. In this submission, we outline five areas – inflation and business costs, fiscal sustainability, the private sector labour market, productivity-enhancing regulatory reform and genuine tax reform – which will prove critical in improving private sector economic performance.