RBA's 0.7% productivity call fuels inflation bets vs Treasury's 1.2%

For fixed-income and currency markets, the gap between Treasury's 1.2% and the RBA's 0.7% productivity assumptions is more than an accounting debate: it is the difference between an economy with spare supply capacity and one prone to persistent inflation. If Westpac's Luci Ellis is right that the RBA's three key assumptions all skew low, Australian rate cuts could come sooner than priced. If HSBC's Paul Bloxham is right about Treasury's optimism, the hawkish bias may be justified.

Australia's latest Intergenerational Report, the triennial roadmap for the next 40 years of the economy, has become a flashpoint over a single assumption: Treasury's projection that labour productivity will grow by 1.2 per cent a year on average through to the mid-2060s. The figure matters because almost every other number in the report - the long-term budget position, living standards, revenue and debt trajectories - is built on it. But the 1.2 per cent assumption sits awkwardly against the Reserve Bank of Australia's medium-term productivity assumption of 0.7 per cent, and even more awkwardly against the 0.3 per cent average productivity growth Australia actually recorded over the past decade. That divergence has prompted a chorus of economists to shine a light on the central bank's broader, gloomier supply-side assumptions.

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If Westpac's Luci Ellis is right that the RBA's three key assumptions all skew low, Australian rate cuts could come sooner than priced.

HSBC chief economist Paul Bloxham told News24 on Thursday that Treasury's 1.2 per cent productivity target looks unrealistically optimistic, especially as the economy is not building enough housing, lacks cheap energy and has an infrastructure shortfall. He questioned how artificial intelligence alone would solve those structural bottlenecks. The AI boom is expected to provide an uplift, but there is genuine uncertainty about whether it can reverse a decade of weak productivity performance quickly enough to justify Treasury's numbers.

Westpac chief economist Luci Ellis, a former chief economist at the RBA, took the opposite side, arguing the central bank's forecasts might be overly gloomy. In a research note, Ellis said the RBA's assumptions implicitly require a repeat of the factors that dragged recent productivity outcomes down, despite strong global investment, domestic policy changes and the possible benefits of AI. She also highlighted that the RBA diverges from Treasury on workforce participation and full employment - effectively the lowest unemployment rate the economy can sustain without pushing up inflation. Ellis argued that while each RBA assumption may seem individually plausible, the fact that all three skew in the same direction starts to look like a pattern, with a thumb on the scale that is unlikely to be accidental.

For financial markets, the gap between Treasury and the RBA is not merely academic. If the RBA's weaker productivity, participation and full-employment assumptions are correct, the economy's supply capacity will grow more slowly, meaning any given level of demand will generate more inflationary pressure. That would force the central bank to keep interest rates higher for longer and would support more hawkish pricing of Australian government bonds and the currency. Conversely, if Treasury is right, there is more headroom for non-inflationary growth, and rate cuts could be delivered earlier without stoking price pressures. The split view from two leading bank economists therefore frames a live debate over the direction of the official cash rate.

The implications also extend to fiscal policy. The Intergenerational Report underpins Australia's long-term budget strategy, including spending on aged care, health, the NDIS and defence. If Treasury's 1.2 per cent productivity assumption proves too high, revenue projections will also be too optimistic and the structural deficit and debt burden will be worse than projected. This is particularly relevant as the government faces rising costs from an ageing population.