The head of the Reserve Bank of Australia has cast doubts over the figures used to underpin the Abbott government's rosy budget forecasts, warning projections for Australia's future economic growth may be too high.
It is the first time RBA governor Glenn Stevens has weighed into the debate about Australia's "trend' rate of growth", warning: "I suspect this will turn out to be an important discussion."
It means Commonwealth and state governments may have to adjust their expectations of future revenue growth downwards, and the Abbott government's hopes for a budget surplus - which it expects to deliver soon after 2017/18 - could take much longer to realise than expected.
Mr Stevens has also signalled that he has set the bar higher for further interest rate cuts, saying he is wary of encouraging behaviour in the financial sector that could become "dangerous" and spill over into the "real economy".
"Perhaps trend output growth is lower than the 3 per cent or 3.25 per cent we have assumed for many years," Mr Stevens said on Wednesday.
"If there are assumptions about absolute growth rates embedded in business or fiscal strategies, or retirement income plans, they would need to be re-examined [if it is the case]," he said.
Since Treasurer Joe Hockey delivered his second budget in May, some economists and public policy experts have been warning that projections for Australia's trend rate of growth underpinning the Commonwealth budget forecasts are too high.
The 2015-16 budget papers show Australia's rate of growth is expected to pick up from 2.75 per cent this year to 3.25 per cent next year, and then to 3.5 per cent the following year.
Growth is then projected to remain at 3.5 per cent between 2017-18 and 2021-22.
That "3.5 per cent" figure is a technical assumption that allows the budget to show the unemployment rate falling to 5 per cent over the next few years as spare capacity in the economy is soaked up.
But highly regarded economists such as Saul Eslake, and public policy experts such as John Daley from the Grattan Institute, say the 3.5 per cent figure is unrealistically high because it does not match global economic conditions.
They also warn it may be encouraging the Abbott government to believe budget surpluses are just on the horizon, with dire consequences for voters.
Former Treasury secretary Dr Martin Parkinson admitted this month that Treasury's assumption that the economy will return to a growth rate of 3.5 per cent over the next four years is likely too optimistic.
He said Australia's "trend' growth rate may be lower in the future — around 2.75 per cent or 3 per cent — making it harder to collect the tax revenue needed to close the budget deficit.
The International Monetary Fund has warned that Australia's long-run growth rate could be even lower, at around 2.5 per cent.
On Wednesday RBA governor Stevens said it was difficult to know why Australia's labour market was in better condition than expected - with unemployment around 6 per cent - given growth in real GDP has been "below trend" for some time.
But one explanation could be that the economy's trend rate of growth is lower than economists have been assuming "for many years," he said.
"Perhaps the growth we have seen is in fact closer to trend growth than we thought," Mr Stevens said.
"I suspect this will turn out to be an important discussion: what is Australia's potential economic growth rate, per head, and why?"
Some Treasury officials are privately unhappy with the criticism they have received for projecting economic growth of 3.5 per cent between 2017-18 and 2021-22.
But Mr Daley says Mr Stevens' intervention in the debate means "we need to think about the problem seriously".
"He's not saying the case is closed. But he is saying we need to think about it," Mr Daley told Fairfax Media.
Mr Stevens said on Wednesday that the RBA has not ruled out cutting interest rates further, but "financial stability is very definitely one of the things we have in mind".
