The Treasury is preparing to downgrade its forecasts of economic growth, cutting expected improvements in government revenue and potentially pushing out its estimate of the date the budget returns to surplus.
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Treasury secretary John Fraser revealed the downgrade at the Melbourne Institute Economic and social outlook conference, saying the department would shortly publish a report outlining its thinking and that deputy secretary Nigel Ray would expand on it in an address to business economists later this month.
Until now budget projections have assumed that the economy will grow at an annual rate of 3.5 per cent between 2017-18 and 2021-22 before growing by a little over 3 per cent per year thereafter.
As a result the budget is projected to return to surplus in 2019-20.
But the economy hasn't grown at an annual pace of 3 per cent for three years. The latest economic figure, for the year to June, is just 2 per cent.
Mr Fraser said the treasury had been assuming the long-term speed limit was "something a little bit over 3 per cent".
"It may have to be marked down a little bit," he said. "I am not talking about over the next three or four years, I am talking about over the next 10 to 15 years".
The long-term downgrade would feed into incomes and tax collections.
"What that says is we had better get off our backsides and do something about productivity. If we don't, then we will consign ourselves, possibly, to a lower growth outlook and that will have real impacts on how we live."
Reserve Bank governor Glenn Stevens has also floated the possibility that the maximum growth rate might have fallen below 3 per cent, citing slower population growth as a potential reason.
Mr Fraser said Treasury had cut its estimate of population growth from 1.6 per cent per year to something closer to 1.2 per cent.
"It's pretty hard not to think we got carried away and thought the mining boom was going to go for 30 years," Mr Fraser told the conference dinner.
"Its pretty hard not to think we spent a lot of the proceeds from the mining boom, treated them as permanent, put them into permanent spending programs, and then got caught short when the revenue ran out."
Mr Fraser said if he could turn back time he would say to Australians enjoying the mining booms: "My friends, this might not go on forever, so plan accordingly."
He returned to Australia from a career in European investment banking late last year. The former prime minister Tony Abbott played on his patriotism to persuade him to return, telling him: "You've never served your country, nor have I. I would like you to run the treasury."
He was optimistic about Britain now that the Conservative Party was no longer in a coalition with the Liberal Democrats and believed that politicians in the United States and Australia made too many compromises in order to govern.
He believed the record run of low global interest rates had done great harm and looked forward to the United States raising its rates and resuming its role as a global growth engine.
He was believed Australians could rise to the challenge of boosting economic growth and thought the message was getting through.
"I am a great believer in Australia and I think that Australians do the right thing," he said. "It may take a little time, but I would hope there is a recognition of the issues."
