Mr Hockey's view has been questioned by the International Monetary Fund and several high-profile economists, including at Commonwealth Bank of Australia, who recently cut their estimate for "potential" growth to a little under 3 per cent.

Downgrade affects budget projections

The downgrade has major implications for the government's May projections that the budget deficit will swing back to surplus by early next decade. Much of that is based on an assumption that economic growth will average an annual 3.5 per cent for five straight years from 2017-18, which would be an almost unprecedented run of growth.

Mr Stevens effectively cast those assumptions into doubt last month when he said trend output may be lower than 3 per cent.

"Perhaps the growth we have seen is in fact closer to trend growth than we thought."

Gross domestic product rose 2.3 per cent in the March quarter, meaning the economy has been below trend for all but three of the past 27 per quarters.

Mr Hockey told AFR Weekend that his May budget forecasts were firmly "on track" and were not going to be revisited.

"In some areas, we are exceeding expectations."


The Treasurer hinted that he has clashed with Treasury forecasters over their view that the jobless rate would rise to around 6.5 per cent. So far, the rate has held well below that, but bounced to 6.3 per cent last month after a rise in participation rates.

Forecasts on unemployment

Asked whether his budget assumptions are too heroic, Mr Hockey said: "I don't accept that because forecasters naturally get it wrong – they inevitably do – and usually have a number of different positions.

"The RBA, for example, is lowering its expectations of unemployment and one of the most robust discussions I've had with Treasury was about forecasts on unemployment," Mr Hockey said.

Mr Hockey listed as reasons for his optimism the rebound in non-mining construction and improving services exports, and "a massive roll-out in new infrastructure".

In a speech in Brisbane on Friday, Reserve Bank assistant governor Christopher Kent said federal and state governments would have to react quickly to the consequences of lower economic growth, which could get worse before it gets better.

Dr Kent stood by the RBA's prediction about lower economic growth over the next few years, saying it was based around the most recent data including population growth falling from 1.8 per cent to 1.4 per cent.

"We have made the best-guess assumption on population growth on the most recent data we've seen. It's understandable population growth has eased back a bit from quite strong levels and it's not quite as strong," Mr Kent told an Economic Society of Australia lunch in Brisbane on Friday.


"But that could turn. It make sense it's a bit low if our labour market conditions have weakened but they have improved elsewhere in the world.

"But market conditions could change here and elsewhere, and that could turn around. It's not a prediction you could count on for a long period of time. We've just made the best assumption we can."

Population growth

Mr Kent said governments would have to be nimble to react to changes in population growth, which would impact on economic growth. But he said it wasn't all downside with less revenue flowing into government coffers because a slower population growth would mean less spending on services.

"It affects both revenue and expenditure as well over time – just like it affects the growth of the aggregate demand and aggregate supply in the economy," he said. "In terms of the balance it doesn't necessarily have any strong implications because it's going to be affecting both sides of that," he said.

But he said Australia was better placed to deal with lower economic growth because of lower levels of public debt. "If you're an economy in Europe or in Japan which has very high public debt, and less growth in the population to generate revenue to service the debt, that makes life harder," Mr Kent said. "But we don't have especially high public debt as a share of GDP at state or federal levels."

