Labour productivity - which measures how much output is produced per hour worked - fell 0.8 per cent in the 12 months to September, the Productivity Commission revealed on Wednesday.
The short-lived productivity bubble caused by COVID-19 disruption has now burst, with levels back to where they were during the stagnant 2015-2019 period, the commission's deputy chair Alex Robson said.
"The data underscores the point that reinvigorating productivity is a national priority," he said.
Productivity is key to the health of the economy.
"Even small changes that make the economy more dynamic and efficient can deliver big economic dividends and add up to major improvements in real wages and living standards over time," Dr Robson said.
Getting productivity moving again will be essential if the Australian government is to find a way to pay for growing structural deficits.
With spending increasing due to structural challenges like an ageing population and tax receipts falling due to sluggish economic growth, Australia is not expected to be back in surplus until 2034/35, the mid-year economic and fiscal outlook revealed on Wednesday.
The government's finances have long been in decline but nothing is being done to reverse it, EY chief economist Cherelle Murphy warned.
"The government has failed to deliver a path to lift the prosperity of the Australian people and grow its way out of the debt burden," she said.
"We need a plan to jump start our productivity through major reforms - including, importantly, to our tax system, trade and education - or we will face higher taxes and cuts to essential services in the future."
Economist Saul Eslake says politically palatable spending cuts are hard to find. (Mick Tsikas/AAP PHOTOS)
Neither side of Australian politics had been willing to have an "adult conversation" with the Australian people about how to pay for the additional spending, independent economist Saul Eslake said.
One way of reducing spending would be to axe the 'No Worse Off' GST deal with Western Australia, which will make the federal budget $21.1 billion worse off over the four years to 2027/28.
Beyond that, politically palatable spending cuts are much harder to find, Mr Eslake said.
Finance Minister Katy Gallagher said Labor had made strides in reducing spending growth, especially through NDIS and aged care reforms, as well as banking previous upward revenue revisions to pay off debt and reduce interest payments.
"I don't think you would have found a government that's done more to try and address those big structural spends," she told ABC Radio National on Thursday morning.
Unlike the previous coalition government, which did not find any expenditure savings in its last budget, Senator Gallagher touted the $92 billion in savings and reprioritised spending Labor had found since the election.
Australians had lower living standards due to higher government spending, Angus Taylor said. (Lukas Coch/AAP PHOTOS)
Without structural change, increased spending will have to be paid for by larger deficits and ever-increasing personal income taxes.
"In both cases, the burden is falling disproportionately on younger generations," Mr Eslake said.
Shadow treasurer Angus Taylor promised to reimpose fiscal guardrails, limiting taxation to 23.9 per cent of GDP, if elected.
He criticised the government for overseeing growth in public servant numbers, vowing to cut growth in the bureaucracy.
Australia's non-market sector, which is mainly made up of government services such as health care, has grown faster than the private sector but underperformed on productivity.
But it's not all doom and gloom, said the Productivity Commission's Dr Robson.
Australia's strong jobs market is a notable success story, with many more workers employed and participating in the workforce than before the pandemic.
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