Simone Ziaziaris
(Australian Associated Press)

The head of Australian Industry Group says he does not expect a “wages break out” any time soon despite the federal government tipping pay packets to grow at 3.5 per cent within three years.

In a rapid improvement from the recent run of low growth, Treasury has forecast wages to pick up slightly to hit 2.25 per cent for the current financial year, before rising to 2.75 per cent in 2018/19 and then to 3.5 per cent by 2020/21, according to the budget papers.

That compares to the Reserve Bank of Australia’s forecast of a gradual improvement in wages growth from its current rate of about two per cent.

“While wage growth remains subdued, it is expected to strengthen as growth in the economy picks up to an above-potential pace and spare capacity in the labour market is absorbed,” the budget papers said.

Ai Group chief executive Innes Willox says there has been some pick up in wages growth, with the latest data showing a 2.5 per cent increase in the March quarter, on the back of a lift in economic activity.

“It is a basic function that if businesses are starting to do well and they are becoming more competitive than they have to pay more,” Mr Willox told AAP.

While some areas like technology, engineering and construction are currently recording significant increases, he said he does not expect wages growth to blow up any time soon.

“The rest of the economy will pick up and follow through if our economic trajectory remains the same but we are not about to see a wages break out,” he said.

The government said higher wages will contribute to a faster rate of economic growth over the coming years.

But it also acknowledged the risks around its forecasts, saying there are key uncertainties around the degree of spare capacity in the labour market.