RBA makes case for supply side expansion Australia's long-run prosperity depends on federal government support for productive industries and more flexible workplaces rather than cheaper loans, the central bank says. Reserve Bank of Australia governor Glenn Stevens made the case for an expansion in the supply side of the economy during testimony to a federal parliamentary committee on Wednesday. Mr Stevens said while low interest rates were important, confidence was better supported by giving business incentives - like lower taxes - to take risks. "We can lead the horse to water, but the horse isn't going to drink until it feels like it," he told the house economics committee hearing in Canberra. The governor earlier warned the economy was likely to expand at a sub-par pace for some time, and Australians shouldn't assume the nation's 21 years of growth could continue indefinitely. The central bank was "open" to further lowering the 2.5 per cent cash interest rate to support activity, against a backdrop of lower government spending from 2014. But pro-growth, pro-productivity and confidence-building reforms are needed at the federal level to help boost investment and real wages. "The long-run source of our growth in prosperity doesn't come from manipulating interest rates," Mr Stevens said. It comes from the productivity efforts of the million-plus enterprises that are out there in the economy and how they manage themselves and how their workforces co-operate with them. It's the supply side from where prosperity comes. Supply side measures, which also include less government regulation and labour force flexibility, had been fairly moderate in recent times, the central bank added. Treasurer Joe Hockey has warned Australia faces a decade of federal budget deficits, low growth, soaring national debt and higher unemployment unless the government cuts spending and generates savings. But he's promised the coalition won't "take a baseball bat to confidence," when it makes changes in the budget due in May. Asked what impact a contraction in spending would have, Mr Stevens said he didn't think there was a case for "pronounced" action. "I don't myself feel that the debt dynamics that we face require us to adopt that level of austerity," he added. But there needed to be national debate on what spending should go ahead. "Are we having the right conversations about how much tax we're prepared to pay versus the things we want the government to give us," he asked. Mr Stevens agrees the Australian economy has big challenges ahead. But he also believes it's better off than most other countries in the world, and particularly Europe. "It's certainly true we have a build-up of government debt and that's a medium-term challenge for us to address," he said. But I'd rather have most of our challenges than the ones I see around the table with governors I sit with a number of times a year. Federal government debt is forecast to peak at $667 billion by 2023/24.