The Productivity Paradox in Australia’s Future

The release of Treasury’s seventh intergenerational report has sparked debate about the future of Australia’s economy, particularly regarding projected productivity growth. According to the report, Australia’s productivity is expected to remain at or near its 30-year average of 1.2 percent, a figure some economists consider overly optimistic.

Productivity growth determines whether Australians grow richer over time and their businesses succeed as the relative cost of producing goods and services declines. With a projected growth rate that may be overly optimistic, Australia’s economy is being set up for potential disappointment. The report frames its projections around five primary challenges facing Australia: the rise of artificial intelligence, the clean energy transition, an aging population, industrial transformation, and geopolitical fragmentation.

These challenges provide a convenient narrative framework for the government’s existing policy prescriptions. Treasury has chosen to project productivity growth at 1.2 percent rather than the more conservative estimate of 0.8 percent proposed by the Reserve Bank of Australia. The difference between these projections can be significant: a mere 0.4 percent change in productivity growth translates into tens of billions of dollars in terms of gross debt-to-GDP ratio.

The report’s reliance on artificial intelligence to drive productivity growth is problematic, given the lack of detail about exactly how this will work. While it acknowledges that more information is needed, it doesn’t provide concrete solutions or strategies for achieving this goal, raising questions about whether policymakers are simply relying on a technological silver bullet to solve their economic woes.

The government deserves credit for taking tough decisions on housing tax breaks and the NDIS in its most recent budget, even if some economists believe these measures won’t address the housing crisis. However, it’s unclear whether Labor’s policies will have any material impact on Australians’ incomes or quality of life. Chalmers himself noted during his Q&A session that this uncertainty is a concern.

As we look ahead to 2028 and beyond, policymakers must focus on more than just their current policy prescriptions. They must grapple with the complexities of productivity growth and the role technology will play in driving it. The future is uncertain, but one thing is clear: we can’t rely solely on optimistic projections or convenient narratives to guide us forward.

Australia’s productivity estimates are lower than those of the UK and US, but higher than New Zealand’s. This suggests that policymakers are aware of the challenges ahead but may be underestimating the scale of the task at hand. As Chalmers and his colleagues won’t be around to bask in the glory or take responsibility for the consequences, it’s up to future generations of policymakers to chart a more sustainable course for Australia’s economy.

The productivity paradox in Australia’s future is a reminder that policymakers must think beyond short-term gains and focus on creating a more productive, prosperous, and equitable society. Anything less would be a recipe for disappointment and stagnation.