Right now, national productivity is stuck around where it was in 2019-20, even though there was a modest 1% lift last year, the first meaningful improvement since the pandemic. Treasury had been assuming long term productivity growth would run at about 1.2% a year and expected the economy to get back to that pace within two years but it now sees that milestone being pushed out closer to five years. This shift follows a period where independent budget analysts have been warning that Australia’s productivity performance has averaged closer to 0.8% a year over the past two decades, well below the level needed to comfortably support higher incomes and a growing population.
The new Treasury downgrade reflects a mix of headwinds and potential tailwinds. On the risk side, factors like climate change, more fragmented global trade and persistent cost pressures make it harder for businesses and governments to produce more output from each hour of work. The independent Parliamentary Budget Office has modelled a scenario where productivity growth only reaches 0.9% a year and in that case federal debt would be about $119 billion higher by 2035-36, with the debt to GDP ratio roughly 3.6 percentage points worse than previously expected. At the same time, the Reserve Bank of Australia is working with a more conservative forecast of around 0.7% annual productivity growth over the next two years, even as policymakers look to emerging technologies such as artificial intelligence to eventually lift output.
The broader picture looks like a delicate trade off between slower productivity, stubborn inflation and pressure on household budgets. Productivity has driven more than 80% of Australia’s national income growth over the past 30 years so weaker gains now seem to be feeding into softer wage growth and a slide in real incomes, with workers’ pay packets going backwards in inflation adjusted terms late in 2025. Higher inflation, which could spike towards 5% if global conflicts keep oil above $US100 a barrel and local fuel prices above $2 a litre, appears to offer a short term boost to government revenue through bracket creep, company tax and GST receipts, especially from the resources sector. But relying on rising prices rather than stronger productivity to balance the books seems likely to weigh on living standards and keep budget repair heavily exposed to global shocks and volatile commodity markets.
