Latest Intergenerational Report points to stubborn productivity issues that AI cannot fix

With government spending projected to increase over the next 40 years, Treasury said that this was an improvement on the previous intergenerational report.

“Spending is projected to increase from 26.6 per cent of gross domestic product (GDP) in 2025–26 to 27.7 per cent in 2065–66, an increase of 1.1 percentage points,” the report said.

While Australia’s waning productivity growth can be supported by AI, sustained growth requires investment, innovation, and economic reform, with the ageing population and fiscal pressures reinforcing the need for tax reform, the accounting body said.

Currently, the 2026 IGR keeps its long-term productivity assumption at 1.2 per cent per year, identical to that at the 2023 IGR.

"The report assumes long-term productivity growth of 1.2 per cent a year. A lot would have to go right for such an estimate to be achieved,” said CPA Australia chief executive Chris Freeland.

"Australia still has a productivity problem. Without stronger productivity growth, it becomes more difficult to lift wages sustainably, improve living standards and strengthen long-term prosperity,” he said.

Interplay between income tax and an ageing population

The 2026 IGR estimated that over the next 40 years to 2066, the number of Australians in the 85-plus age group will triple (from 625,000 today to 1.9 million), and predicted that most of this growth will occur in the 2030s and 2040s.

“As more people move into older age groups, a smaller share of the population will be in the traditional working ages, placing gradual pressure on labour supply,” the report said.

“Australia’s superannuation system is helping people fund their own retirements and reducing pressure on the Age Pension. But as our population ages, government spending on health, aged care and other essential services will continue to rise. The bigger challenge for policymakers is ensuring our tax system can sustainably fund those services into the future,” Freeland said.

This is exacerbated by Australia’s continued overreliance on income taxes, which the ATO’s latest data reveals currently sits at 52.2 per cent of the government’s revenue – a steady increase since its 2020–21 taxation statistics.

Further research by the Institute of Financial Professionals Australia (IFPA) said that the government’s current revenue structure is made narrow and inflexible by this income tax reliance, reinforced by bracket creep.

"Recent GDP growth has been driven largely by Australians working more hours rather than producing more from the hours they work. That is not a sustainable path to stronger living standards," Freeland said.

"Bracket creep is not tax reform. It is tax increases by stealth. Australians deserve greater transparency about how much future government revenue relies on workers being pushed into higher tax brackets over time.”

"The report shows Australia will increasingly rely on fewer workers to fund a growing demand for services. This strengthens the case for comprehensive tax reform that supports growth, investment and economic participation."

AI is not a magic pill

As the AI data centre boom continues, it is having impacts on other parts of the construction sector, with labour supply being drawn away from residential construction, which holds the majority of the 1,834 first-time insolvencies in August, according to CreditorWatch’s August Business Risk Index.

“AI will likely boost productivity by improving efficiency and unlocking new innovations, but there are a wide range of potential future outcomes. Whether the productivity impacts of AI follow the path typical of general-purpose technologies over time will depend on the long-term rates of innovation and adoption, and how Australian businesses, workers and governments engage,” the 2026 IGR read.

While productivity could come out of the AI boom, IPA chief executive Andrew Conway said that tax reform must be implemented in conjunction with investment in AI.

“The Treasurer cannot put the economy and productivity into reverse with tax changes that deter investment and then assume AI will come to the rescue,” Conway said.

“We cannot put all our eggs in the AI basket and hope a possible productivity boost will make up for a shrinking tax base.”

“AI may support productivity over time, but it is not a substitute for policy discipline. Australia needs settings that broaden the tax base, encourage investment and reduce the pressure on workers.”

Freeland added that it is important for Australia to have a clear plan for productivity growth, competitiveness in the global economy, and a more resilient local economy for future generations.

“Australia needs a serious, forward-looking reform process that supports investment, improves productivity and ensures future generations are not left carrying an unsustainable debt burden,” Conway said.