Intergenerational Report looks to AI to buoy productivity slump

Australia's economy will continue to stagnate over the next 40 years, growing at just 2% annually, according to the latest Intergenerational Report (IGR), which points to the artificial intelligence (AI) revolution to buoy sagging productivity.

Treasury estimates the economy will more than double its current size and income per capita is tipped to hit 55% by 2065-66 but acknowledges that Australia's productivity performance will depend on adopting innovation, supporting investment, developing skills and delivering regulatory reforms that improve the efficient operation of the economy.

The nation's real gross domestic product (GDP) is projected to slump to 2% on an average annual basis, which is below the 3% experienced over the past 40 years.

However, based on a long-term productivity growth assumptions, Treasury maintains a rate of just 1.2% p.a.

Slowing population growth and ageing will continue to drag on economic performance.

Australians will continue to have among the longest life expectancies in the world, projected to be 89.5 years for women and 86.1 years for men by 2065-66. Those aged 65 and over is projected to continue growing, while the 85-plus cohort is expected to be the fastest growing.

The ageing population primarily stems from falling fertility rates, while the country's older population profile will negatively impact labour force participation.

"As the population ages, increased demand for care and support services will reinforce shifts in the economy towards services. This long-run trend towards services and the care economy will coincide with the adoption and diffusion of AI and broader changes in the industrial base," the IGR reads.

The intergenerational equity problem will also compound thanks to the long-term decline in home ownership and the pressures that an ageing population and structural trends in the tax base are placing on working-age Australians.

Treasury is therefore pinning its hopes on the AI boom to boost productivity, pointing to initiatives such as making Australia a leading destination for data centre investment, which has nearly doubled in capital expenditure the 2023 IGR. Currently, only 10% of local businesses have adopted AI in ways they would describe as "significant".

While the economic and social impacts of AI will be "profound," AI advancements, adoption and investment are accelerating, with the potential to boost productivity.

"While there is not yet evidence of significant labour market impacts, it is expected that productivity gains will arise from some tasks being automated using AI, and that demand for labour will increase and change in other areas," the report said.

Treasurer Jim Chlamer said advances in AI represent "the most dramatic change" since the last IGR in 2023 and the government is acting now to maximise the opportunities and minimise the serious risks it presents.

"AI is developing rapidly and will be a defining influence on the economy over the next 40 years," he said.

Stephen Smith, a partner at Deloitte Access Economics, said since 2008 Australia has relied too much on increasing the population and too little on improving productivity to drive economic growth.

"This is not a sustainable model for the future. The report shows that over the next 40 years, Australian prosperity - measured in terms of real economic activity per person - will depend entirely on labour productivity," he said.

"Declining fertility rates have seen population projections downgraded, while the economic dividends of rising labour force participation and falling unemployment have now run their course.

The report's most consequential number is therefore its assumption of 1.2% annual labour productivity growth."

Business Council of Australia chief executive Bran Black also contests this figure, noting that the council's own modelling found labour productivity went backwards by an average of 0.1 % p.a. over the past six years.

"Simply matching the 2010s - previously the worst decade for productivity growth in the modern data - would require productivity to grow by 3% a year for the next four years, a rate Australia has not sustained since around the turn of the century," Black said.

Super delivers

In response to intergenerational equity challenges, Treasury highlighted the maturing superannuation system as a means to continue helping younger Australians build wealth.

It calculates the median superannuation balance for individuals aged 65-69 will rise from $204,000 in 2024 to approach $450,000 in nominal terms by the end of the medium term.

"Superannuation will support a higher standard of living for older Australians in retirement, with superannuation drawdowns projected to rise to almost 6% of GDP by 2065-66, as well as reducing reliance on the Age Pension," the report said.

Treasury projects the number of Australians above Age Pension age will almost double to around nine million by 2066, while the proportion of older Australians receiving a pension or income support payment is projected to fall from 66% to 52%.

Age and service pension expenditure is projected to decline from 2.3% of GDP to 1.8% over the same period, compared to the OECD average of 10.3%.

"Governments will need to tackle the housing and economic challenges through reforms that support investment, productivity, and economic growth. This is key to maintaining public confidence, including preventing superannuation being identified as the solution to Australia's economic challenges," Financial Services Council chief executive Blake Briggs said.

CPA Australia chief executive Chris Freeland commented Australians are retiring in record numbers and living longer than ever, while the ratio of working people to support those in retirement continues to decline.

"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," Freeland said, adding the tax system remains overly reliant on personal income tax, with bracket creep continuing to drive revenue growth.

"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," he said.