OECD Report : Australia

 According to the sources, the Australian economy is currently normalising following a five-year period of "highly unusual" macroeconomic fluctuations triggered by the pandemic, global energy and food price shocks, and subsequent interest rate hikes. While the economy experienced a significant slowdown in 2023 and 2024, it is now on a path toward recovery with growth expected to align with pre-pandemic trends.

Growth Projections and Recovery Drivers

Real GDP growth, which slowed to approximately 1.1% in 2024, is projected to recover to 1.8% in 2025 and reach 2.3% in both 2026 and 2027. This recovery is expected to be driven by several key factors:

• Household Income: A rebound in real disposable household income as nominal wage gains catch up to inflation.
• Monetary Easing: An easing of interest rates, which is already supporting a rebound in sensitive sectors like housing investment.
• Private Demand: Investment and private consumption are set to grow more rapidly as the heavy impetus from government consumption growth begins to ease.

Inflation and Monetary Policy

Australia achieved a "soft landing" in the labor market, but inflation management remains a primary focus. Headline inflation peaked at nearly 8% in late 2022 and successfully returned to the 2-3% target band in late 2024. However, an unexpected upturn occurred in the third quarter of 2025 (reaching 3.0% for core inflation) due to the withdrawal of energy rebates.

The Reserve Bank of Australia (RBA) began an easing cycle in February 2025, with subsequent cuts in May and August 2025. The sources suggest that if inflation continues to trend downward in 2026, there may be space for further easing toward a neutral monetary stance.

Labour Market and Wage Dynamics

The labor market has remained remarkably resilient despite restrictive monetary policy.

• Employment: The number of people employed and participation rates are at record highs, supported by a strong rebound in immigration and higher female labor force participation.
• Wages: Despite a tight labor market, real wage growth has been weak. Between early 2022 and late 2025, real hourly wages in Australia fell by 2.6%, a steeper decline than in nearly any other OECD economy, largely due to Australia's relatively "inertial" wage-setting system of multi-year collective agreements.

Fiscal Position and Long-term Pressures

The general government deficit widened to 3.4% of GDP in 2025, though it is projected to narrow to 2.5% by 2027. While Australia maintains a relatively light debt burden compared to its peers, the sources highlight significant long-term fiscal pressures:

• Structural Deficit: A structural deficit has opened at the federal level on a cash basis.
• Ageing and Healthcare: Population ageing is expected to increase health and aged care costs by 1.5% of GDP by 2050.
• Climate and Transition: The costs of climate adaptation and the loss of fuel excise revenue (due to the shift to electric vehicles) present further budgetary challenges.

External Risks and Structural Challenges

The macroeconomic outlook is sensitive to several global risks identified in the sources:

• China and Trade: Australia depends heavily on China for commodity demand. Recent shifts in US trade policy (including 10% to 50% tariffs) and broader global trade tensions could indirectly impact Australian national income.
• Productivity: A major headwind is the long-term slowdown in productivity growth, which was already at its lowest rate in decades prior to the pandemic.
• Housing: High housing costs and a structural shortfall in supply continue to weigh on labor mobility and intergenerational equity.

In the larger context of the 2026 Economic Survey, the sources conclude that while the cyclical recovery is underway, sustained living standards will require reinvigorating business dynamism, strengthening competition, and addressing the housing and energy transitions.

In the context of the OECD Economic Survey: Australia 2026, fiscal policy is described as being in a state of rebalancing following the major shocks of the pandemic and subsequent energy price spikes. While the public finances have weakened in recent years, the sources emphasize the need for a gradual consolidation to address a structural deficit and rising long-term spending pressures.

Current Fiscal Position and Strategy

The general government deficit expanded by approximately 1.5 percentage points of GDP over the last three years, with the federal budget returning to a net lending deficit in 2024-25. This deterioration was driven by permanent spending increases, income tax cuts, and cost-of-living reliefs.

• Federal Strategy: The 2025-26 Federal Budget aims to put debt on a sustainable footing by limiting spending growth and directing revenue windfalls (often from high commodity prices) toward budget repair.
• State and Territory Pressures: Sub-federal governments recorded an aggregate deficit of 2.1% of GDP in 2024-25. States face a "vertical fiscal imbalance," where they are responsible for 40% of spending (notably health and education) but collect only 20% of total revenue. Consequently, public debt has risen in most states, particularly in Victoria and the Northern Territory.

Long-term Fiscal Pressures

The sources highlight several "substantial pressures" that will challenge fiscal stability in the coming decades:

• Population Ageing: Increased health and aged care costs are projected to add 1.5% of GDP to public spending by 2050.
• NDIS Sustainability: The National Disability Insurance Scheme (NDIS) currently costs 1.5% of GDP. While reforms passed in 2024 aim to save AUD 60 billion over a decade, the government must effectively cap annual growth at 8% to ensure sustainability.
• Climate Transition: Achieving net zero will require significant public investment, while the shift to electric vehicles will erode fuel excise revenues, which currently account for about 0.6% of GDP.

Tax System Reform

A central theme in the sources is that Australia’s tax mix is inefficient and skewed toward direct taxation (labour and corporate income). To support growth and address deficits, the sources recommend rebalancing the system toward more efficient bases:

• GST Reform: Australia’s 10% GST rate is low by international standards. The sources suggest broadening the base by reducing exemptions and considering a rate increase (potentially to 15%) to reduce reliance on labour taxes.
• Property Taxation: The sources advocate for replacing state-based stamp duties (which hinder labour mobility) with recurrent land taxes.
• Superannuation: Recommendations include further reducing tax concessions for high-wealth individuals to ensure the system focuses on retirement adequacy rather than wealth accumulation.
• Natural Resources: The sources suggest Australia has historically undertaxed resource rents and could raise additional revenue (up to 0.5% of GDP) through minor adjustments to the royalty system.

Fiscal Framework and Governance

While the Charter of Budget Honesty provides transparency, the sources suggest the framework could be strengthened by:

• Spending Targets: Introducing a numerical spending target to provide a clearer budget envelope, especially since revenues are volatile and heavily influenced by global commodity prices.
• Intergovernmental Coordination: Enhancing the role of the Council on Federal Financial Relations to manage medium-term cost drivers across both federal and state levels.
• Bracket Creep: The sources note that the non-indexation of tax brackets (fiscal drag) has increased the effective tax burden on households, though periodic cuts have partially mitigated this. Indexing thresholds is suggested to improve transparency and reduce arbitrary tax increases.

In the larger context of the OECD Economic Survey: Australia 2026, revitalising competition is presented as a critical lever for reversing the long-term slowdown in productivity growth and easing cost-of-living pressures,,. The sources indicate that competition has waned over the past two decades, characterized by declining business dynamism—such as lower firm entry and exit rates—and rising market concentration and profit margins,,.

The Current Competitive Landscape

Australia faces unusual challenges in fostering competition due to its geographical remoteness (the "tyranny of distance") and highly dispersed population, which naturally predispose the economy to fragmented and concentrated markets,,. Key findings regarding the current state include:

• Rising Mark-ups: Average firm-level mark-ups increased by approximately 6% between 2003 and 2017, suggesting that many firms face less pressure to lower prices,.
• Market Concentration: Industry concentration is notably higher in Australia than in the United States and has been rising.
• Policy Stagnation: While once a global leader following the 1990s Hilmer reforms, Australia’s product market regulation (PMR) settings have remained largely unchanged while other OECD peers have moved forward with more vigorous reforms,.

Key Reform Pillars

The 2026 Survey highlights several major initiatives and recommended actions to restore competitive intensity:

1. Merger Control Reform The sources highlight the introduction of a mandatory notification merger regime (commencing in 2026) as a significant step forward,. This replaces a permissive voluntary system that allowed many "stealthy" or incremental acquisitions to go unnoticed. The new regime shifts the Australian Competition and Consumer Commission (ACCC) from a prosecutorial to an administrative review model, bringing Australia into alignment with international best practices,.

2. Revitalising National Competition Policy (NCP) A "revitalised" NCP agenda has been established to tackle regulatory fragmentation across Australia’s federal system,. This includes:

• Incentive Payments: Reintroducing "Competition Payments" to reward states and territories for meeting agreed reform benchmarks, such as streamlining planning and zoning or harmonizing occupational licensing,,.
• Regulatory Harmonisation: Addressing differences in state-level rules—for instance, in solar panel regulations or heavy vehicle permits—that raise costs for small businesses and limit labour mobility,.

3. Strengthening Enforcement and Oversight The sources advocate for a more vigorous enforcement of existing competition laws, noting that there have been relatively few successful complex abuse-of-dominance cases,. Recommendations include simplifying the legal framework for cartel conduct, boosting ACCC enforcement capacity, and making systematic use of data-rich market studies conducted by both the ACCC and the Productivity Commission,,.

Sector-Specific Objectives

The sources identify several highly concentrated sectors where specific barriers to entry should be removed:

• Aviation: Reforming slot allocation at major airports (like Sydney) to increase transparency and provide more "use-it-or-lose-it" pressure on incumbents,,.
• Banking: Ensuring proportionality in licensing to allow smaller digital challengers (neobanks) to enter the market and mandating standardized notifications to help consumers switch products,,.
• Supermarkets: Requiring major chains to publish daily price and product size data in standardized formats to improve transparency and address "shrinkflation",.
• Telecommunications: Encouraging a fourth mobile network operator through infrastructure sharing (roaming and towers) and pro-competitive spectrum allocation, particularly in regional areas,,.
• Construction: Promoting Modern Methods of Construction (MMC), such as prefabrication, by establishing national standards and using government procurement to create the necessary scale for innovation,,.
• Motor Vehicles: Removing parallel import restrictions to allow agents other than manufacturers to import cars, which could lower retail prices and increase consumer choice,.

According to the sources, housing in Australia is characterized by high quality and spaciousness, yet it is currently expensive and in short supply, creating a significant strain on well-being and economic productivity. Over the past 30 years, real house prices in Australia have risen more in relation to household incomes than in any other OECD country.

The Current State of Affordability

The sources state that housing costs have surged over the past three years due to a combination of rising interest rates, high rental inflation, and a chronic shortage of dwellings.

• Price and Debt: Australian households carry a high ratio of mortgage debt to disposable income. Because the vast majority of mortgages are adjustable-rate, households felt the impact of rising interest rates almost immediately, leading to a sharp increase in mortgage interest payments as a share of income.
• Rental Stress: By 2023, 54% of low-income renters were in "rental stress," paying more than 30% of their income in rent.
• Social Impact: High costs have reduced homeownership among the young and limited geographic mobility, which prevents workers from moving to high-productivity areas. This "urban sprawl" also increases greenhouse gas emissions due to longer commutes.

Supply-Side Constraints

The sources identify restrictive land-use regulations as the primary factor behind the long-term shortfall in housing supply.

• Zoning and Planning: Regulations often include building height restrictions and minimum lot sizes that prevent the development of medium- and high-density housing in major cities. Australia’s land-use planning is highly decentralized and overlapping, which tends to result in tighter regulations.
• Construction Productivity: Productivity in the construction sector is lower today than it was 20 years ago. The industry is fragmented, with many small firms that lack the scale to innovate or adopt Modern Methods of Construction (MMC), such as prefabrication.
• Social Housing: Social housing makes up only about 4% of the housing stock, down from 6% in 1990 and roughly half the OECD average.

Demand-Side Drivers and Tax Distortions

The sources argue that current tax and policy settings further exacerbate the affordability crisis by boosting demand rather than supply.

• Favorable Taxation: Residential property investment is supported by a 50% capital gains tax reduction and "negative gearing," which allows investors to deduct rental losses from their other taxable income. These settings tend to inflate property prices.
• Stamp Duties: High state-based transaction taxes (stamp duties) make it costly for people to move or downsize, while recurrent land taxes remain relatively low.

Proposed Policy Solutions

To address these challenges, the OECD Economic Survey: Australia 2026 recommends several structural reforms:

• Rebalancing Property Taxes: The sources advocate for replacing state-based stamp duties with recurrent land taxes to improve mobility and align the taxation of real estate with other assets.
• Planning Reform: Federal incentives should be used to encourage states and local authorities to ease planning restrictions and facilitate higher-density construction around transport connections.
• Boosting Social Housing: The sources recommend increasing public funding and raising the targets for the Housing Australia Future Fund (HAFF) to expand the social housing stock.
• Industrializing Construction: Establishing national standards and a voluntary certification scheme for MMC would help the construction sector achieve the scale necessary to lower costs and increase supply.

In the larger context of the OECD Economic Survey: Australia 2026, the climate transition is framed as both a significant long-term fiscal challenge and a critical opportunity to reinvigorate industrial productivity. While Australia has historically been viewed as an international laggard, the sources indicate that recent legislative efforts have put the country on a path to meet its medium-term goals, though substantial structural hurdles remain.

Emissions Targets and Progress

Australia has enshrined its climate goals in law through the Climate Change Act of 2022, which targets a 43% reduction in emissions by 2030 (from 2005 levels) and Net Zero by 2050.

• 2030 Outlook: Australia is currently considered broadly on track to meet the 2030 target; as of 2024, emissions were 28.2% below 2005 levels.
• 2035 Ambition: The government recently set a 2035 target of 62-70% reduction, which the sources describe as a "high degree of ambition" that will require a significant acceleration of effort beyond existing power-sector policies.

The Electricity Sector: Successes and Volatility

The energy sector has driven the bulk of Australia’s recent emission reductions, largely due to a rapid shift to renewables and the declining use of coal. However, this transition has introduced new complexities:

• Intermittency and Pricing: High penetration of solar and wind has led to a rising incidence of negative wholesale electricity prices, particularly in South Australia and Victoria. This indicates a pressing need for increased investment in grid transmission and battery storage to balance supply and demand.
• Capacity Investment Scheme (CIS): To manage this, the government expanded the CIS with a target of adding 26 GW of renewable generation and 14 GW of clean dispatchable capacity by 2030.

Sectoral Challenges: Transport and Agriculture

While the energy sector is decarbonizing, other major emitters are lagging:

• Transport: This sector is the second-largest emitter and its emissions have been rising. Australia remains heavily car-dependent, and the sources suggest that urban sprawl and low fuel taxes contribute to a slow take-up of electric vehicles (EVs). To address this, the sources recommend gradually raising motor fuel taxes toward European levels and implementing road-user charges to offset the eventual loss of fuel excise revenue.
• Agriculture: Accounting for 18% of emissions, this sector lacks a clear reduction strategy. The sources note that while there is research into methane-reducing feed supplements, the red meat industry recently abandoned its 2030 carbon neutrality target as "unrealistic".

"Future Made in Australia" and Green Industry

The transition is a central pillar of the government’s industrial policy. The Future Made in Australia agenda commits approximately AUD 23 billion over ten years to develop priority sectors like green hydrogen, critical minerals, and green metals.

• Green Iron Potential: Australia is uniquely positioned to lead in green iron production by combining its massive iron ore deposits with exceptional solar and wind resources.
• Critical Minerals: Australia is already the world’s largest producer of lithium and a major producer of cobalt, offering a significant opportunity to diversify global supply chains away from China.

Adaptation and Economic Resilience

Australia is "highly exposed" to climate risks, including extreme heat, bushfires, and coastal flooding.

• Economic Toll: Seasonal changes between 2001 and 2020 have already reduced annual average farm profits by 23%.
• Policy Response: The sources highlight the importance of the National Adaptation Plan (NAP) and the need for better disclosure of climate risks in property sales to ensure the insurance industry can price hazards accurately.

Ultimately, the sources conclude that while the 2030 targets are within reach, achieving Net Zero by 2050 will require "further policy efforts" to manage the exit of coal, decarbonize transport and agriculture, and integrate climate risks into land-use regulations.

In the larger context of the OECD Economic Survey: Australia 2026, revitalising productivity growth is identified as the primary requirement for sustaining high living standards and supporting future wage increases. Productivity growth in the five years preceding the pandemic was roughly half the average of the previous half-century, and more recently, labour productivity has stalled, leaving it no higher than it was a decade ago.

The Productivity Challenge

The sources attribute the recent extreme weakness in productivity to a mix of cyclical, sectoral, and structural factors:

• Sectoral Shifts: A significant drag has come from the non-market sector (such as healthcare and aged care), which is labour-intensive and where productivity is difficult to measure. Additionally, the mining sector has faced a structural trend toward lower productivity as easy-to-access deposits are exhausted.
• Business Dynamism: There has been a notable decline in firm entry and exit rates, as well as job mobility, which reduces the "creative destruction" necessary to reallocate resources to more efficient firms.
• Measurement Lags: The sources note that the recent surge in migration may temporarily lower measured productivity because new migrants often start in lower-wage roles before their productivity catches up with native-born workers.

Key Reform Pillars for Growth

The sources outline a comprehensive reform agenda aimed at reversing these trends through competition, regulatory streamlining, and human capital development:

1. Revitalising the National Competition Policy (NCP) A central reform theme is the "revitalised" NCP, which uses incentive payments to encourage states and territories to remove regulatory barriers. This includes streamlining commercial planning and zoning to support new development and harmonising standards for Modern Methods of Construction (MMC) to address the productivity slump in the building sector.

2. Reducing Regulatory Fragmentation Australia’s administrative and regulatory burdens remain high compared to top OECD performers. The sources recommend:

• Occupational Licensing: Expanding Automatic Mutual Recognition to all states (notably Queensland) and narrowing exemptions to allow workers to move more easily between jurisdictions.
• International Standards: Adopting an expedited approach to recognising trusted overseas standards (e.g., for medical devices or construction products) to reduce duplicative testing and lower costs for foreign competitors.

3. Tax and Institutional Reform The sources argue for a tax mix shift toward more efficient bases to support growth. This includes broadening the GST and increasing its rate to 15% while reducing reliance on labour taxes—a move estimated to boost the GDP level by 1.6% over 10 years. Other proposed reforms include indexing the retirement age to longevity and increasing business R&D support.

4. Human Capital and Inclusivity To maximise the productive potential of the workforce, the sources highlight the need to:

• Improve Education: Strengthen vocational education and improve outcomes in the school system.
• Gender Equality: Address the gender pay gap and remove barriers to female labour force participation, which remains lower in hours worked compared to men.
• Migration Alignment: Ensure the migration system effectively matches incoming skills with acute labour shortages in sectors like construction and healthcare.

Estimated Macroeconomic Impact

The OECD's long-term modelling suggests that a coordinated package of these structural reforms could be highly transformative. If Australia successfully reduces regulatory barriers to levels seen in top-performing countries like Denmark or the Netherlands, and implements the suggested tax and R&D reforms, the cumulative impact could boost the GDP level by 3.4% over 10 years and up to 5.8% over 20 years.