Can AI Rescue Australia's Stagnant Economy?

 

Australia's productivity has barely moved in a decade. Treasury's latest Intergenerational Report expects a recovery, with artificial intelligence playing a pivotal role. We've heard optimistic productivity forecasts before.

Another Forty Years of Optimism

Treasurer Jim Chalmers has released the 2026 Intergenerational Report, projecting an Australian economy more than twice its current size and per-capita incomes 55% higher by 2066.

Underpinning those projections is an assumption that long-term labour productivity growth will reach 1.2% annually. The Treasurer has identified AI as a pivotal contributor to achieving it.

That sounds encouraging.

Unfortunately, Australia has a rather inconvenient productivity record.

The Numbers Tell a Different Story

The Productivity Commission's September update paints a picture of prolonged stagnation.

Australia's Productivity Reality

Over the twelve years to June 2026, economy-wide labour productivity increased just 3.6%. The non-market sector—dominated by government-funded services—actually recorded a decline of 2.5% over the same period.

The economy has barely recovered from the productivity slump that followed the pandemic.

And this is the starting point from which Treasury expects a sustained recovery.

We've Heard This Before

The first Intergenerational Report, published in 2002, assumed annual productivity growth of 1.8%.

Twenty years later, actual growth had averaged just 1.2%.

Yet aggregate GDP growth came remarkably close to Treasury's original projection. How?

Australia's population grew by approximately three million more people than forecast, largely because net overseas migration was roughly double the original assumption. Workforce participation also exceeded expectations.

The economy grew, but not in the way Treasury anticipated.

Subsequent reports continued to revise productivity expectations downward. The 2021 assumption of 1.5% was reduced to 1.2% in 2023.

The 2026 report retains that figure, despite another three years of disappointing performance.

The historical lesson is not that productivity cannot recover. It is that long-term forecasts have repeatedly overestimated Australia's capacity to deliver it.

Enter the AI Miracle

Artificial intelligence undoubtedly offers enormous opportunities. It can automate administrative work, accelerate research, improve logistics and make skilled workers more productive.

But purchasing AI software does not automatically produce higher national productivity.

Businesses must reorganise their operations, retrain employees, invest in infrastructure and eliminate inefficient practices. Some will succeed. Others may simply add AI subscriptions to their existing costs.

Even Reserve Bank Governor Michele Bullock has cautioned that there is not yet evidence of an Australian productivity improvement attributable to AI. She has also raised the possibility that the investment boom in AI infrastructure could initially contribute to inflation rather than improved productivity.

There is an important difference between the potential of a technology and the capacity of an economy to exploit it.

Australia has been adopting digital technologies for decades. Yet productivity has continued to deteriorate.

Why should AI automatically produce a different result?

The Arithmetic of Wishful Thinking

Treasury's 1.2% assumption might appear modest compared with the productivity growth Australia enjoyed in earlier decades.

But consider the consequences if actual performance falls short.

Forty years of productivity growth

Illustrative cumulative productivity index, starting at 100. Three constant annual growth scenarios; not forecasts.

Calculated using annual compounding.

After forty years, sustained growth of 1.2% produces approximately 61% more output per hour. At 0.8%, the improvement is only 38%. At 0.3%, it is barely 13%.

The difference is enormous. It affects wages, tax revenue, government spending and the living standards of future generations.

Treasury's projections are scenarios built on assumptions, not guarantees. But when an optimistic assumption becomes the foundation of fiscal planning, its failure has consequences.

Technology Is Not a Substitute for Reform

Australia's productivity problem predates AI.

It reflects a complex combination of weak business investment, poor capital allocation, declining productivity in government-funded services and an economy increasingly concentrated in activities where efficiency improvements can be difficult to achieve. The Productivity Commission has identified investment, skills and competition as important areas for reform.

AI may help address some of these problems. It cannot resolve all of them simply by existing.

The question is whether Australia's businesses and institutions will make the organisational changes needed to convert technological potential into measurable economic gains.

The experience of the past two decades provides ample reason to scrutinise the assumptions.

Treasury has already had to reduce its productivity forecasts once. The new report relies on the same 1.2% figure despite a much weaker recent record.

AI may transform the world. But Australia's economic projections depend on something much less certain: our ability to turn that transformation into productivity.

Further reading: 2026 Intergenerational Report, Productivity Commission's September 2026 update and Treasury's review of previous Intergenerational Reports.

Further Reading from Grappy's Soapbox

- The AI Race Will Be Won With Energy — Explores the electricity, data centres and industrial infrastructure needed to realise AI's potential. It complements the new article's distinction between technological promise and economic results.

- How Much Migration Can Australia Absorb? — Examines the distinction between growth in total GDP and improvements in living standards, including the importance of productivity.

- Climate, Energy and Prosperity: The Debate That Shapes Our Future — Considers how energy costs, infrastructure investment and energy policy affect economic prosperity.

The Strait Opens As Iran's Economy Closes

Oil is moving through the Strait of Hormuz again. But while the world adjusts to the blockade, Iran faces mounting isolation by sea, air and through its banking system.

Three Weeks Can Make a Difference

In my 31 August article, Are the Straits of Hormuz Open?, I estimated that Gulf oil exports had recovered to around 15–16 million barrels per day, including shipments through the Strait and pipelines bypassing it.

That was a substantial recovery from the March collapse, but still well below the pre-war flow of roughly 21 million barrels a day through Hormuz alone.

September has demonstrated just how fragile that recovery remains.

Attacks on Saudi Arabia's East-West pipeline and another tanker incident in Hormuz sent oil prices climbing. On 17 September, Brent closed at US$104.82 a barrel.

Then the news changed. Gulf shipments increased, Saudi Arabia moved to restore its pipeline, and reports emerged of possible renewed negotiations with Iran. On 22 September, Brent briefly fell below US$98 before recovering.

The market is reacting to something more substantial than diplomatic speculation.

Oil is getting through.

Hormuz: The Latest Numbers

On 21 September, US Central Command reported that oil shipments through Hormuz had reached a six-month high. It said US naval operations had helped move more than one billion barrels of Gulf oil in recent months.

Saudi exports through the Strait have reportedly reached as much as 2.4 million barrels per day over the preceding fortnight.

These developments confirm the direction of travel, although they do not establish a precise current total for all oil passing through Hormuz. Military-reported movements, commercial tanker tracking and exports through bypass pipelines measure different things.

Hormuz shipments: six-month high reported on 21 September. Normal pre-war traffic has not been fully restored.

The distinction matters. Hormuz remains dangerous, and attacks on shipping and alternative export routes can still disrupt supplies. But it is no longer accurate to describe the Gulf's oil exports as paralysed.

Iran: A Modern Economic Siege

For Iran, however, the picture is moving in the opposite direction.

The US naval blockade, reinstated in July, has severely restricted Iranian oil exports. Reuters reported that crude loadings fell from around two million barrels per day in March to approximately 220,000–255,000 barrels per day in August. For seven weeks, no meaningful Iranian crude exports had passed through Hormuz.

Iranian crude loadings collapse

Approximate barrels per day, March and August 2026. (Figures reported by Reuters.)

Oil is only one part of the pressure.

By sea: The blockade has sharply restricted Iran's access to its principal oil customer, China. Oil held in floating storage abroad has provided a temporary source of supply, but without fresh shipments that reserve diminishes.

By air: On 8 September, the US Treasury sanctioned 36 targets associated with Iranian aviation. International services have subsequently been cancelled or suspended, including Mahan Air flights to Istanbul, Ankara and Muscat. New restrictions on refuelling, ground handling and ticket sales threaten the remaining international operations.

Through the banks: On 18 September, Turkey revoked the operating licence of Bank Mellat's Istanbul branch. The move followed increased US pressure on financial institutions dealing with Iran, further narrowing its international banking options.

Iran has responded by shifting more trade overland, particularly through Turkey. But congested border crossings, higher transport costs and difficulties making international payments limit how much these routes can replace maritime trade.

This is not complete isolation. Iran retains trading relationships, land borders and diplomatic contacts. But the combined pressure on its shipping, aviation and financial systems is making international commerce progressively more difficult.

And ordinary Iranians are bearing substantial costs alongside the government: higher prices, fewer travel options and increasing difficulties obtaining imported goods.

The Pressure — and the Unanswered Question

Iran has responded to the blockade with threats against shipping and continued resistance to US demands. Yet on 22 September, a senior Iranian official indicated that Tehran could reopen Hormuz within a week if Washington eased military pressure and lifted the blockade.

The proposal has not produced an agreement.

The economic pressure is measurable. Whether it will produce a negotiated settlement, prolonged confrontation or further escalation remains unresolved.

For the rest of the world, the immediate story is improving oil flows and easing prices.

For Iran, it is the steady contraction of its economic connections.

The Strait is becoming more accessible to Gulf oil. Iran's own route to world markets is becoming harder to use.

That is the striking contrast since our last report.

I would use this as the article draft and hold the cartoon, search description and X posts until you are happy with the text. The most useful continuing indicator will be the gap between total Gulf oil shipments and Iran's own exports, rather than oil prices alone.

Weekly Roundup - Top Articles and Commentary from Week 39 of 2026

     

Here are links to some selected articles of interest and our posts from this week.

• The AI Race Will Be Won With Energy
• Bill Maher Says What Others Wont
• AI Wants The Art, Artists Want the Pay
  
• How Much Migration Can Australia Absorb?
• From Child Safety To Government Control
• The Strait Opens As Iran's Economy Closes
• Will AI Rescue Australia's Stagnant Economy
  

Cartoon of the Day

We welcome all feedback; please feel free to submit your comments or contact me via email at grappysb@gmail.com or on X at @grappysb

From Child Safety To Government Control

 

There is something almost everyone seems to agree on: social media can be bad for children.

Parents worry about it. Psychologists warn about it. Politicians promise to do something about it. And increasingly the villain has a name — the algorithm.

The concern is not imaginary. Heavy and problematic social-media use has been associated with depression and anxiety, particularly among adolescent girls. Cyberbullying, social comparison, harmful content and disrupted sleep can all cause problems.

But the evidence also suggests something rather less dramatic: how social media is used matters enormously. Time limits, keeping phones out of bedrooms at night, parental supervision and simply talking to children about what they encounter online can reduce the risks.

Which raises an uncomfortable question.

When did a difficult parenting problem become a government responsibility?

Whatever Happened to Parents?

Every generation of parents has faced influences it couldn't completely control — television, pornography, alcohol, drugs, unsuitable friends and the irresistible attraction of doing whatever your parents told you not to do.

Social media has made the job harder. But parents still decide when younger children get smartphones. They can impose time limits, monitor accounts, keep phones out of bedrooms and intervene when something looks wrong.

None of that guarantees success.

Parenting never has.

Yet increasingly the response seems to be:

If parents cannot completely control something, government should.

Australia has already prohibited children under 16 from holding accounts on designated social-media platforms. Britain has strengthened online-safety and age-assurance requirements. European governments are considering further restrictions.

The justification is compelling.

We are protecting the children.

But what exactly are we authorising government to do?

From Protecting Children to Controlling Algorithms

Governments are moving beyond restricting children's access. Increasingly they want to regulate the algorithms deciding what appears on our screens.

Australia's proposed “My Feed, My Way” reforms would require platforms to give users greater control over whether their feeds contain algorithmically recommended material.

Giving users more choice sounds attractive.

But it also establishes an important principle:

Government can regulate the mechanism deciding what information appears before us.

Today the concern is obvious harmful content directed at children.

Tomorrow it might be misinformation.

Then extremist material.

Then hate speech.

Then political propaganda.

Each step can be justified as preventing harm.

I am not suggesting governments introducing child-safety laws secretly intend to censor political debate. The danger is simpler than that.

Once society accepts a government power for one legitimate purpose, extending that power becomes much easier.

The question therefore isn't whether children should be protected.

Of course they should.

It is where that authority stops.

The Privacy Paradox

There is another uncomfortable consequence.

To stop children using social media, platforms first have to determine who the children are.

That can involve analysing photographs, facial-age estimates, account behaviour, devices and other personal information.

So we arrive at a strange outcome:

To protect children from technology knowing too much about them, we may require technology to know considerably more about them.

Perhaps that trade-off is worthwhile.

But we should at least acknowledge it.

Three Responsibilities

There is a simpler way of looking at the problem.

Social-media companies have responsibilities. They should not knowingly drive vulnerable children toward increasingly harmful material simply because engagement produces revenue.

Parents have responsibilities. Governments cannot replace knowing what your 13-year-old is doing at midnight with a smartphone behind a closed bedroom door.

Government has responsibilities too — particularly where platforms facilitate illegal activity or knowingly expose children to demonstrable dangers.

But these are three different responsibilities.

We should be wary of allowing the third gradually to absorb the first two.

Social media can harm children. That is a legitimate reason for parents to take greater control and for platforms to behave responsibly.

It does not automatically follow that government should decide what information algorithms may place before us.

Protecting children is important.

So is protecting the freedom of adults to decide what they read, watch and believe.

The challenge is ensuring that in pursuing the first, we don't quietly surrender the second.

Because after we turn off the algorithm, one question remains:

Who gets to decide what replaces it?

Further Reading: This debate is ultimately about who retains control as technology becomes more powerful. 
In Speak … If You Dare! I looked at the growing pressures on free expression, while Can We Keep AI Under Control? examined the broader problem of keeping increasingly autonomous technology within boundaries set by humans. 

The same principle runs through both: technology may change, but responsibility for deciding the limits should never be surrendered lightly.

How Much Migration Can Australia Absorb?

Australia’s migration debate has become trapped between two extremes.

On one side, any attempt to question migration levels is too readily dismissed as hostility towards migrants. On the other, some propose dramatic cuts without adequately considering the workers Australia genuinely needs.

There ought to be room for a more practical question:

How many migrants can Australia absorb without making Australians poorer or placing intolerable pressure on housing and infrastructure?

That question has become unavoidable.

The Albanese Government has now announced another migration overhaul. It proposes tighter rules for international students, restrictions on visa hopping, limits on extended working-holiday visas and stronger action against overstayers. The Government says these measures will help reduce net overseas migration from about 300,000 towards 225,000 by 2027–28. Reuters

There are some sensible measures in the package. Australia should not allow temporary visas to become an indefinite chain of course changes, extensions and appeals. Nor should people whose visas have expired simply disappear into the community.

But the central problem remains unanswered.

Why is 225,000 the right number?

It appears to be a forecast the Government hopes to reach, rather than a figure derived from Australia’s housing capacity, infrastructure constraints or effect on living standards.

Growth that does not make us richer

High migration produces economic growth almost automatically. More people mean more workers, more consumers, more taxpayers and more government revenue.

That makes the headline GDP figure look respectable.

But increasing the size of the economy is not the same as increasing the prosperity of the people already living in it. If GDP rises by 2 per cent while the population rises by 2.5 per cent, the economy has grown but the average Australian’s share has shrunk.

For a government unwilling to reduce expenditure, rapid population growth is politically convenient. It expands the tax base and helps keep the economy out of a technical recession.

Unfortunately, Australians do not live in “aggregate GDP”. They live on household incomes. They pay rent or mortgages, wait in traffic, seek hospital appointments and compete for increasingly scarce housing.

The relevant question is not whether migration makes Australia’s economy larger. Of course it does.

The question is whether it makes Australians better off.

In recent years, the answer has been far less reassuring. Population growth has helped sustain headline economic growth while per-person living standards have been squeezed. The economic pie grew, but the number of people sharing it grew rapidly as well.

Housing cannot be wished into existence

Every additional person needs somewhere to live.

That statement is so obvious that it should not need repeating. Yet migration policy has often been conducted as though housing supply will automatically adjust to whatever population number Canberra chooses.

It does not.

New homes require land releases, approvals, finance, builders, tradespeople, materials, roads, water, electricity and other services. All take time. Some are already in short supply.

Migrants themselves are not to blame for this. They come under rules established by the Australian Government. The failure lies in admitting people much faster than the country can provide the homes and services they require.

When population growth exceeds housing construction, the result is predictable:

• rents rise;

• vacancy rates fall;

• more people compete for each available property;

• first-home buyers find the market even harder to enter; and

• governments fall further behind in providing schools, hospitals, transport and utilities.

The Government frequently responds that migrants are needed to build the houses. There is some truth in that—but only if migration is carefully targeted towards the actual shortages.

Bringing in construction workers may help increase supply. Bringing in many more people who also need homes, without adding comparable construction capacity, makes the shortage worse.

The composition of migration therefore matters as much as the total.

Migration should serve Australia

Australia needs migration.

We have an ageing population, a low birth rate and genuine shortages in medicine, nursing, aged care, construction, engineering and other specialised fields. A sensible migration program can fill skills that cannot readily be supplied locally and prevent population decline from becoming economically disruptive.

But migration is a policy instrument, not a national objective in its own right.

The program should be large enough to:

• fill clearly demonstrated skills shortages;

• replace essential workers lost through retirement;

• support a sustainable demographic balance; and

• attract people whose skills will add to Australia’s productive capacity.

It should not be used merely to inflate GDP, support an ever-expanding bureaucracy or conceal weak productivity growth.

Nor should businesses be able to rely indefinitely on imported labour instead of training Australians, improving productivity or offering wages sufficient to attract local workers.

A temporary period of repair

Even if Australia eventually decides that a net migration figure around 200,000 is sustainable, it does not follow that this is the correct number today.

Migration has exceeded Australia’s capacity for several years. We are not beginning with a balanced housing market and adequate infrastructure. We are beginning with an accumulated shortage.

That means the appropriate short-term migration figure may need to be significantly lower than the desirable long-term figure.

Think of it as a household that has been spending beyond its income. Merely reducing expenditure to equal income does not repay the debt already accumulated. A temporary surplus is needed to catch up.

Housing requires the same logic.

For a period, Australia must build substantially more homes than are required by population growth. Only then can vacancy rates recover, rents stabilise and the accumulated shortage begin to fall.

Once that repair has occurred, migration could rise to a sustainable long-term level—provided housing and infrastructure are keeping pace.

Start with capacity, not a political target

The Government’s proposed figure of 225,000 may prove too high, too low or approximately right. But it should not be accepted simply because it appears in a government forecast.

A credible migration policy should begin with measurable constraints:

1. How many homes is Australia short today?

2. How many new homes can realistically be completed each year?

3. How many homes are required for natural population growth?

4. How much migration can be accommodated while still reducing the housing deficit?

5. Which skilled migrants would increase Australia’s productive capacity rather than merely add to demand?

Social cohesion and the importing of overseas hatreds are also serious concerns. The increasingly visible demonstrations in Australian cities have understandably sharpened public unease. But that is a separate discussion involving not simply the number of migrants, but whom Australia selects and what it expects of those who settle here.

For now, the numerical principle should be straightforward:

Migration should not exceed Australia’s capacity to house its population, provide essential infrastructure and improve—not dilute—living standards.

The Government has announced another set of migration adjustments. What it has not provided is a convincing calculation showing why its preferred figure is sustainable.

In the next post, we will attempt that calculation. We will examine Australia’s existing housing shortage, the number of homes we can realistically build, the housing required for natural population growth and the skilled migration Australia genuinely needs. From those numbers, we should be able to estimate a temporary migration ceiling that allows the housing shortage to shrink rather than continue growing.

That is the calculation we will be presenting in the next post in this series.

Further reading

• Has Multiculturalism Lost Its Way? — The difference between welcoming migrants and abandoning the expectation that newcomers integrate into Australian society.

• Tony Abbott’s Warning on Multiculturalism — Why mass migration without integration can weaken social cohesion and shared democratic values.

• Never Again Starts Here — The case for confronting antisemitism and the deterioration of social cohesion in Australia.

The first two are the closest fit. The third supports the brief reference to imported hatreds and the highly visible deterioration in social cohesion.