Treasury's 1.2% Productivity Bet Under Fire as Economists Warn of a $20,000 Income Gap

Treasury's 1.2% Productivity Assumption and the 40-Year Growth Gap

Australia's latest Intergenerational Report projects a much larger economy and rising living standards by 2066, but the result rests on a single contested number: productivity growth recovering from 0.3 per cent a year over the past decade to 1.2 per cent.

Treasurer Jim Chalmers released the report on Monday. Under the central scenario, the economy would more than double in real terms over 40 years, income per person would be 55 per cent higher, and real gross national income per person would reach $149,500. The Treasurer pointed to artificial intelligence as "the biggest economic transformation of our lifetime" and also cited recent regulatory and competition policy changes.

But Treasury's own sensitivity analysis shows the downside. If productivity grows by 0.8 per cent a year — still above the Reserve Bank's 0.7 per cent medium-term assumption — average income would be about $20,000 lower than the baseline, real GDP growth would be 1.2 per cent instead of 1.6 per cent, and real gross national income per person would be $129,800 rather than $149,500.

The sharper consequence is fiscal. Under the low-productivity path, the budget deficit is projected at 4.2 per cent of GDP rather than 1.8 per cent, and gross debt reaches 55.9 per cent of GDP instead of 27.4 per cent. That is why economists from HSBC and elsewhere have attacked the headline assumption as unrealistic.

Why Economists Call the Productivity Rebound Unsupportable

Treasury's Baseline Relies on a Productivity Turnaround

Treasury downgraded its long-run productivity assumption from 1.5 per cent in 2022 to 1.2 per cent in this report. That still requires a fourfold acceleration from the 0.3 per cent average of the past decade, and from the most recent 0.2 per cent decline in the June quarter. The baseline therefore embeds a strong recovery before any clear sign it is happening.

Paul Bloxham's Supply-Side Critique

HSBC chief economist Paul Bloxham questioned the speed of the rebound. His concern is that Australia's economy is largely supply constrained by a lack of housing and cheap energy. In his view, artificial intelligence is unlikely to fix those problems, because the main bottlenecks are physical capacity and energy costs, not information processing. That distinction matters: if AI raises software productivity but cannot build houses or generate cheap power, it will not close the gap.

Chris Richardson's Fiscal Warning

Independent economist Chris Richardson went further, calling the productivity assumption "bollocks" and describing the AI narrative as a "terrible toupee" hiding larger structural weak spots in the economy and the budget. The fiscal sensitivity supports his point: the low scenario more than doubles the projected deficit as a share of GDP and nearly doubles the debt-to-GDP ratio, even though the productivity assumption is still higher than the Reserve Bank's.

The AI Question Is Still Unanswered

The report treats AI as the mechanism that could lift productivity above 1.2 per cent if gains accelerate. But so far there is little evidence to justify pinning Australia's long-term living standards on AI. The productivity slowdown is shared across developed economies and reflects structural shifts — a more service-based economy, ageing populations and slower diffusion of new technology — so the burden on AI is large and unproven.

What the Low-Productivity Scenario Means for Households and Budget Planners

• Households: Use the 0.8 per cent productivity scenario, not the 1.2 per cent baseline, as a conservative reference. It still implies real gross national income per person rising from $96,500 to $129,800 by 2066, but $20,000 below the baseline figure of $149,500.
• Businesses planning long-term demand: Stress-test revenue assumptions against real GDP growth of 1.2 per cent in the low scenario rather than the 1.6 per cent baseline, because the gap compounds into a substantially smaller economy over 40 years.
• Budget-sensitive sectors: Factor in Treasury's own low-productivity deficit of 4.2 per cent of GDP and gross debt of 55.9 per cent of GDP, compared with 1.8 per cent and 27.4 per cent in the baseline. That gap points to materially greater pressure on future taxation or spending.
• Anyone relying on AI-driven income growth: Do not assume the productivity payoff is automatic. HSBC's Paul Bloxham argues AI is unlikely to fix Australia's housing and cheap-energy constraints, and productivity has actually declined in the latest quarter.