AUSTRALIA 2026
JANUARY 2026
ā¢ Policy support for activity is rebalancing, but fiscal policy needs to address long-term issues
ā¢ High housing costs would be reduced by removing barriers to supply and tax distortions
ā¢ Australia has made progress on the energy transition, but greater efforts are needed
ā¢ Revitalising competition would help to lower prices and boost productivity
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AFTER A PERIOD OF WEAK GROWTH, THE AUSTRALIAN ECONOMY IS RECOVERING
Australia has high levels of well-being, but experienced a slowdown in recent years. The economy is now recovering, but long-standing challenges of slower productivity growth, high housing costs and high carbon emissions need to be addressed.
Australia enjoys a high standard of living. This is supported by an open economy, strong institutions, and extensive natural resources. Strong educational attainment and human capital have helped to sustain living standards. Output and employment grew at a solid pace in the years prior to the pandemic.
However, productivity growth has been slow in recent decades, while housing costs have risen strongly and carbon emissions remain high Productivity growth in the 5 years prior to the pandemic was around half the average of the previous half century, although this is partly driven by developments in the mining sector and the expansion of the non-market sector, which is labourintensive and where productivity is difficult to measure. Shifts in the geopolitical environment and digitalisation will require Australia to adapt. Housing affordability is strained for many Australians, particularly the young, and the climate transition will require additional efforts to meet national objectives.
As in other countries, inflation surged and interest rates rose sharply in the wake of the pandemic. The combination of rebounding demand and supply constraints yielded large energy and food price
shocks and then broader inflationary pressure, which triggered a tightening of monetary policy.
There was a marked decline in real disposable incomes as inflation surged ahead of nominal wage gains while bracket creep pushed up effective tax rates and mortgage costs soared. Investment has been, held down by weak housing investment while higher commodity prices did not yield a boom in business investment (Figure 1). Immigration rebounded strongly following pandemic-related disruption while the unemployment rate has remained below pre-pandemic levels.
The economy will continue to recover in response to the easing of interest rates and the rebound in real disposable incomes. Investment and private demand are set to grow more rapidly as public consumption growth eases (Table 1). Overall, GDP growth is forecast to average a little more than 2% over the coming years, slightly above its trend rate.
Australia faces risks from shifts in the global economy. Exports depend significantly on the strength of demand and construction activity in China. Shifts in global supply chains related to higher trade restrictions in the world since 2025 could impact demand for Australian products.
Figure 1. Demand growth has been weak
1.Quarter-on-quarter annualised rates.
Source: OECD Analytical Database.
Table 1. Growth is projected to recover
unless
Source: OECD STEP118 database.
POLICY SUPPORT FOR ACTIVITY IS REBALANCING, BUT FISCAL POLICY NEEDS TO ADDRESS LONG-TERM ISSUES
Monetary policy was tightened to address high inflation after the price shocks, but part of the tightening was unwound in 2025 as inflation settled in the target range. The general government budget deficit has widened and is projected to increase further in 2025-26. The planned gradual fiscal adjustment should be implemented by raising spending efficiency and improving the functioning of the tax system.
Interest rates rose sharply as inflation peaked in 2022, but began to be eased in 2025 as inflation rates returned to the target range. Headline and core inflationwere around the official target for much of the past year but haveincreased in recent months+ Given the uncertainty over inflation trends, a flexible and data-dependent approach to monetary policy is warranted for now, but if, as expected, inflation turns back down during 2026, there may be some space for further easing. . Recent reforms to strengthen the governance of the Reserve Bank have helped to support more robust decision-making.
Despite higher interest rates the financial system has remained resilient. While household debt is high, mortgage delinquencies have risen only modestly in recent years and remain close to historical norms. The rate of bankruptcies appears relatively high, but this has not translated into large losses for the banking system.
The general government deficit increased in 202425 and is planned to increase further in 2025-26 While this has helped to support the economy during a period of weak private demand, fiscal adjustment will be needed to narrow the deficit to stabilise the debt ratio and to avoid boosting demand once the output gap is closed. The government should implement the planned gradual fiscal adjustment for the coming years using a combination of measures to raise spending efficiency and improve the efficiency and fairness of the tax system.
While Australia has a relatively light government debt burden, long-term pressures need to be addressed. Although the private superannuation pensions are well established and the population remains relatively young, ageing will increase health and care costs. Australia will need to invest further in climate transition and adaptation, while the switch to electric vehicles will lead to lower government revenues in the absence of tax reforms.
Spending restraint can be implemented by raising efficiency and better management of high-cost programmes. Spending growth in the National Disability Insurance Scheme needs to be restrained more effectively, including by better controlling access to support. More systematic reviews of spending and implementation of ongoing efforts to improve evaluation would help.
The tax system is heavily reliant on labour taxes, while making less use of more efficient consumption, property and environmental taxes. The tax system should be rebalanced away from labour taxes by raising Goods and Services Tax rates and making greater use of property and environmental taxes, while easing the burden of income taxes. A system of regular reviews of spending efficiency and the tax system could build on existing ad hoc reviews.
HIGH HOUSING COSTS WOULD BE REDUCED BY REMOVING BARRIERS TO SUPPLY AND TAX DISTORTIONS
Australiaās housing is spacious and of high quality, but housing costs in large cities are high. Measures to ease land-use regulations and inefficient practices in the building industry would improve supply, while reforming property taxes would help to dampen property prices.
Housing costs are high, particularly in large cities, and have risen rapidly. While housing is spacious and of high quality, costs are relatively high by international comparison and have risen rapidly in the past few years (Figure 2). Housing shortages lead to overcrowding and financial strain, reduce labour mobility, worsen intergenerational equity and increase congestion as people travel large distances to work.
Construction of new homes has failed to respond to higher demand. Land-use restrictions should be eased to allow more and denser housing to be built, particularly along transport corridors, including reducing the scope for local planning decisions to unduly limit supply. The federal government could incentivise more planning flexibility at local level.
Low productivity in the construction sector, including slow adoption of modern practices, increases the costs of new building. Efforts to improve training and support new approaches through building regulations should be prioritised.
Low recurrent property taxes and subsidies contribute to high housing costs, given limited supply. Property taxes can be an efficient way of raising revenue and ensuring that taxation of real estate is aligned with that of other assets. While stamp duties are high, recurrent property taxes are low. A shift from transaction taxes to recurrent property taxes would help to align housing more closely with other assets and other forms of consumption.
Consumer price index categories: rents and dwelling purchases
Source: Australian Bureau of Statistics.
AUSTRALIA HAS MADE PROGRESS ON THE ENERGY TRANSITION, BUT GREATER EFFORTS ARE NEEDED
While per capita greenhouse gas emissions remain high, measures under the 2022 Climate Change Act are contributing to reduced emissions and a shift towards renewables, but further efforts will be needed to reduce transport emissions, manage a higher share of renewables in transport and tackle agricultural emissions.
Recent progress suggests that Australia is on track to meet its 2030 emissions reduction objective, supported by a rapid shift to renewables. Emissions remain high, but efforts to reduce them accelerated with the 2022 Climate Change Act. Australia uses a variety of instruments to achieve emissions reductions. These include support for renewables, a reformed Safeguard Mechanism for large emitters and vehicle efficiency standards. A rapid increase in renewables and declining use of coal for energy production is lowering emissions. Additional reductions could be achieved through greater ambition in the pricing of large-scale emissions.
Australia will need to continue rolling out renewable projects at pace while transforming the grid to manage the intermittency of renewables and find additional ways to reduce emissions. Rapid growth in renewable generation will need to be sustained to meet growing electricity demand and replace coal generation. Australiaās ageing fleet of coal fired generators has increased volatility in electricity markets large-scale investments are needed to update electricity infrastructure, along with a sustained and rapid increase in renewable generation, storage and firming capacity.
To reduce emissions further, action will be needed in the transport sector and agriculture. Transport emissions continue to rise and Australia is heavily reliant on road transport, while take-up of electrical vehicles is relatively low. Setting a path to gradually raise taxes on motor fuel, including reducing credits for business fuel purchases, would help to encourage a shift to lower-emission modes of transport. Roaduser charging could help to manage congestion. Investment in public transport and charging infrastructure, combined with measures to avoid urban sprawl, would help to reduce transport emissions. The agricultural sector is a major emitter of greenhouse gases, and its share is rising. A strategy is needed to reduce emissions in this sector, drawing from leading practices internationally.
Extreme heat events, wildfires and flooding will pose a growing risk to Australia as temperatures rise. Large areas of the country are highly vulnerable to heat risk, while the main cities are located in coastal areas. Australia is relatively well advanced in adaption policies and insurance coverage, but challenges remain.
REVITALISING COMPETITION WOULD HELP TO LOWER PRICES AND BOOST PRODUCTIVITY
Competition has waned across the Australian economy over the past two decades. Business and employment dynamism have declined, while market concentration has risen. The governmentās Competition Review, launched in 2023, has taken promising steps to address these issues, but further efforts are warranted.
Competitive pressures have weakened over past decades as reform momentum has eased. Many key sectors are highly concentrated. Prices are high and markups have risen (Figure 3). Firm entry and exit rates have declined over time, reducing the dynamism of the economy and weighing on productivity.
While Australia was once regarded as a leader, its competition policy framework has fallen behind the frontier relative to its OECD peers. Competition policy has been less demanding than in other jurisdictions, regulatory barriers to competition remain in place and high levels of regulatory fragmentation across the states and territories reduce competition. This is problematic given the unusual challenges Australia faces in fostering and sustaining competition given its external and internal geographical remoteness.
The new merger regime and National Competition Policy (NCP) agenda are positive steps to boost competition. The recently introduced merger regime, including mandatory notification, suspensory requirements and administrative rather than judicial control, brings Australia in line with
OECD best practices. Effective implementation of the new regime will be key to its success. The updated NCP agenda also includes Competition Payments to states to reward reform progress, based on past approaches, and should contribute to reduced regulatory fragmentation across states and territories.
The competition policy framework should be strengthened to address entrenched positions. While the merger reform should help to avoid further increases in concentration, it will not directly address existing anti-competitive practices. Despite prohibitions against misuses of market power, enforcement remains relatively light. Stronger measures to tackle abuse of dominance are needed, including reducing legal ambiguity in complex abuse cases and boosting penalties. To support more active pursuit of anti-competitive practices, Australia should undertake more frequent, data-rich and action-oriented market studies, with lead responsibility for such studies being determined on a case-by-case basis between the Australian Competition and Consumer Commission and the Productivity Commission.
Regulatory barriers continue to hold back competition, including differences in state-level regulations. Australiaās fragmented licencing and permitting system is particularly cumbersome compared to best practice. To reduce administrative burdens on businesses and workers, there is a need to remove licences that are outdated or duplicative and tailor licences to risk, with streamlined or automatic approval for low-risk activities. Restrictions on foreign direct investment are high and should be narrowed to remove barriers to foreign competitors in the domestic economy. At the national level, the government should adopt an expedited approach to recognising trusted overseas standards to encourage overseas competition.
Key sectors of the economy are highly concentrated and the removal of barriers to new entrants should be a priority. The domestic aviation, telecommunications, banking, digital platforms, supermarket and automobile sectors would benefit from more intense competition. For example, to lower barriers to entry, promote innovation, and enhance consumer choice and competitive pressure in financial services, Australia should continue its push towards ensuring proportionality in the payments licensing framework, with lighter requirements for low-risk providers.
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