Australia displays enviable economic health, but its productivity gains are eroding silently. According to the IMF, a growing number of market sectors in the country have advanced more slowly than they did on average in previous periods. The IMF identifies several factors, including the decline in private investment, insufficient business dynamism, and regulatory fragmentation.
The essentials
- A growing number of Australian market sectors have recorded productivity growth below their past performance (IMF, Article IV 2026).
- R&D investment as a share of GDP has been falling for fifteen years, creating a gap with certain advanced economies.
- The IMF particularly highlights fragmented regulations, infrastructure constraints, business dynamism, and digital skills needs.
- Sector-specific aid can offset some symptoms, but without cross-cutting reforms, structural problems remain.
- A resource-rich country can recover sustained productivity gains by addressing these structural causes rather than accumulating targeted subsidies.
A wealthy economy slowing down unnoticed
Australia came through the pandemic without a major recession, maintained low unemployment, and benefited from elevated commodity prices for several years. On paper, the diagnosis looks favorable. In sector-by-sector productivity data, the picture is less flattering.
In 2026, the IMF conducted its annual consultation with Australian authorities. A significant number of market sectors are advancing at a pace inferior to that of previous decades. This slowdown is barely visible in macroeconomic aggregates, but appears clearly at the sector level.
This type of slowdown is particularly treacherous for economies rich in natural resources. Exports of minerals and energy continue to feed external accounts and tax revenues. They mask the drift until prices fall or a neighboring region moves upmarket. The Asia-Pacific region is doing precisely both right now. Global trade is reconfiguring its flows to the benefit of Asian economies, and Australia must decide how it positions itself in this reconfiguration.
Regulation: when fragmentation costs growth
The first brake identified by the IMF: regulation. Australia is a federation of six states and two territories, each with its own regulatory frameworks for project approval, professional licensing, and commercial zoning rules. A company wanting to operate at the national scale navigates as many distinct systems.
The cost of this fragmentation cannot be measured directly, but its effects are documentable. Infrastructure project approval timelines are particularly long in comparison. Professionals trained in one state sometimes must recertify to practice in another. These frictions slow labor mobility and the diffusion of practices between regions.
The IMF does not recommend deregulation in the crude sense of the term. The target is coordination and a reduction in regulatory burden. These are reforms without much political visibility, but whose aggregate economic gain is substantial. Economies that have pursued this type of cross-cutting simplification, like the Netherlands in the 2010s for establishment permits, observed measurable productivity gains in the years that followed.
Skills: the labor market is not enough to self-regulate
Second brake: skills. Australia has high employment and an immigration system calibrated to attract skilled workers. Yet the IMF underscores the need for digital skills, technological adoption, and active labor adjustment policies.
The skills deficit concerns the speed at which workers can retrain when a sector evolves, and the capacity of firms to absorb new technologies without systematically importing necessary qualifications. Immigration fills part of this deficit, but a system of initial and continuing training that better anticipates needs costs less and creates fewer dependencies.
The diffusion of digital tools and automation across Australian sectors depends partly on workers’ and firms’ ability to adapt. Generative AI has not yet reorganized labor markets, but economies that invest now in upskilling their workers will be better positioned to capture the gains when diffusion accelerates. Australia has the budgetary resources to do so. The question is whether training institutions are agile enough to respond.
R&D: fifteen years of progressive lag
Third brake, and probably the most structural: research and development. R&D effort as a share of GDP has been declining in Australia for fifteen years, creating a gap with economies that maintain this effort.
R&D is an important determinant of technological diffusion, alongside notably human capital, market policies, and technological adoption. Firms that invest in research absorb innovations produced elsewhere more quickly. R&D can produce indirect benefits of diffusion and technological absorption, whose scale across the entire economy is not established here. The decline in R&D investment potentially reduces the capacity to adopt and develop new technologies, without demonstrating by itself an increase in dependence on imported technologies. Favorable terms of trade allow Australia to buy more imports, without sufficing to demonstrate its overall competitiveness.
It becomes vulnerable as soon as that advantage erodes.
Comparison with other advanced economies is instructive. In France, public science generates ten times fewer industrial returns than in Germany, due to lack of institutional links between laboratories and firms. Total R&D spending increased in value between 2021-22 and 2023-24, while its weight in GDP remains below that of the early 2010s. The IMF particularly recommends regulatory, competition, infrastructure, tax, and digital skills reforms.
The limits of sectoral policies
Faced with declining productivity, the spontaneous political response often consists of targeting sectors of the future: green technologies, defense, semiconductors, digital economy. Australia is no exception to this logic. Several sectoral plans have been launched in recent years, with dedicated envelopes and upmarket-moving objectives.
The IMF does not contest the legitimacy of these choices. It raises a methodological problem: sectoral aid does not replace structural reforms. The IMF recommends that industrial policy remain narrowly targeted at market failures and positive externalities. A technology firm benefiting from an implantation subsidy in a regulatory complex zone does not simplify regulation. A visa program for foreign engineers does not strengthen the local training system.
An R&D tax credit without a requirement for university partnerships does not rebuild links between public research and the private sector.
The long-term risk is that of accumulation: each wave of industrial policy piles new aid without reducing underlying frictions. Budget costs rise, and the Asia-Pacific region continues to move upmarket. The window to choose differently shrinks.
Two trajectories for 2035
The IMF sets out structural reform priorities to improve Australian productivity.
The IMF calls for reducing regulatory burden, developing digital skills, and supporting technological adoption. These reforms seek to strengthen technological diffusion and improve structural competitiveness without closely depending on commodity cycles.
The alternative would be to accumulate sectoral aid without structural reforms. This approach would leave regulatory frictions, skills deficits, and insufficient R&D effort intact, while neighboring economies continued to move upmarket.
Several signals will allow distinguishing which trajectory Australia pursues. The evolution of the share of sectors in productivity deceleration, published annually by the Australian Bureau of Statistics, is the most direct. R&D effort as a share of GDP, tracked by the OECD, is the second. Australia’s competitiveness ranking in the Asia-Pacific region, according to the World Economic Forum or the International Institute for Management Development, will provide a comparative reading. These three indicators, taken together, will say in five years whether cross-cutting reforms have been undertaken or whether sectoral counter-service policy has prevailed.
Australia possesses solid institutions and reform capacity, but its budgetary margins must be reconstituted according to the IMF. Gradual fiscal consolidation would allow financing regulatory, skills, and infrastructure reforms. Resources are not lacking. What is at stake is the political will to prefer unremarkable reforms to more visible sectoral announcements.
Institutions that make a difference
The IMF particularly recommends regulatory, competition, infrastructure, tax, and skills reforms. Productivity indicators by sector, published regularly, would allow tracking progress. Inter-state coordination to reduce regulatory frictions would strengthen investment. Support for technological adoption and digital skills would improve innovation diffusion.
The IMF recommends reforms in regulation, competition, infrastructure, taxation, and digital skills to improve productivity. These areas involve externalities or coordination failures that coordinated public action can address.
Australia possesses solid institutions and reform capacity to undertake these changes. The question is whether it will do so before regional pressure forces it to react in emergency mode.
Sources
- IMF, Article IV Consultation Australia 2026
- OECD, R&D statistics by country (MSTI, Main Science and Technology Indicators), annual data
- Australian Bureau of Statistics (ABS), multifactor productivity data by industry
- World Economic Forum, Global Competitiveness Report, annual editions
