Australia is often called the “Lucky Country,” but maintaining high living standards will require reforms to lift productivity growth, restore housing affordability, and strengthen fiscal sustainability. Drawing on the OECD Economic Survey of Australia 2026, this blog highlights key priorities—from boosting competition and business dynamism to easing housing supply constraints and improving the tax mix—while keeping long-term resilience and climate risks in view.
By Geoff Barnard and David Cashin, OECD Economics Department
Today Australians are marking their national day, with citizenship ceremonies, community celebrations, awards, speeches and sporting events. As they do each year on this day, they are reflecting on their history and looking to the future. The OECD’s latest Economic Survey of Australia, released last week, confirms that they have good reason to be proud of their achievements and optimistic about what lies ahead.
Australia enjoys enviable macroeconomic stability and some of the highest living standards among OECD countries, supported by strong institutions and abundant human capital. At the same time, policymakers must grapple with a number of challenges to ensure that macroeconomic stability is maintained and living standards continue to rise.
Like much of the rest of the world, Australia’s economy went through a series of large fluctuations in the years since the onset of the COVID-19 pandemic, experiencing multi-decade highs and lows for GDP growth, inflation, unemployment and interest rates, as well as large swings in budget balances. Australia continued, however, to prove relatively resilient, with lower peak inflation than most OECD peers and avoiding recession in the post-pandemic period as interest rates rose. And there is evidence that the turbulence of the recent past is subsiding, with growth picking up, inflation converging on target, unemployment low and public finances stabilising.
While the ratio of public debt to GDP jumped during the pandemic, it remains low compared to most OECD countries, and the general government deficit is likely to narrow slightly over the next few years. Even so, to safeguard fiscal sustainability and maintain room for manoeuvre, budget deficits at the national and state levels will need to be reduced further over the medium term through a well-designed combination of expenditure restraint and revenue-enhancing tax reforms. In doing so, there is scope to improve the efficiency of the tax mix, notably by broadening the base of the Goods and Services Tax via reduced exemptions and perhaps also a higher rate, while reducing the reliance on taxes on labour.
Housing is an especially pressing policy issue. Although Australia is among the countries with the highest average living space per person, housing affordability is severely strained. The ratio of house prices to income rose by more in Australia over the past 30 years than in any other OECD country, and with the sharp rise in interest rates from mid-2022, mortgage payments increased rapidly in the last few years, given Australia’s high share of adjustable-rate mortgages. Rent inflation also surged at this time, and more than half of low-income renters are in rental stress (paying more than 30% of income in rent). The main cause of the affordability crisis is the persistent failure for new housing supply to keep pace with household formation, and the key to resolving it is removing supply constraints, in particular by easing restrictive land-use regulations at the local level. This is especially critical in the major cities, where higher-density construction should be facilitated, particularly around transport connections. It would also be helpful to build more social housing, which accounts for about 4% of the housing stock, down from 6% in 1990 and only about half the OECD average.
Source: OECD Analytical house price indicators and Australian Bureau of Statistics.
While the fall in economy-wide labour productivity since 2021 largely reflects a combination of cyclical and idiosyncratic factors related to the pandemic, trend productivity growth has slowed over the past 20 years, and this has coincided with a fall in business dynamism and a rise in market concentration, markups and profit margins. Firm entry and exit plays a key role in productivity growth via creative destruction and resource reallocation, as more productive firms expand and less productive ones are displaced. To reinvigorate productivity growth and reduce cost-of-living pressures on consumers, reforms are needed to encourage greater competition. The government’s Competition Review that began in 2023 has taken promising steps towards these objectives, including the introduction of a mandatory notification merger regime and an agreement between the Commonwealth, state and territorial governments to revitalise the country’s National Competition Policy. However, additional measures to improve competition will be needed, including successful implementation of the new merger regime, a strengthening of abuse-of-dominance enforcement, boosting the powers of the Australian Competition and Consumer Commission and tackling barriers to competition due to regulatory fragmentation within Australia’s federal system. Adopting an expedited approach to recognising trusted overseas standards and reducing regulatory restrictions on foreign direct investment would also help.
The recent severe bushfires and floods in Victoria are just the latest reminder of Australia’s vulnerability to climate change. Apart from the risk to human life, rising temperatures and extreme weather events can damage infrastructure and other capital (including natural capital) and negatively affect labour productivity. Australia needs both to continue making progress on policies to mitigate climate change and to further develop and implement its relatively advanced plans for adaptation. Carbon emissions, while still among the highest in the OECD in per capita terms, are falling towards Australia’s 2030 target, and the targets for 2035 announced last year reflect a high degree of ambition, but further policy efforts will be needed to achieve the goal of Net Zero by 2050. Challenges remain to expand the share of renewables in the electricity grid and manage the transition as coal exits the electricity system; reduce emissions in transport and agriculture; and ensure that land-use regulation reflects climate risks. Australia has among the lowest net effective price of carbon emissions in the OECD, and greater use of pricing, including via the Safeguard Mechanism for industrial emissions as well as in agriculture, would help to achieve the Net Zero objective.
Check out the launch presentation and brochure on the Economic Snapshot of Australia web page.
References:
Read the full Economic Survey: OECD (2026), OECD Economic Surveys: Australia 2026, OECD Publishing, Paris
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