Decades of strong and continuous growth cemented Australia’s reputation as the “lucky country.” Most Australians took this economic exceptionalism for granted. And who could blame them? It was just a fact of life. While economic engines elsewhere faltered with bursting bubbles and financial crises, Australia powered ahead.
Yet, around 2016, Australia’s economic engine started running out of puff and is now at risk of stalling. In the golden years (1993–2016), per capita GDP grew at 1.8 per cent a year. The post-2016 growth rate has averaged just 0.6 per cent, and, since 2020, it has been negative.1
Above decks, many missed the trouble brewing in the engine room. An extended mining boom, strong population growth, and a massive stimulus bump during the pandemic years kept the party going. Optimism prevailed: This is Australia, things are different here, and “she’ll be right, mate.”
Up on the bridge in Canberra, lagging indicators masked slowing underlying momentum. Inflation, terms of trade, and immigration propped up headline economic numbers and the budget. At the same time, the passengers—especially older, first-class passengers—were buoyed by some of the world’s highest house prices. Since 2008, the average net wealth of Australians has doubled, remaining on par with the United States as the highest per capita among major economies. As much as 70 per cent of this increase came from property values.2 Spending by older home-owning cohorts remains healthy, while younger Australians—who have record-low home ownership—are tightening their belts.3
Now, Australia’s economic doldrums are increasingly apparent. In recent years, living standards in Australia have declined faster than in any other developed economy. Consumer prices, mortgage interest repayments, and income tax have increased sharply.4 At the same time, Australian real incomes are 2 per cent below their pre-pandemic high, while those of the Organisation for Economic Co-operation and Development (OECD) are 7 per cent higher, on average.5 Australians are no better off now than they were ten years ago6 (Exhibit 1).
Productivity growth is the economic engine propelling Australia forward. It explains Australia’s long run of growth in per capita GDP, wages, and real living standards. More productive work makes Australian goods and services more affordable, easing cost-of-living pressures. It’s a true win-win.
Increases in per capita GDP can only come from more hours worked per person, or from higher productivity. Adding a third element—population growth—gets us to total GDP growth. There the trend is clear: Australia’s GDP growth rate has consistently declined since the 1990s. What little growth remains is population driven. GDP per capita is headed south, and productivity is the missing ingredient: Since 2016, Australia has had zero productivity growth, and, since 2022, it has been negative7 (Exhibit 2).
While Australia has slipped down the leaderboard, joining France, Italy, and Canada, the United States is surging ahead. While Australia has stood still, the average American is 17 per cent more productive than they were in 20168—and 18 per cent wealthier in real terms.9 In fact, the United States is enjoying a productivity resurgence, posting 2.7 per cent growth in nonfarm business sector productivity in 2024—double the prepandemic trend.10 As a result, the average American worker now produces 70 per cent more per hour worked than the average Australian.11 Meanwhile, other countries like South Korea, Poland, Ireland, Israel, and even Japan have put in strong performances, too. The frontier keeps advancing, and Australia is falling behind (Exhibit 3).
Not only is Australia’s economic engine stalling, but the country must also navigate increasingly challenging waters. In 2025, Australians 65 and over will outnumber those under 15 for the first time.12 AI capabilities are rapidly expanding. We estimate that 27 per cent of all tasks done in Australia today could be automated by 2030.13 Managed well, this is a huge opportunity, but it also demands flexibility and resilience. Australia’s fiscal capacity is under generational strain, just as the country’s geostrategic situation is in flux. Total public-sector spending at all levels—federal, state, and local—now makes up around 44 per cent of GDP.14 Australia’s fiscal math becomes exponentially harder when triangulating among increased social spending, rising defence needs, and a moribund economy.
In short, Australia’s economic engine is stalling at precisely the moment it needs full power to get through turbulent seas.
It’s time to restart the engine
The first step in solving any big problem is acknowledging it and building collective resolve. Fortunately, restarting productivity growth is now at the top of the agenda for many business and policy leaders.
Setting a sensible goal will help galvanise efforts of key stakeholders. We believe that Australia should aspire to productivity growth of at least 1.5 per cent. One combination that would work to achieve this is to return market-sector productivity growth to its 30-year average of 1.7 per cent (up from 0.6 per cent currently), to deliver 0.4 per cent productivity growth in the nonmarket sector, and to equalise the growth rates of the market and nonmarket sectors (in terms of hours worked). This would return Australia to a bit above its healthy long-run average—but it requires a major course correction.15
As with any big reform agenda, there is a risk that we end up with a long list of “productivity adjacent” ideas that may be good things to do, but do not really orient the nation toward achievement of the aspiration. For example, the Productivity Commission is currently doing admirable work on 15 productivity topics. Our view is that just four of these topics can have a material, near-term impact on productivity, even though each topic has individual merit.
Drawing on local and international McKinsey Global Institute (MGI) research, we have dug deep to build a shared fact base, testing our findings with hundreds of Australian business and policy leaders. This work has helped us identify what is really required to move the needle on productivity, based on hard evidence.
We have boiled our findings down to five tests to check whether Australia is focusing on what matters to boost productivity. While our firm does not advocate specific policy positions, we are laying out the conditions a comprehensive productivity agenda needs to satisfy to restart Australia’s economic engine. Such an agenda must do the following:
- Unlock $130 billion in incremental new capital investment per year by 2030.16
- Make Australia a great place to build, to energise, and to finance.
- Create a regulatory environment where standout firms thrive and invest.
- Strike the right balance in the nonmarket sector.
- Forge a compact that prioritises productivity.
We first turn our attention to the market sector, the heart of Australia’s economic engine. The market sector accounts for 72 per cent of hours worked, around 82 per cent of gross value added, and almost all productivity growth.17 But its share of Australia’s economy is declining fast: The number of hours worked in the market sector is growing at only half the rate observed in the nonmarket sector, a topic we will return to. Between 1996 and 2016, the market sector was steaming ahead at a healthy productivity growth rate of 2.2 per cent annually. But now productivity growth has slowed to just 0.6 per cent.18 This slump is broad-based, cutting across all the cylinders of the national economy—six out of 16 sectors have had negative productivity growth since 2016, and only two (accommodation and real estate) are running at about the medium-term average.19
Test 1: Does it unlock $130 billion in incremental investment per year?
The primary cause of Australia’s productivity slowdown is very simple: Australia’s market sector is not investing enough. Private capital expenditure is now below the recession levels of the 1990s (Exhibit 4). We attribute around 70 per cent of the productivity decline to this one factor.20 While a fall in mining investment explains much of this, non-mining investment is also at generational lows.
This matters because, over the long term, around three-quarters of productivity growth across most countries comes from “capital deepening”—put simply, investing more capital per hour worked.21 But since 2016, Australia’s hours worked have grown twice as fast as they did in the previous decade, while growth in capital stock halved.22 As a result, capital stock per hour worked has grown by just 0.4 per cent a year, down sharply from 3.4 per cent between 2007 and 2016.23
Let’s look forward then and quantify just how much investment Australia would need to restart productivity growth. Currently, Australia invests $380 billion per year in its market sector.24 To reach market-sector productivity growth of 1.7 per cent annually, Australia needs to grow capital stock per worker by around 3 per cent per year. This means increasing annual private investment by an incremental $130 billion per year by 2030. A historical analysis shows that while this would be a substantial increase, it is not unprecedented (Exhibit 4).
Productivity can be an abstract topic. This question makes it concrete: What would it take to unlock an incremental $130 billion per year? This would require multiple megaprojects and a rebuilding of Australia’s industrial base. It would take big companies doing big things. It would require these investment opportunities to be attractive from the perspective of global investors who can take their money anywhere. And Australia would need to mobilise this spending fast—it doesn’t have a decade to wait.
Test 2: Does it make Australia a great place to build, energise, and finance?
To understand why investment is depressed in the first place, we need to go deeper into the engine room, to the fundamental issue of competitiveness. There is no lack of investment in the world. For example, the top five American tech companies alone invested US $470 billion last year, nearly double the amount invested in Australia as a whole.25
If we look at the sectors that are not only lagging in terms of productivity but also matter as big inputs into Australia’s investment economy, three critical industries stand out: construction, utilities, and financial services. In other words, Australia’s ability to build, energise, and finance is compromised.
- Build. It now takes more hours per square meter to build a house than it did in the 1980s, according to a recent Productivity Commission research paper.26 House construction prices have tripled while the cross-sector consumer price index (CPI) has doubled.27 When Australia sets out to build big things, it rarely goes according to plan. Consider the country’s major energy transition projects. Such projects end up costing two to six times as much as initially estimated,28 and they are taking at least twice the intended time to build.29
- Energise. Australian gas and electricity prices used to be among the most competitive in the world (Exhibit 5). Since 2015, the East Coast gas price has increased by a factor of three,30 and the delivered price of electricity by around 30 per cent.31 Meanwhile, the United States—which first started exporting liquefied natural gas (LNG) in 2015 but by 2023 had overtaken Australia as the world’s largest exporter—has seen only mild gas price inflation, in part because governments there have continued to encourage the development of new domestic supply. To boot, the United States also reduced electricity sector emissions faster than Australia, with cost-effective gas displacing coal generation.32
- Finance. Banks once turbocharged Australian productivity, clocking 5 per cent annual productivity growth between 1995 and 2016.33 Yet since the Banking Royal Commission, banks have gone backwards on productivity. Meanwhile, the insurance sector never fired.34 At the same time, the ratio of home mortgages to commercial lending increased from 1.1 to 1 in the early 2000s to 1.9 to 1 today.35 Australia is certainly financing capital, but not the productive stuff. With its strong banks and deep pools of pension assets, Australia should be an investing powerhouse.
So the second thing Australia needs to focus on is making it easier, cheaper, and faster to build, to energise, and to finance investments. If Australia could sharpen its focus on reform, it should be here.
Test 3: Does it create a regulatory environment where standout firms thrive and invest?
There is a common thread across the construction, energy, and finance sectors. They have been the focal points of well-intended—yet nonetheless heavy—government intervention. Between 2016 and 2024, these three sectors adapted to more than 80 new major policy and regulatory changes.36
Regulatory creep is not confined to these sectors, though. Governments and authorities at all levels are increasingly relying on a growing number of regulations and rules (known as “delegated legislation”) to intervene at ever-more granular levels of the economy. Between 2007 and 2022, the number of restrictive clauses in Australian federal law increased by 50 per cent, mostly through delegated legislation. The only dip was recorded in 2014, when there was a dedicated effort to deregulate37 (Exhibit 6).
This leads to the next big priority: establishing a conducive regulatory environment for productivity champions to emerge. Taxation gets a lot of attention in this context. The effective corporate tax rate in Australia is 27 per cent, compared to 23 per cent in the United Kingdom, 19 per cent in the United States, and 18 per cent in Ireland.38 Adding payroll taxes makes these differences even bigger. But higher taxation is not the only element of the Australian business environment—and it is also only a small component of the net present value of a project. Getting projects to happen faster, more cheaply, and with lower end-state operating costs also figures heavily. In the Economist Intelligence Unit’s business environment rankings, which consider 91 indicators, Australia dropped six ranks between 2016 and 2023, putting it eight ranks below the United States.39
Why does a globally competitive business environment matter? MGI research shows that a small number of large and highly dynamic firms explain the lion’s share of national productivity growth. When these firms become more productive, so do economies. Fewer than 100 productivity champions (“standouts”) account for two-thirds of growth in the sample of 8,300 large firms in Germany, the United Kingdom, and the United States (2011–19). In other words, if a country has fast-growing, highly productive companies, their growth is incredibly good for that country as a whole.40 Our analysis of the ASX 100 shows that Australia has far too few productivity standouts.
In addition to creating more standout firms, it is also important to reduce the number of stragglers—those firms that account for a disproportionate share of productivity decline. In fact, in the MGI sample, more than 0.5 per cent of the performance edge the United States has over its European counterparts is explained by the faster exit and restructuring of low-productivity companies. The faster flow of people from lower- to higher-productivity firms augmented the strong performance of the US economy. Australia will also need to unleash such dynamism.
So we arrive at test number three: Does the productivity agenda create the tax and regulatory environment where investment can be unleashed, standout firms can thrive, and stragglers can be rapidly restructured?
Test 4: Does it strike the right balance in the nonmarket sector?
The nonmarket sector—which includes education, health, aged care, the social sector, and public service—is growing at more than twice the rate of the market sector (Exhibit 7). In 2025, it accounted for 28 per cent of hours worked, up from 20 per cent in 1995, and eclipsing the nonmarket sectors of both the United Kingdom and Germany. Over the past three years, the nonmarket sector represented two-thirds of job growth in Australia, while market-sector jobs were added at a historically low rate.
Taken on its own, the sector mix is neither good nor bad. But the nonmarket sector exhibits almost no productivity growth (Exhibit 7). We estimate that the growth of the nonmarket sector compresses national productivity growth by 0.2 per cent per annum.
Part of this is due to measurement. A longer, healthier life, or a child who can read fluently, is plainly valuable, yet these gains do not show up on profit-and-loss statements, making productivity appear flat even when outcomes improve. At the same time, however, the remarkable advances in productivity that can happen in the market sector are not replicated in the nonmarket sector. One reason is that many nonmarket services are resourced to meet rigid ratios, such as nurse-to-patient ratios. By locking in resources, fixed ratios curb the scope for innovation and effectively stultify productivity growth over time. The pressure to achieve efficiency is also not as high as it is in the market sector: Half of all jobs added in education between 2007 and 2024 were not “teaching” roles.41 And capital investment is lower, with spending oriented to wages and running costs, rather than to capital expenditure that has the potential to effect systemic change.
The key here is to get the balance right, at least to remove the productivity drag. This would require some combination of slowing the growth in nonmarket hours and increasing their productivity. Moreover, the larger the nonmarket economy is, the more important it is not only to ensure a healthy level of productivity in this sector itself, but also to have a thriving market sector. Sweden, for example, has a high level of social spending, but at the same time it also has a globally competitive market sector with a surprising number of world champions for a country of less than half Australia’s population. Examples include Ericsson, H&M, IKEA, SAAB, Spotify, and Volvo. Under no circumstance can Australia continue having a high-growth, low-productivity nonmarket sector accompanied by a sclerotic market sector.
Test 5: Does it forge a compact that prioritises productivity?
As we have gone through these analyses and shared them with many business and policy leaders, we identified one ultimate root cause of Australia’s current productivity stagnation—and that is a lack of commitment to prioritising productivity growth among the panoply of other goals. We hear many reasons for this. At its simplest, Australia enjoyed good times for a long time and has grown accustomed to the trappings of prosperity above deck, without needing to worry too much about the engine below.
Getting productivity to fire again will require tough choices, and tough choices require a compact between the players in the system to make things better for everyone. Our hope is that the 2025 Economic Reform Roundtable, taking place from August 19–21 in Canberra,42 will result in an aligned national plan that a broad coalition—of policy, business, social, and union leaders—can rally around. Agreeing on, and then implementing, such a plan would require zero-sum single issues to be set aside in the pursuit of a “package deal” of productivity-enhancing initiatives. Australia has done this before. The 1983 Prices and Incomes Accord entailed real and immediate sacrifice to deliver on the promise of greater long-run prosperity. Australia will only pick up speed when business and policy leaders start attending to productivity as the engine of prosperity, instead of taking its propulsion for granted. Time to go below decks and fix Australia’s economic engine.
