Treasury: AI Will Drive Australia's Biggest Economic Transformation But Requires Swift Adoption

Treasury Projects AI-Driven Productivity Growth

Australia's Treasury has delivered a comprehensive analysis to Treasurer Jim Chalmers revealing that AI will support the nation's long-term productivity growth target of 1.2% annually while triggering profound effects on the labor market1

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. The assessment comes as Jim Chalmers describes AI as the biggest economic transformation in our lifetime, emphasizing that swift AI adoption matching US progress will determine whether Australia reaps the full economic benefits2

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The Treasury analysis acknowledges that AI alone cannot achieve the productivity targets. With labour productivity declining in 2024-25 and remaining mostly flat over the past decade, reaching the 1.2% per annum growth assumption requires significant improvement over the transition period1

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. The Productivity Commission's quantitative estimates suggest AI will generate some, but not all, of the baseline productivity growth in Treasury's projections.

Infrastructure Expansion and Government Response

As of March, Australia operated 162 data centres with approximately 130 more proposed, bringing the total to nearly 300 operating or planned facilities1

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. The Albanese government is preparing legislation covering conditions for these centres, including requirements on energy and water use. Data centres will need to bring new renewable energy sources, though National Cabinet has granted Queensland and the Northern Territory some flexibility on this requirement.

Most economic gains from AI will come from importing the emerging technology from overseas and embedding it in business practices, Treasury states, even as the Albanese government attempts to develop a domestic AI industry beyond data centres2

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. This reliance on overseas innovation highlights the critical importance of policy adaptation to facilitate rapid technology diffusion.

Upside and Downside Scenarios for Economic Transformation

Treasury has outlined contrasting scenarios that could shape Australia's economic transformation. In a plausible upside scenario, high rates of AI-driven innovation at the global frontier and its diffusion to Australia could lift long-term productivity growth to within the range of 1.5-2%1

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. However, a realistic downside scenario exists where weak AI innovation and diffusion, combined with structural headwinds, keep productivity growth around its current underlying rate of 0.5-0.8%.

Possible risks to progress include trade barriers and geopolitical tensions, which could significantly affect investment and technology transfer1

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. The analysis remains hedged with uncertainty about the longer-term implications of a technology still in its early stages.

Current AI Adoption Patterns Across Sectors

While two-thirds of businesses in Australia report adopting AI in some form, less than 10% describe their adoption as significant1

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. This likely reflects the developmental stage of AI, with many more applications emerging over time. Information, telecommunications, professional services, finance and insurance sectors currently show the highest rates of AI adoption.

Larger firms may adopt AI faster, while smaller firms face barriers associated with skills, data, computing capacity, cloud infrastructure and access to foundation models1

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. This disparity in adoption rates could exacerbate existing economic inequalities between large and small businesses.

Impact on the Jobs Market and Labor Markets

AI will have profound effects on the labor market, though impacts so far remain limited and will accelerate unevenly across sectors1

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. The technology will not affect all workers or places equally, potentially shifting the division of labour across occupations, regions and sectors depending on exposure, skills and capacity to adapt.

Unlike earlier technology waves that primarily automated physical and routine jobs, AI has the potential to have a bigger impact on high-skilled non-routine and cognitive jobs, augmenting some and automating others1

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. Because AI can automate a significant share of cognitive, non-routine tasks currently performed by high-skilled workers while accelerating productivity and economic growth, labor market impacts could be materially different from past technological shifts.

Where workers use AI to perform better, output per worker increases, supporting wage growth, labour's share of income and employment1

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. The ability of labor markets to adjust will depend on the magnitude and timing of the positive technology shock, how it is adopted and diffused throughout global and domestic economies, and how well policy settings adapt to the changing economic environment.

Implications for Living Standards and Interest Rates

The boost productivity potential of AI promises higher living standards for Australians, according to Chalmers2

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. However, Treasury warns that with AI in a phase of high investment, there could be changes to the real neutral interest rate—the point at which monetary policy is neither restricting nor stimulating the economy1

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AI hyperscalers are increasingly issuing debt to fund their capital expenditure programs, demonstrating that AI-driven demand on the global savings pool is already growing1

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. This pressure could be partially offset by increased household savings, either as precautionary saving from households uncertain about AI's impact on their future employment and income or in expectation of a longer retirement from AI advancements driving longer life expectancy. The pressure would be reduced if productivity impacts are lower than expected or if external factors like geopolitical risks affect investment.