Thank you, Chair, and thanks to the Committee, for the opportunity to make an opening statement. Can I start by joining you, Chair, in expressing my deep sympathies for Dr Haines and her family and for our shock around the horrific events of last week.
The global and domestic economic environment remains as challenging as it was at my last appearance in front of you in June. Pressures are being felt across almost all economies through geopolitical disruption and uncertainty, elevated inflation, increased demand for capital, and tighter financial conditions.
Australia also faces these global headwinds. While domestic activity has remained resilient, supported by private demand, and the unemployment rate remains low by historical standards, inflation is above the target band. The effects of increases in interest rates are becoming evident in the economy, including in the labour and housing markets, which should assist in returning inflation to target. While higher bond yields will put upward pressure on the fiscal position, public debt and deficits are relatively low in Australia compared with other advanced economies.
International economic conditions
With global pressures becoming more persistent, they are also becoming more difficult to absorb. This is particularly evident in global energy markets.
The unresolved conflicts in the Middle East and between Russia and Ukraine continue to disrupt global energy trade routes and supply chains. Drawdowns of strategic and commercial reserves have provided a partial buffer to date, but inventories cannot absorb supply disruptions indefinitely.
Pressure is most acute in refined fuel markets, reflecting refinery shutdowns in the Middle East and Russia alongside reduced Chinese exports of refined fuels. Singapore diesel crack spreads – which averaged a little over US$10 per barrel between 2017 and 2021 – have averaged about US$40 per barrel so far this month. Shipping costs have also surged, with the International Energy Agency stating that the cost of transporting crude oil from the Middle East to Asia has climbed to more than 5 times its pre‑conflict level.
This is adding to global inflation, with headline inflation across G7 economies increasing by around 1.5 percentage points on average from the start of the year to September, and interest rates increasing around the world.
Alongside these geopolitical pressures, the global economy is experiencing another powerful, but very different force, through the rapid expansion of investment in AI. While the energy shock is constraining supply and weighing on activity, the AI investment boom is supporting growth, while also adding to pressure on global prices and resources.
AI investment is already very strong. Capital expenditure by the 5 largest global hyperscalers is forecast to exceed AUD $1.1 trillion in 2026, more than 4 times its level in 2023.
This contributes to our optimism about AI’s potential longer term economic and productivity benefits. In the near term, however, the scale of investment is increasing competition for capital and key inputs, including computer chips, construction capacity and skilled labour. There are early signs of this in several economies, including the US. After decades of decline, US prices for some computer equipment have recently risen markedly. In this sense, the investment that should expand productive capacity in the future is also adding to inflationary pressures today.
These forces have contributed to a revaluation of sovereign bonds as markets anticipate tighter monetary policy and reassess neutral real interest rates. This partly reflects strong demand for capital from both the private and public sectors. In some economies, for example parts of the Euro area, widening sovereign bond spreads also reflect concerns about fiscal sustainability. At the same time, the strength of the AI investment cycle has contributed to the strong performance of global equity markets this year.
Domestic economic conditions
These global developments are flowing through to Australia.
Real GDP grew by 2.3 per cent in 2025–26, in line with our forecast at Budget. Growth was supported by household consumption, dwelling investment and business investment. Growth in public demand has eased, while unemployment remains low by historical standards, and the participation rate is close to historical highs.
On the other hand, capacity constraints are contributing to persistent services and housing inflation and this is being exacerbated by the conflict in the Middle East, with higher fuel and supply‑chain costs adding to those pressures. Household and business sentiment is subdued, with households and some businesses being particularly exposed to these rising costs.
The effects of tighter financial conditions and weaker sentiment are increasingly evident in the housing market in particular.
Higher interest rates, heightened global uncertainty and weak consumer sentiment have contributed to a significant decline in established housing prices, with the tax reforms announced in the 2026–27 Budget also having some effect. The softening has been most pronounced in the wealthier suburbs of Sydney and Melbourne, but is now evident across the country. Nationally, dwelling prices have declined by 5.2 per cent from their March peak but remain almost 6 per cent higher than 2 years ago.
The price declines have been sharper than in the early stages of most other housing slowdowns over the past 20 years, but the run up in housing prices was also more significant. Consistent with this, the major banks have revised down their dwelling price forecasts materially over recent months.
It is important to distinguish the cyclical and structural drivers of the housing market. Interest rates have a particularly strong cyclical effect because Australia’s high share of variable‑rate mortgages means monetary policy passes relatively quickly to existing and new borrowers. The Budget tax reforms are expected to have a more structural effect through their impact on the relative attractiveness of housing to investors. As outlined in the Budget papers, the impacts of the tax measures on housing prices and rents are expected to be modest over the medium term, while shifting the ownership of the housing stock towards owner‑occupiers.
Beyond these cyclical developments, productivity remains a significant long‑term challenge. There is no single reform or technology that will lift productivity growth on its own, which is why the government has a broad productivity agenda addressing issues across most sectors of the economy. Sustained improvement will require continued effort across many fronts and active engagement by business, workers and governments. AI is expected to make an important contribution, but its impact will depend on adoption and diffusion across the broader business sector, supported by complementary skills, organisational change, investment and policy reforms.
These gains will take time to emerge and diffuse through the economy. The 2026–27 Budget and 2026 Intergenerational Report project underlying productivity growth to gradually transition to its long‑term growth rate over around 5 years. This is a more gradual path than previously assumed.
Turning to fiscal policy, the 2026–27 Budget update improved the outlook for the fiscal position. The government has taken steps to restrain spending growth, including significant reforms to the NDIS, reforms to means testing and consumer contributions in aged care, changes to the private health insurance rebate and changes to the home batteries program and the treatment of electric vehicles under the fringe benefits tax.
The temporary reduction in fuel excise announced in March provided initial support to households to help adjust to higher prices, but the full rate was restored on 3 August to avoid sustained pressure on demand and limit the budget impact.
The budget continues to face structural pressures – including from the increasing cost of debt – and continued fiscal consolidation will be needed to strengthen fiscal sustainability and provide the flexibility to respond to future shocks.
Close
Treasury will update its economic and fiscal forecasts in MYEFO. Significant uncertainty will remain while the conflict in the Middle East is unresolved and as AI development continues to unfold at pace. The range of possible outcomes is unusually broad: energy disruptions could persist, financial conditions could tighten further, and the scale and timing of AI‑related investment and productivity gains remain difficult to judge. Overall, we are expecting growth to slow and there are downside risks to our Budget outlook.
The Intergenerational Report released in September places these developments in a longer‑term context. Previous reports focused on the implications of demographic change, which will continue to shape the economy for decades ahead. However, Australia’s working‑age population remains more resilient than many other OECD countries. Together with the implications of population ageing, the 2026 IGR also considers the profound implications of AI, geopolitical fragmentation, the energy transition and Australia’s industrial transformation.
Finally, I would like to note several organisational changes following the recent departure of Diane Brown. Katrina Di Marco has been appointed to lead Revenue, Small Business and Law Group and Jason Allford is acting as Deputy Secretary of the International, Corporate and Investment Group. To assist the Committee, Ms Di Marco will be available to answer questions in both sessions.
Thank you for the opportunity to make this opening statement. I welcome your questions.