After an unsteady 2025, business owners are pragmatic about 2026: they’d love relief but expect the opposite, according to the Australian Industry Group’s 2026 Business Outlook report. In the survey of more than 200 business leaders, 90 per cent tipped business costs would climb even further this year.

They blamed a ‘triple threat’ of returning inflation, high energy prices and a mounting regulatory burden for directly squeezing profit margins. At the same time, LinkedIn research unearthed a reduction in job movement that would make talent harder to secure. 

With urgent regulatory reform or a sudden influx of talent unlikely, the report predicts that business owners -feeling increasingly boxed in -will turn to the one lever they can control: technology, to drive efficiency.

The Regulatory Squeeze

The Ai Group report confirmed the cost of doing business had hit a tipping point:  37 per cent of leaders cited the burden of payroll and company taxes, while 33 per cent bemoaned compliance requirements.

For many SMEs, this manifested as a ‘compliance ceiling’ where every hour spent interpreting new industrial relations laws or manual reporting was an hour not spent on business development. Employment Hero CEO Ben Thompson said red tape had SME owners feeling restricted:

“Layers of legislation and the increasing cost of compliance mean it’s never been a more expensive or confusing time to be an employer,” he said. “Businesses aren’t pulling back, but they are doing what they can to keep their employees and their business above water.”

Innes Willox, CEO of  Ai Group, agreed a renewed national focus on regulation this year was critical. “Industry leaders are clear that without meaningful regulatory reform, our current higher-cost, lower-growth business conditions are likely to become entrenched.” 

Uncertain Job Huggers Are Holding Tight To Roles 

While costs rise, the talent pool has essentially frozen. The LinkedIn study declared the pandemic-spawned era of the ‘Great Resignation’ had been replaced by risk-aversion. This ‘job hugging’ trend, where employees prioritise security over fulfilment and stay in roles, was a continuation of a shift identified in Employment Hero’s Annual Jobs Report. 

Only 51 per cent of respondents told LinkedIn they planned to seek a new role in 2026, down from 59 per cent last year. The trend means talent turnover may be lower and the workforce is potentially stagnant. For SMEs, this is a productivity risk, since they can’t hire their way into new capabilities.

AI May Be The Best Weapon Against Rising Business Costs

Instead of waiting for regulatory reform, the Ai Group report found businesses were turning to technology to control costs. 49 per cent were investing in tech upgrades – the only investment category to increase in 2026. 50 per cent were prioritising process improvement, highlighting a tactical shift towards enhanced operational efficiency. 

The report noted a ‘growing belief that new opportunities, particularly from artificial intelligence, will bring major benefits to business productivity.’ This echoed Employment Hero’s recent Productivity Commission submission which declared, “Al is one of the most transformative technologies of our time. We encourage policy recommendations that reward risk-taking, streamline regulation, and give business owners the freedom to focus on what they do best: solving problems, creating jobs and driving growth.”  

By delegating the heavy-lifting of candidate sourcing and screening to automated systems – such as AI recruitment agents – businesses could effectively bypass the administrative weight that the Ai Group identifies as a barrier to growth. But Mr Willox stressed that businesses should not be expected to go it alone. “No amount of tech investment can compensate for poorly designed regulation or uncompetitive tax settings,” he said.

Despite Rising Costs, There’s Still Hope Of Growth

There were some glimmers of optimism from the top end of town. A separate PwC Australia CEO Survey showed 58 per cent of Australian chief executives expect economic growth over the next 12 months, up from 35 per cent last year. But they cite keeping pace with technological change as their top concern, ahead of inflation and broader economic uncertainty.

The survey found 37 per cent of Australian CEOs now expressed high trust in AI, up from 31 per cent last year. But it also uncovered a clear execution gap, since although 67 per cent planned to invest in AI tools in 2026, only 28 per cent believed the investment would be sufficient to meet strategic goals. Said PwC Australia CEO Kevin Burrowes: “The AI opportunity is massive, but Australia risks falling behind on execution. Those who see AI as a growth engine can focus freed resources on revenue generating initiatives, such as innovation, customer relationships and strategic thinking, which in turn increase their competitive advantage.”