Small and medium businesses will need a new survival strategy as they plan for a future characterised by higher productivity, a shrinking workforce, an older customer base and slower GDP growth, while artificial intelligence underpins all sections of the economy.

The 2026 Intergenerational Report explores the forces that are expected to reshape Australia’s economy over the next 40 years, identifying five key factors: AI, geopolitical fragmentation, the ageing population, the energy transition, and the changing industrial base.

The document outlines how the ‘AI revolution’ will power ‘the biggest economic transformation of our lifetime,’ while society grapples with demographic change as deaths outnumber births for the first time.

“No previous IGR has contended with challenges this great or politics this fraught or a future less certain,” says Treasurer Jim Chalmers. “Yet this IGR shows that we are better placed than our peers in almost every regard. The global and generational risks are serious, but Australia’s opportunities are endless.”

Both the Treasurer and the report note that current volatility makes longer-term predictions even more difficult than usual. But SME owners may wish to incorporate the forecasts into plans for investment and hiring in the decades to come.

AI Will Be Central To The Economy And Society

The Intergenerational Report identifies AI as the long-awaited solution to the nation’s productivity crisis. It offers three estimates of GDP growth per person: an upside scenario with supercharged growth of around 2 per cent; a downside with only modest improvement; and a baseline scenario of 1.2 per cent, which is significantly higher than the current rate, which has been flat if not declining in recent years. While some commentators have painted this mid-range forecast as optimistic, the report says it is in line with long-term outlooks in other Western countries. “The pace of change is accelerating and this puts very plainly the choice before us: to keep up and succeed, or to lag and languish,” Chalmers says.

Uncertainty extends beyond AI, with the report listing escalating conflicts, changes to trade relationships and tariffs, and supply chain upheaval as possible factors. “The world is becoming more dangerous, more unpredictable, more unequal, and more divided. These aren’t just individual threats. They’re part of a bigger fraying of that intergenerational promise of better times,” Chalmers says.

While Australia’s population is tipped to reach almost 40 million by the 2060s, the falling fertility rate will likely lead to more deaths than births during this decade. With more older people placing demand on health and aged care services, government spending will increase, negatively impacting productivity. Workforce participation is expected to peak around 2039-40, after which point labour will be harder for SMEs to source.

The report describes the energy transition as ‘important and urgent’ in the wake of recent global energy shocks. It predicts data centres will account for 10 per cent of the nation’s electricity use by 2050 but household bills will fall by 40 per cent between 2030 and 2050 due to the further rollout of green energy.

Changes to the business landscape are expected to continue on the current trajectory, as global demand shifts away from fossil fuels towards critical minerals, renewable energy, and AI-related infrastructure, goods and services. “Business services will likely experience significant growth within industries as AI transforms business models and expands the range of activities that can be traded across borders,” the report says.

Adoption Must Increase Before AI Can Boost Growth

Despite basing predictions on the prevalence of artificial intelligence, the report acknowledges its rollout has been slow: two-thirds of businesses are using the technology in some form, but less than 10 per cent describe adoption as significant. Take-up is even lower among small and medium businesses, with an Employment Hero SME Pulse survey finding limited or zero AI use in 59 per cent of businesses with fewer than 20 employees.

Chalmers offers perspective, saying Australians are adopting AI at a higher rate than almost every G20 country. He also notes the enormous capital expenditure by hyperscalers in planning local data centres. “Australia has positioned itself early and well,” he says.

But the report acknowledges a number of barriers to AI adoption, particularly by small and medium businesses. This includes a lack of in-house expertise to implement and manage the technology, and uncertainty over the return on investment at this early stage. Data readiness is a factor for small businesses that are yet to address fragmented systems and manual record-keeping. But the biggest hurdle is emotional rather than practical.

“Australians’ trust in AI is also low, which reduces willingness by workers, consumers and businesses to engage with AI technologies,” the report declares. However, it also highlights the necessity of bridging the divide. “Businesses that successfully develop or adopt AI are expected to experience faster productivity growth, stronger profitability and increased market shares, reducing the competitiveness of firms that are slower to adapt.”

The Workforce Will Change But No-one Knows How

The Intergenerational Report expects that AI will fundamentally change the workforce but stops short of forecasting mass displacement, particularly in the immediate term. It cites Jobs and Skills Australia research indicating only 4 per cent of workers are currently in jobs that have high automation exposure, compared to low exposure for 79 per cent of occupations.

The expectation is that the technology will reshape rather than eliminate most roles. “Within jobs that will continue to require human expertise, the pace of AI adoption will depend on both AI’s capability to complete a task, and how readily tasks within AI’s capabilities can be ‘unbundled’ from other tasks,” the report says.

It notes that government data suggests there has been no detectable trend of AI-related job losses, including among young and graduate workers. This is in line with Employment Hero’s AI Paradox survey, which found SMEs with AI at their core were expanding rather than cutting entry-level positions.

The key to longer-term success, the report declares, will be providing support when roles are affected, and AI literacy training at a broad and sector-specific level. Communications and change management skills will be in high demand during the transition. “AI may also introduce new risks to job quality, work health and safety, and worker wellbeing, with impacts varying across workplaces and occupations depending on differences in AI adoption and operating environments,” the report predicts.

AI Is Not The Only Solution To The Productivity Crisis

The business community has welcomed the focus on productivity as desperately overdue. Business Council of Australia CEO Bran Black says real GDP per person is almost $2,000 lower today than predicted in the 2023 Intergenerational Report, because the expected productivity improvement failed to materialise. He suggests the goal of 1.2 per cent won’t be possible without tax reform and a reduction in red tape. “We should be aiming to make Australia one of the best places in the world to invest in and use AI, because if we get the settings wrong the investment, technology and productivity gains will go elsewhere,” he says.

The Australian Industry Group has echoed scepticism over the baseline 1.2 per cent target. “The projected productivity outcome is plainly incompatible with recent performance, but we welcome what is an admirable pursuit of achieving it,” says Chief Executive Innes Willox. He notes the report has ‘cast all our economic eggs into the AI basket,’ when there are other factors holding businesses back. “The word ‘productivity’ appears in the IGR 404 times, but references to regulation occur only 41 times. Regulatory reform to dismantle barriers to growth, innovation and competitiveness is essential,” he says.

In an assessment relevant to SME budgets, Westpac Senior Economist Pat Bustamante says the IGR reinforces the bank’s view that Australia is unlikely to return to an era of ultra-low interest rates. But he offers a more optimistic spin on AI’s potential role in countering the impact of the ageing population on the workforce. “This is one area where AI, along with governance changes, could deliver outsized benefits,” he says.

Master Builders Australia CEO Denita Wawn says while the report recognises the need to resolve the nation’s housing supply crisis, the opportunity to revisit tax reforms introduced in the May budget has been missed. She cites new polling which has found 60 per cent of SME property developers expect proposed trust tax changes will affect the timing and viability of projects. “Governments should be doing everything possible to accelerate housing delivery by increasing the construction workforce, cutting unnecessary red tape and encouraging investment in new housing supply,” she says.