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Notes from Productivity Commission update in February 2026

March 9th, 2026 Notes from Productivity Commission update in February 2026

The Productivity Commission is the Australian Government’s independent research and advisory body on economic policy and productivity. Its role is to analyse policy issues and recommend reforms that improve Australia’s productivity, living standards, and economic performance.

In February 2026 it released a document titled “Annual productivity bulletin 2026” which noted that Australian market sector R&D investment, as a proportion of Gross Fixed Capital Formation (GFCF), declined by more than 40% between 1995 and 2025. This metric analysed is R&D as a share of total investment (GFCF), and shows that while Australia has continued to invest heavily in physical assets (like buildings and machinery), it has significantly shifted away from investing in the “ideas” and innovation that drive long-run productivity.

 
The bulletin noted that the lessons for Policy are:
 
  •  More investment is important, but what we invest in and how we use it also matters. Australia is performing better than average in this area, but there is always room for improvement.
  • Recent research on innovation shows that very few Australian firms create new-to-world technologies, and the rate at which Australian firms are adopting cutting-edge technologies at the productivity frontier has slowed (Andrews et al. 2022, Nguyen and Hambur 2023, PC 2023). Additionally, Australian market sector research and development investment as a proportion of GFCF declined by more than 40% between 1995 and 2025 (ABS 2025). New types of capital are less likely to exhibit diminishing returns, so improving technological innovation can offset the decrease in capital productivity coming from accumulation and improve labour productivity at a given level of capital intensity (Romer 1990). The PC (2023, 2025a) has previously recommended that governments improve Australia’s tax and regulatory systems to support innovation and provide free or low-cost access to research to increase the diffusion of ideas across all firms. 
  • It is also vital that we use existing capital as effectively as possible. Evidence suggests that capital reallocation from less to more productive firms in Australia has become slower and less efficient over time (Hambur and Andrews 2023). Although most of the capital stock in Australia is privately owned (ABS 2025), governments can improve the ways that firms allocate and manage capital resources, including by strengthening competition and increasing access to finance (Hambur and Andrews 2023). Further research into firm practices and economic conditions in countries like the Netherlands and the United States could show how Australia can better use its capital to increase productivity and improve living standards.  
 
The Productivity Commission has previously resisted calls for expansion to R&D Tax Incentives (which is at odds with proposals from The Business Council of Australia). However, the Productivity Commission’s research regarding declining R&D Investment should be noted, particularly given the recent reemergence of Inflation issues in Australia.
 
This reporting shows that The Government’s response to the Strategic Examination of R&D is important for policy measures seeking to reverse the decline in Australia’s R&D Investment.
 
Swanson Reed will continue to advocate for a stable and sustainable R&D Tax Incentive to support Australian Industry.
Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.

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