Thanks for the feedback!
Spot on with the CPU AI, it is supposed to find the closest ball and move towards it at a set speed limit, so it doesn't just track the ball perfectly and make the game impossible.
Everything was done using default godot physics, which I don't know all that much about, but learned a few things thanks to this project. There are a couple ways I nudged (or tried to nudge) the physics engine, for example adding sideways velocity to the ball if it hits the edges of the paddle, but that didn't really work too well by the time I needed to submit, unfortunately.