The Australian Government has released its fifth Intergenerational Report, following those released in 2002, 2007, 2010 and 2015. This report examines the long-term sustainability of current policies and how demographic, technological and other structural trends may affect the economy and the budget over the next 40 years.
Our economy and budget were in a relatively strong position when the pandemic first hit. Our budget was in balance for the first time in 11 years with work participation at a record high and welfare dependency at its lowest in a generation. Two years down the track as we learn to live with COVID-19, the economic recovery is well underway, but the side effects will likely remain with us for some time. One of the most enduring of those is likely to be a smaller population as a result of a period of sharply limited migration and a temporary fall in fertility rate.
The Australian economy is projected to grow at a slower pace over the next 40 years than it has over the past 40 years, though growth per person is projected to be closer to historical averages.
Slower population growth is the main reason for the expected slowdown in economic growth. Australia’s total population is projected to reach 38.8 million in 2060-61. This is lower than previous projections.
Migrants are expected to continue to be the largest source of population growth. Migration contributes to economic growth and can help offset population ageing. However, migration needs to be managed well to ensure it supports higher living standards.
The population will continue to age, largely as a result of improved life expectancies and low fertility. In 2060-61, 23 per cent of the population is projected to be over 65, a rise of around 7 percentage points from 2020-21. The ratio of working-age people to those over 65 is projected to fall from 4.0 to 2.7 over the next 40 years. Australia is currently in the middle of a significant demographic transition, as people in the baby boomer generation reach 65. This has already driven a rapid fall in the ratio of working-age people to those over 65 through the past decade, which will continue for the next decade.
Ageing will reduce labour force participation. The participation rate is projected to decline from a record high of 66.3 per cent in March 2021 to 63.6 per cent by 2060-61. In the future, more Australians will retire having made superannuation contributions while working. This will reduce the call for government support through the Age Pension. However, superannuation attracts favourable tax treatment which reduces government revenues. The projected combined total of Age and Service Pension expenditure and superannuation tax concessions is estimated to grow from around 4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61.
Productivity has been the most important source of income growth in Australia, contributing over 80 per cent of growth in real gross national income (GNI) per person over the past 30 years. Although the report highlights that governments will need to take the lead in building innovation and technological advancement, it is individuals and businesses that will need to use such improvements to enhance Australia’s productivity growth. Despite challenges posed by the COVID-19 pandemic, the move towards remote working may have been the impetus for productivity gains seen through successful measures such as teleconferencing, remote collaboration and the ability to network remotely. Going forward, trusted advisers will need to ensure that these changes are accurately measured and improved upon, and that provisions are made for future economic shocks.
Written for you by Rohin Sharma
Client Portal
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