The 2023 Australian Intergenerational Report provides a 40-year projection of the outlook of the economy and the Government’s budget to 2062–63.
The report forecasts structural trends that will give current generations an insight and encouragement about what we need to be doing now to successfully navigate the future. The report links the continued growth and prosperity of Australia to eight key areas we will explore here.
Our Population
Australians will live longer, healthier lives over the next four decades. By 2063, about 40.5 million people are predicted to call Australia home as a result of sustained population growth, which is projected to fall from its current annual rate of 2 per cent to just 0.8 per cent.
While net overseas migration has trended higher in recent decades, Treasury assumes it remains constant for the next 40 years at 235,000 people a year, though it admits this forecast is uncertain.
Australia will be older due to the twin forces of increasing life expectancy and low fertility. Female life expectancy is expected to increase to 89.5 years from 85.2 years, while male life expectancy is predicted to increase to 87 years from 81.3 years. As a result, the number of Australians aged over 65 will more than double by 2063, while the number of people older than 85 will more than triple.
The fertility rate, which is the average number of babies per woman, is expected to remain at about 1.6. Since deaths will grow at a faster rate than births, the annual rate of growth in the population from “natural increase” will average just 0.3 per cent over the next 40 years.
The Economy
Australia’s $2.2 trillion economy is forecast to be 2.5 times larger by 2062-63 and real incomes about 50 per cent higher. But GDP growth is expected to average just 2.2 per cent a year over the next four decades, compared to the 3.1 per cent annual gains experienced over the past 40 years. That would be the slowest sustained rate of economic growth since World War II. The slowdown principally reflects a fall in productivity growth.
Meanwhile, the care and support sectors are forecast to grow alongside the ageing of the population and the rapid expansion of the National Disability Insurance Scheme. Government spending on health, aged care and the National Disability Insurance Scheme is expected to increase to 10.7 per cent of gross domestic product by 2063, up from 6.2 per cent today.
The mining sector is also predicted to evolve over the next four decades, shifting away from fossil fuels and towards critical minerals as a result of the transition to net zero.
Workforce Participation
An ageing Australia means a declining share of people will be in work. The share of the population aged over 65 is forecast to increase to 23 per cent from 17 per cent, reducing the size of the workforce. As a result, the current record labour force participation rate of 66.6 per cent is expected to gradually decline, hitting 63.8 per cent in 2063.
But this forecast may not come to pass. Previous intergenerational reports have all predicted participation declines, only to be proven wrong by growing rates of participation among women and older Australians, as well as growth in the young migrant population. The elderly have had more opportunities to participate thanks to greater availability of less physically demanding jobs in the service sector, and shifting cultural norms.
In 2063, those in the labour force will put in fewer hours on average than today’s workers. The report predicts the multi-decade decline in average hours worked will continue, falling from 32 hours a week today to 31 hours by 2063.
Productivity
Productivity is expected to grow at 1.2 per cent a year over the next 40 years, which was the average rate of growth over the past 20 years. The decline in productivity growth over the past decade has been experienced across advanced economies and has manifested in fewer new businesses being created and fewer Australians switching jobs.
The growth in the care economy is one of the factors weighing on productivity growth, since the services sector is generally less productive than other parts of the economy.
The outcomes in the report are highly sensitive to the productivity assumption. If productivity instead grew by 1.5 per cent a year for the next 40 years, which was the assumption contained in the 2021 report, then the economy would be almost 10 per cent larger by 2063 than the baseline forecast. The speed at which productivity grows will be pivotal for future incomes. Treasury estimates that productivity gains accounted for more than two-thirds of the 48 per cent increase in real wages over the past 30 years.
Climate Change and Energy
Australia will be warmer in 2063 than it is today. The Australian Intergenerational Report cites the intergovernmental panel on climate change, which warns average temperature rises are likely to exceed 1.5 degrees before 2100, potentially before 2040. It says that workers in certain industries, especially agriculture, construction, manufacturing and services, may need to lower their exposure to heat or face occupational safety risks.
Increased frequency of natural disasters is expected to weigh on farm output and will also lead to strong growth in federal government expenditure on disaster relief. The transition to renewables will reshape the energy system as wind, solar and battery storage displace fossil fuels in the national electricity market.
The Budget
Despite recording a surplus this year, the federal government’s budget is expected to tip back into deficit and stay there for the next 40 years. Treasury expects spending as a share of GDP to increase from 24.8 per cent to 28.6 per cent over the next four decades, but it assumes the tax take remains constant at 26 per cent of GDP.
Initially, deficits will be a relatively small share of GDP, and gross debt will decline from 39.3 per cent of GDP to 22.5 per cent by 2049. But those deficits will become increasingly large as a result of mounting spending pressures from health and the NDIS, and from 2049 gross debt to GDP will start to increase. However, debt will remain very low by international standards.
Government Spending
The big five spending pressures over the next 40 years will be health, aged care, the NDIS, defence and interest payments on government debt. Spending on these categories as a share of GDP will increase to 14.4 per cent from 8.8 per cent over the next four decades.
The ageing of the population accounts for 40 per cent of the increase, since it leads to increased spending on health and aged care, though this is partly offset with a modest decline in spending on education.
The fastest growing item will be the NDIS, which is expected to expand by 7 per cent a year. Slowing the $42 billion program’s rapid growth trajectory is the Albanese government’s top fiscal priority. The scheme is forecast to hit “maturity” in 2044, at which point it would make up 2.4 per cent of GDP, compared to 0.9 per cent at present, making it roughly comparable to aged care in cost. However, if the NDIS has not matured by this point, Treasury forecasts it will consume 3.2 per cent of GDP and government debt will be 40 per cent larger. That is also assuming national cabinet’s NDIS sustainability framework is successful. Without the framework, which has not been finalised, the NDIS would cost more than 6 per cent of GDP in 2063, which is more than the health budget.
Revenue
Workers are expected to pay an increasing share of the total tax take over the next four decades due to structural change in the economy. The shift towards electric vehicles means petrol excise revenue will collapse, while declining smoking rates will hit tobacco excise collection.
Indirect tax receipts excluding GST are expected to decrease to 1.4 per cent of GDP by 2063, down from the current rate of 2.2 per cent. The decline could be even more rapid if Australians adopt EVs at an even more enthusiastic scale than predicted. That means taxpayers will need to give up a bigger share of their income to fill the gap. This will occur primarily via bracket creep, as increasing nominal wages pushes people into higher tax brackets, which are assumed to remain unchanged. Personal income tax receipts are expected to hit 14.3 per cent of GDP by 2063, compared to 11.7 per cent at present.
Meanwhile, the number of people paying tax is expected to narrow due to the ageing of the population. Only 12 per cent of Australians aged 70 and over pay income tax and this group is expected to increase.
Source: AFR
