Ageing population to keep budget in red for another 40 years

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June 29 2021
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Australia needs to lift productivity to overcome the real threats of an ageing population brought on by a dwindling fertility rate and a stop in migration, a government report shows.

Less workers to fund an ageing population

The fifth instalment of the Intergenerational Report (IGR) highlighted the challenges for Australia’s economy with a century-low population growth said to have a lasting impact over the next four decades.

The IGR has been handed down every five years, kicking off with Treasurer Peter Costello, giving Australia a snapshot of life in 40 years’ time. While scheduled to hit desks in 2020, the fifth IGR report was delayed by 12 months due to the pandemic.

Unveiling the long-awaited document this week, Treasurer Josh Frydenberg said its release served as an “early warning sign” for the government and the country about what's to come if certain trends remain.

The real fear is Australia's dwindling population, with the country said to hit 38.8 million in 2060-61 or six years later than earlier forecasted.

“This is the first time there has been a downward revision of the population forecast in an IGR,” Mr Frydenberg said.

Not only is Australia facing a smaller-than-expected populace, but its age too is concerning with expectations the pressure on welfare and health services will swell significantly.

As such, the budget is expected to remain in the red for at least another 40 years, improving to 0.7 per cent in 2036-37 but then widening to 2.3 per cent by 2060-61, “as the effects of ageing take hold”.

“It’s a trajectory similar to many of the previous IGRs reflecting the impact of an ageing population and existing policy settings,” Mr Frydenberg outlined.

Rising healthcare costs

Unsurprisingly, an ageing population with fewer workers is tipped to see Australia spend more of its GDP on aged care support.

“In this year’s IGR, health accounts for the biggest shift in government spending over the next 40 years, going from 4.6 to 6.2 per cent of GDP, with aged care going from 1.2 to 2.1 per cent of GDP and spending on the NDIS at 1.4 per cent of GDP, nearly 30 per cent higher than what was forecast in the 2015 IGR,” the report found.

According to Mr Frydenberg, significantly, as expenditure rises, the tax take doesn’t go beyond 23.9 per cent of GDP, the self-imposed cap the Coalition put in place.

“Ageing will remain a key source of pressure on our economy and on our budget over time,” Mr Frydenberg said.

“The taxes of each working-age person will need to support the essential services for a growing number of older Australians.”

Economic growth

But despite the barriers, Mr Frydenberg expects Australia’s economy to be two and half times bigger in 40 years than it is today.

He highlighted that the real GDP per person is expected to grow at an average annual rate of 1.5 per cent a year compared with 1.6 per cent over the last 40 years.

“To generate this growth, it is assumed that productivity growth will maintain its 30-year average of 1.5 per cent,” the Treasury report explained.

Mr Frydenberg concluded that "growing the economy is Australia’s pathway to budget repair, not austerity or higher taxes".

"Only by growing the economy can we continue to guarantee the essential services Australians rely on.

"We are relatively well placed, but at the same time, there are warning signs.

"There remains much work to do be done".

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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