The sixth intergenerational report (IGR) was released by the Treasurer last month, documenting key demographic and economic trends that will impact Australia’s growth potential, living standards, and fiscal position (debt and deficits) over the next four decades. These key trends are:
• population ageing
• technological and digital transformation
• climate change and the net zero transformation
• rising demand for care and support services
• geopolitical risk and fragmentation.
The first IGR was commissioned by former Treasurer Peter Costello, in response to increasing concerns about the effects of an aging population on the sustainability of fiscal policy, and published in 2002. At that time, the report garnered deep interest and concern, suggesting a continuous decline in budget deficits, hitting 6% of GDP per annum by 2042. Updates have been provided every five years since the first, the last being in 2021, each making more or less the same projections.
Treasurer Jim Chalmers brought forward the sixth report to 2023, concerned that changes in population due to COVID, declining long-term productivity growth and the additional costs of climate change would have a meaningful impact on our long-term prosperity. Yest despite these latest alarming projections, the 2023 IGR rated barely a mention across mainstream media.
The 2002 report said, “Living standards of next generations will depend on decisions made now.” Yet it is hard to see any real game changing policy in the 21 years since to enhance growth and Budget prospects. The exception has been relatively recent changes to child care and paid parental leave, supporting an increase in women’s participation.
Perhaps this continued failure to address the issues at hand, despite the repeated warnings, has given some a false sense of security; hence, the muted response.
But we should not be so blasé. Each of the three drivers of growth – population, participation and productivity are projected to decline such that, on current policies, real economic growth over the next 40 years will average 2.2%, compared to the 3.1% of the previous four decades.
With slower growth and fewer workers supporting more people in need, especially a rapidly rising aged cohort of Boomers, budget deficits will increase significantly over time. While net debt is forecast to improve marginal over the next 20 years, in large part due to the current banking of extra revenues from commodities and the strong labour market, the impacts of higher spending and a declining workforce start to kick in in the mid-2040s, rising to 25.2% of GDP by 2062. This compares to current levels of just over 20%. To address this, governments will either need to cut services and/or increase taxes.
In earlier reports, much of the focus was on the deterioration of the fiscal position. The numbers in this year’s IGR suggest that we have plenty of time to deal with this problem.
The real issue this time around is the declining productivity growth, which in turn means lower household incomes. Declining living standards is not something any government wants to preside over, but they also find it difficult to think beyond the three-year electoral cycle, by and large, especially when it comes to the tougher decisions such as tax reform.
And citizens are complacent too. Bracket creep is taking up more of workers’ earnings today, but as long as actual income tax rates don’t rise, we seem to only grumble mildly.
The exception to the short-termism that is so typical of governments, is climate change. Despite the calls of many in the climate movement that more needs to be done faster, which is true, the federal government is working very hard to reach its targets of 43% emissions reduction by 2030 and net zero by 2050. It understands the necessity but is grappling with the challenges of the reality. Australia’s very heavy reliance on fossil fuel exports makes us vulnerable to change. But we are just as vulnerable to the impacts of a worsening climate. It is one of the most wicked problems this country has ever faced.
However, despite flagging climate as a critical issue, this year’s IGR only touches briefly on its economic impacts, and in fact has only modelled the potential impact on labour productivity of higher average temperatures and these estimates – a loss of 0.2% to 0.8% over the 40 years – appear very underdone compared to other models. Treasury is rebuilding its climate modelling team, after a decade of attrition, and we can expect much greater insights from future IGRs on this front and indeed well before the next report is due.
The IGR also touches on the potential for technological change to enhance productivity and economic growth as well as quality of life but does not quantify what this yet. As we enter a new era of generative AI, which is already improving the efficiency of many tasks, from writing to sewage system stability, we have yet to get a good quantitative understanding of how far this may take us. Concerningly, it does note that Australia lags significantly on this front, however, and this has led to a decline in business dynamism which is essential for higher productivity growth and skilled job opportunities.
The IGR is an important document for framing long term policy in this country. Opportunities as well as challenges have been identified. We now look to our political leaders to take the hard decisions that are needed to ensure a brighter future, and to bring the Australian population on the journey.