Cuts to pension, schools, health ‘will negate cost of ageing cohort’

JOE Hockey is counting on huge cuts to outlays on pensions, schools and health to entirely neut­ralise the cost of servicing an ageing population over the next 40 years, although the number of people older than 85 will rise fourfold in that time.

The Intergenerational Report projects that the total cost of government services in 2054-55 will be 25.1 per cent of GDP, which is almost unchanged from the 25 per cent of GDP it estimates for 2014-15.

The three previous IGRs all expect­ed the cost of an ageing population would come at a huge cost to the federal budget, reaching between 4.5 per cent and 5.9 per cent of GDP over four decades.

There have been minor changes to demographic projections as a result of higher immig­ration but they have not materially influenced the government’s success in eliminating the cost of an ageing population.

INTERACTIVE: The InterGenerational Report

The latest IGR still expects that in 40 years’ time there will be just 2.7 people working for every aged dependent, the same as the 2010 IGR, whereas today there are 4.5 people in the workforce supporting every aged dependent.

Despite the impact of ageing (the proportion of the population older than 65 is tipped to more than double, from 3.6 per cent to 8.9 per cent) the IGR forecasts that the cost to the budget of the aged pension will fall from 2.9 per cent now to 2.7 per cent of GDP in 40 years.

The previous IGR expected age pensions would be costing ­almost 4 per cent of GDP.

The budget plan to shift the indexation of age pensions from average male weekly earnings to the much slower-rising consumer price index, while lifting the pension age to 70 years, has driven this change.

The increase in the pension age is also expected to help lift the share of the population in the workforce from the 60.6 per cent projected in the previous IGR to 62.4 per cent in the latest report.

Huge savings are also anticip­ated in health spending.

In the last IGR, health costs were expected to rise by 80 per cent over the next four decades to 7.1 per cent of GDP.

In the latest report, they will increa­se by only 30 per cent, to 5.5 per cent of GDP.

Treasury parliamentary secret­ary Kelly O’Dwyer said the now cancelled Medicare co-payment accounted for only $1 billion of these savings.

By far the biggest cut to health is the government’s plan to reduce the indexation of funding for state hospitals to no more than population growth and the CPI.

Last year’s budget documents showed this would be rising $15bn a year within the decade and that the total would keep rising beyond that.

Changes to the indexation of payments to the states for schools are also expected to bring big savings.

Commonwealth spending on education is expected to almost halve, from 1.9 per cent of GDP to 1 per cent.

The government has foreshadowed that these reductions in federal payments to the states will be covered in the forthcoming white paper on the federation, which is expected to include changes in taxation relations.

As well as covering the cost of ageing, these savings are covering the cost of introducing the national disability insurance scheme, which is expected to cost 0.9 per cent of GDP, or almost the same as projected federal spending on school and tertiary education.

They will also fund the Coalit­ion’s commitment to keep defence spending at 2 per cent of GDP.