Demography is economic destiny

The timing of the Business Council’s Seizing the Moment plan is ideal as Jim Chalmers prepares to release Treasury’s latest full Intergenerational Report on Thursday. It will be the sixth report on the challenges posed by the nation’s ageing population since Peter Costello presented the first in May 2002, encouraging Australians to have an extra child – “one for mum, one for dad and one for the country’’. The first and subsequent reports warned that the overall proportion of the population needing to be supported by the working-age population is set to rise. In 2010, for example, Treasury predicted that by the middle of the century “there will be just 2.7 working-age Australians for every retired person, compared with nearly five now’’. The new IGR predicts our population will reach 40.5 million in 2062-63. By then, the number of people aged 65 and over is projected to more than double and the number aged 85 and over to more than triple.

Extracts from the new report, released on Sunday, state: “Demographic ageing alone is estimated to account for around 40 per cent of the increase in government spending over the next 40 years. … Ageing and a growing population are driving strong growth in health and aged-care spending. Other factors, such as new technologies, treatments and other improvements in care quality, are also projected to drive government spending growth.” The report also identifies the NDIS, defence and interest payments to service debt as major contributors to the structural budget crisis facing this and future governments.

Increasing revenue and prosperity by improving productivity, as the BCA sets out, would be the best antidote to the challenges posed by intergenerational ageing. The last IGR report, in 2021, said: “Productivity has been the most important source of income growth in Australia, contributing over 80 per cent of growth in real gross national income per person over the past 30 years … government policies can assist in lifting productivity, including by helping individuals and businesses take advantage of new innovations and technologies.’’ Demographics will also influence other policy spheres – optimising immigration in the national economic interest, aged care, workforce participation of women and older workers, welfare eligibility and income support, superannuation and health.

After the financial ravages of the pandemic, the government did well banking the bulk of the resources windfall to turn around the budget with a forecast surplus of about $20bn. But as pressure on the budget intensifies over coming years, containing spending, including on big-ticket items such as eligibility for the NDIS, will become more important to help cut interest payments to service debt. Rebuilding “fiscal buffers” to stand the nation in good stead in the event of another health or economic crisis must also be a priority. But Dr Chalmers needs to move on from blaming the Coalition for leaving behind an “eye-watering debt”, as he did on Sunday. Facing the possibility of 15 per cent unemployment early in the pandemic, the Morrison government spent heavily. But Labor in opposition demanded significantly higher spending. As voters grasp the demographic picture, both sides of politics must focus less on electoral sweeteners and more on productivity gains.