Australia's economic growth risks slowing over the next 40 years while government debt is set to increase significantly, according to Secretary of the Department of Treasury Dr Steven Kennedy.
He warned of these fiscal challenges in a speech to CEDA, following on from the 2023 Intergenerational Report.
The report projects GDP growth averaging just 2.2 per cent annually through 2062, down from 3.1 per cent over the past four decades.
Dr Kennedy noted a range of long-term structural adjustments that could affect the budget bottom line in the future, including population ageing, shrinking fuel and tobacco excise bases and more reliance on personal income tax as a share of the tax base.
The report shows Commonwealth spending growing from 24.8 per cent to 28.6 per cent of GDP by 2062, driven by health, aged care and pensions. But tax revenue stays steady at 24.4 per cent from around 2033-34, producing rising deficits.
“Demographic ageing is estimated to account for around 40 per cent of the increase in payments, concentrated in health, age pension, and aged care spending,” Dr Kennedy said.
As long as the fertility rate is below replacement, successive generations will be smaller, posing a dual challenge of a shrinking tax base and greater spending on health and aged care, Dr Kennedy said.
“A permanently higher share of older people underpins the importance of the design of aged care services, and the tax and superannuation systems,” he said.
Dr Kennedy noted Australia has outperformed other advanced economies in productivity and participation growth over the past 20 years. But he warned "consistent slowing in productivity across all countries" poses fiscal risks.
“At some point, Australia’s productivity growth will converge with global rates and if global rates are lower in the longer term so will be Australia’s productivity growth,” he said.
“This is an important consideration given the risks future generations could face from two of the powerful forces – climate and energy, and global fragmentation.
“And it only emphasises the importance of policies to mitigate the risk associated with these forces.”
Kennedy outlined Treasury plans to enhance climate and migration modelling in future reports along with the need for better data to inform policy reform.
“The IGR is not a prediction of the future per se, rather, it demonstrates the longer-term implications of our current path,” he said.
“Our aim is to avoid the risks projected by the IGR through ongoing improvement and reform of policy settings.”