The Productivity Commission has highlighted the immediate challenges for governments posed by demographic trends, in its final report on the Economic Implications of an Ageing Australia.
The study found that ageing pressures are about to accelerate as the baby boomer generation retires. Ageing will reduce economic growth at the same time that it intensifies demands for public services, such as health, aged care and the age pension. With present policy settings, age-related spending will exceed the growth of tax revenue. This will open a fiscal gap equal to around 6½ per cent of GDP by 2044–45.
With the workforce shrinking as a proportion of the population, per capita GDP growth will fall to as low as 1.25 per cent per year in the 2020s, about half the rate in 2003–04.
The Commission’s Chairman, Gary Banks said “The ageing of our population is a long-term phenomenon. But its effects will be felt sooner than many imagine. The actions of governments today will determine how well
The Commission demonstrates that, in the absence of other policy actions to reduce fiscal pressure, taxation levels would need to rise by 21 per cent by 2044–45, or the debt burden of ageing would become twice as large as
The Commission said that policy responses would have to be on a broad front and at all levels of government. Coordinated reforms would be needed in key human service areas like health and aged care. The Commission shows that raising labour force participation can partly offset ageing’s impacts and highlights the importance of productivity growth to future prosperity.
However, the Commission finds limited scope for population policies to offset the demographic trends. Increased migration was not a realistic solution, though greater emphasis on skilled migration could play a useful role. The Commission projects fertility rates to rise slightly over the next decade, but the effects are greatly outweighed by improvements in life expectancy.
Gary Banks said, “The very fact that ageing brings us longer, healthier lives shows why we shouldn’t just see it as a problem. Talk of intergenerational conflict also seems overplayed when you factor in the potential for higher incomes from continuing productivity growth. That said, the economic and fiscal challenges are real. The earlier governments act, the less risk of crisis measures in the future.”
KEY POINTS:
In itself, population ageing should not be seen as a problem, but it will give rise to economic and fiscal impacts that pose significant policy challenges.
People aged over 55 years have significantly lower labour force participation rates than younger people. As more people move into older age groups, overall participation rates are projected to drop from around 63.5 per cent in 2003 04 to 56.3 per cent by 2044–45.
Hours worked per capita will be about 10 per cent lower than without ageing.
Assuming the average labour productivity performance of the past 30 years, per capita GDP growth will slump to 1.25 per cent per year by the mid 2020s, half its rate in 2003–04.
While taxation revenue will largely track GDP growth, government expenditure is likely to rise more rapidly, placing budgets under considerable pressure.
Although education and some welfare payments are projected to increase more slowly than GDP, government spending on health, aged care and pensions will grow at a faster rate.
The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2044–45, with ageing accounting for nearly one-half of this.
In the absence of policy responses, the aggregate fiscal gap will be around 6.4 percentage points of GDP by 2044–45, with an accumulated value over the forty years of around $2200 billion in 2002–03 prices.
On past trends, much of this could be expected to be borne by the Australian Government, but there are significant potential burdens faced by State and Territory Governments.
A range of policy measures will be needed to reduce the fiscal pressure from ageing and/or to finance the fiscal gap.
Plausible increases in fertility and net migration would have little impact on ageing trends.
Measures to raise productivity and participation would enhance income growth and the capacity to ‘pay’ for the costs of ageing, including through taxation. However their ability to alleviate fiscal pressure directly depends on the extent to which service demands and costs continue to rise with growth.
More cost-effective service provision, especially in health care, would alleviate a major source of fiscal pressure at its source.
Timely action would avoid a need for costly or inequitable ‘big bang’ interventions later. Population ageing can only be conceived as a crisis if we let it become one.
All of the above text is a press release provided by the quoted organization. globalagingtimes.com accepts no responsibility for their accuracy.