Australian 2010 Intergenerational Report

The Australian Government has released its well foreshadowed Intergenerational Report titled "Australia to 2050: Future Challenges". The Overview runs to 22 pages while the full document is 190 pages (1MB). No real surprises here, but it provides a good basis to reflect on the policy choices facing Australia.

The primary driver of the outcomes contained in the report are demographic in nature ie the number of working age Australians supporting each retiree is expected to fall from 5 people today to 2.7 people in 2050. Without any action this will result in a deteriorating fiscal position to a deficit of 3.75% of GDP. Capping real government spending growth to 2%, reduces the fiscal gap to 2.75%.

The key to addressing this imbalance (and thus maintaining living standards) is productivity. Unfortunately productivity growth has declined in the past decade to 1.4% compared with 2.1% in the 1990's. The report highlights the benefit of raising productivity and points to increased spending on education, infrastructure (eg National Broadband Network) and regulatory and tax reform as sources of productivity.

The main source of growth in spending relates to health care, driven by an older population and resulting pressure on services, as well as demand for higher standards of care and technology innovation. Spending on health is expected to almost double as a percentage of GDP from today through to 2050 and account for two thirds of the increase in government spending over the period.

Climate change has listed as a threat and policies designed to lower pollution and increase use of renewable energy noted. However, in a world where energy costs will necessarily be higher than when relying on fossil fuels, it will be difficult to deliver the productivity gains required to address the looming fiscal gap and maintain living standards.

Migration policy is the elephant in the room. While global demographics are difficult to turn around quickly, a small country such as Australia can alter net migration as a matter of policy and increase the proportion of working age Australians to retirees.