Ageing population, climate to change face of economy

Andrew Brown |

Treasurer Jim Chalmers says the federal government has a responsibility to prepare for the future.
Treasurer Jim Chalmers says the federal government has a responsibility to prepare for the future.

Australians will live longer, work less, earn more, have fewer children and be more reliant on the wealth delivered by critical minerals to keep the economy strong.

That’s what the nation will look like in 40 years, according to the latest federal government Intergenerational Report released on Thursday.

It projects that by 2062/63, real incomes will be 50 per cent higher than they are today, and the economy will be 2.5 times bigger.

Life expectancies are set to increase, with the number of over-65s to double in the next four decades, while over-85s will triple and those older than 100 will increase sixfold.

Population growth is tipped to slow from 1.4 per cent during the past 40 years to 1.1 per cent in the coming four decades.

But an ageing population will be one of the biggest pressures on the country’s finances, as spending increases for aged and health care and the workforce in those sectors doubles.

Treasurer Jim Chalmers said despite an ageing population and more people working for longer, no changes were likely to be made to the aged pension.

“We are looking for ways to give older workers more options and more choices,” he told the National Press Club in Canberra.

“There is a major focus of ours to try to work out – in a world where there will be a smaller and smaller proportion of workers, how do we encourage people to work more if they want to?”

The sixth Intergenerational Report shows that by 2063 Australia will have a population of more than 40 million people.

As the nation ages, the workforce participation rate will drop from 66.6 per cent to 63.8 per cent, and the average number of hours people work will fall.

But productivity will continue to rise 1.2 per cent per year.

Health, aged care, the National Disability Insurance Scheme, defence and debt interest payments are forecast to make up about half of all government spending by 2063.

The report warns of the further effects of climate change, with spending on natural disasters tipped to triple.

Rising temperatures and changing conditions will cost the economy more than $400 billion in the next 40 years.

The transition to net-zero emissions will also see demand for some Australian exports decline, with the market for thermal coal set to halve.

However, demand for Australia’s critical minerals resources, which are key to technology and clean energy production, will be eight times higher.

Dr Chalmers said there could be a sense of complacency about the future, in particular about climate change.

“We’ve tried complacency on climate change, and it’s meant that we wasted a lot of time, and we’ve got to catch up,” he said.

“Climate could ravage our economy, we might not build the workforce that we need, we might miss this kind of new productivity frontier, we might not make the most of our advantages, we might leave ourselves more vulnerable to a world that is getting riskier. “

More electric vehicles and a drop in smoking rates will reduce revenue from fuel and tobacco excises.

Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the report served as a wake-up call for economic reform.

“The Intergenerational Report is a sobering study that warns us the next 40 years could be very challenging,” he said.

“Even to maintain our level of prosperity for future generations of Australians, the priority must be on lifting productivity.” 

Brendan Rynn, chief economist with consultancy firm KPMG, said the report should be above politics to get the tax settings right for the future.

“The Intergenerational Report confirms that the dynamics of population and evolution of business means current tax settings will not be fit for purpose over the mid to long term,” he said.