As old as the story of time is the story of change. Each Australian generation has lived sometimes radically different lives than their parents. With the baby boomers coming into retirement and a growing population that’s living longer than ever before, what could the near future hold for Australia’s economy?
To get a handle on recent and upcoming demographic shifts, we reviewed the recent 2023 Intergenerational Report released by the Treasury. The report paints a picture of what the population and economy will look like over the next 40 years to the year 2065. So, what does this report reveal?
Primary findings and scope of the intergenerational report
The report aims to uncover the major forces that will come to bear on Australia’s economy over the next four decades. The report found that there were five major forces that will shape the Australian economy:
- population ageing
- expanded use of digital and data technology
- climate change and the net zero transformation
- rising demand for care and support services
- increased geopolitical risk and fragmentation.
Australia is getting older and living longer
The intergenerational report tells us that Aussies are living longer than ever before. It’s predicted that men born in 2022-2023 are expected to live around 81.3 years, but men born in 2062-2063 will likely live to 87 years. For women we’re looking at 85.2 years and 89.5 years, respectively.
According to a recent media release from the Australian Institute of Health and Welfare, we’ve stretched our life expectancies an average of 3 months per year since the 20th century and,
“over the past 5 decades, life expectancy in Australia has increased by 13.7 years for males (to 81.3) and by 11.2 years for females (to 85.4).”
In terms of population growth, it’s predicted that growth will of course occur, but at a reduced rate. Over the next 40 years we’re looking at a growth rate of 1.1% compared to 1.4% over the past 40 years. The population is projected to reach 40.5 million in 2062–63.
This ballooning of Australia’s life expectancy and growing population will have important economic ramifications over the next four decades.
Impacts on age care and healthcare
This ageing population factor will generally mean that people will retire later in life and healthcare will become a huge issue. According to the report, healthcare in Australia will expand from 4.2% of national GDP today to 6.2% in 2063. In terms of aged care we’re looking at a jump from 1.1% to 2.5% of GDP.
This means that both government expenditure and private industry will need to expand in tandem with population ageing to keep on top of this growing concern. At the heart of it, healthcare and aged care will cost the nation significantly more.
How will productivity change?
While the actual projected productivity of the nation is difficult to determine due to the unseen influences of government policy and industry shifts, the report tells us that,
“Productivity growth is assumed to grow at 1.2 per cent a year, around the average of the past 20 years.”
We’re also going to see a drop in GDP due to less reliance on revenue from resources as well as tobacco and fuel excises.
This poses an issue, as the required productivity will need to increase much further than this projection to maintain a healthy economy and the pressure will be on for government and private businesses to achieve this.
To keep pace, we’re going to need to see more market dynamism alongside increased tech investment and adoption.
This means that Australia’s small business community, the economic backbone of the country, will need to kick into gear.
The unstoppable pace of digital technology and AI
To achieve increased productivity, we’re going to need to see a boost in tech investment and a broadening of private industry adoption. According to the report,
“Digitalisation will change how we work, raising productivity, improving workplace safety and providing us with the agility we need to face the challenges of the future.”
With government pushes to increase SME digitisation, and a robust and innovative business community, we’re certainly poised as a nation to meet these future challenges head on.
One way to look at this in action is the way we responded to the COVID-19 pandemic. With movement restricted and in-person business transactions largely halted, businesses of all types embraced digital technology to continue to trade.
This kind of adoption also makes predictions around future productivity difficult. Looking at the explosion of AI for example, it’s impacts and future manifestations are as yet unwritten. As the report notes,
“Newer technologies like artificial intelligence and large language models may also require complementary intangible investments such as business reorganisation and building of organisational knowledge – investments which are not always captured in balance sheets – and whose benefits take a long time to manifest.”
Responding to climate change
Alongside the realities of climate change, including increased natural disasters that will put pressure on spending and livelihoods, is the impacts that will be felt from decarbonizing the economy.
With Australia still heavily reliant on fossil fuel consumption and export, we will feel net zero in a sharp way. The way we function as an economy will need to change. This means clean energy support and industry, and of course the requisite battery storage needs that things like solar power require. This could also mean that mineral and mining focuses will shift from coal to the elements necessary for technology.
The report notes that,
“Expanding Australian industry’s capacity further along battery mineral value chains is also possible, through businesses building capabilities in downstream refining, manufacturing, and battery integration and services.”
Changes in the broader economy and budgets
So, what about broader expected shifts in the economy and budgets over the next four decades? With the increased pressures of healthcare spending and changes to our export base alongside diminishing taxes like fuel and tobacco, what are the predictions?
“Growing spending pressures are projected to result in deficits remaining in future years. After declining to 22.5 per cent of GDP in 2048–49, gross debt is projected to reach 32.1 per cent of GDP by 2062–63.”
As these are budgetary concerns, we’ve luckily seen a lot of government focus on this area as surplus will be of increased importance to balance the scales. In fact, in 2022/23 we saw the first budget surplus in 15 years.
What about spending? The report tells us that “Total government spending is projected to rise by 3.8 percentage points of GDP over the next 40 years. Demographic ageing causes around 40 per cent of this increase.”
Taken as a whole, what we’re seeing is significant economic shifts and pressures, however these challenges, while sobering, are certainly surmountable with good policy and an innovative private sector.