Australia in the 2060s: an optimistic outlook dominates budget forecasts in the Intergenerational Report

This year’s Intergenerational Report (IGR) highlights AI, population ageing and geopolitical fragmentation. It is a tribute to optimistic forecasts. Things will turn out for the best if artificial intelligence (AI) improves productivity, promised budget savings are actually achieved, global turmoil creates new opportunities and global warming is limited. But it is a more political IGR than many have been since they first began in 2002. Although nowhere near the low-water mark of the highly political 2015 report from then treasurer Joe Hockey, politics features in this one via its many mentions of current government policies. They may not last the coming 40 years. The population is ageing, but healthier An important topic in each report has been the ageing population. Australia’s fertility rate has been below the replacement rate of 2.1 children per woman for 50 years. It is projected to drop further to 1.34 children by 2065–66. By then, deaths will outnumber births. This is the first time this has been projected in an IGR. The first IGR in 2002 noted that the proportion of the population aged over 65 had risen over a century from just over 4% to 12.5%. That proportion is now projected to be 25% by 2065–66. Most countries are spending an increasing share of their national income paying pensions. By contrast, Australia’s superannuation scheme means the proportion is actually projected to fall here. Moreover, the IGR notes the “working age” cutoff at 65, the official definition “is increasingly less reliable as an indicator of economic dependency” (that is, older Australians supported by taxes paid by younger people still in the workforce). Australians are living longer and healthier. A continuing trend of more people staying in work for longer will help the economy and budget. By 2065–66 it is projected that 1.9 million Australians (5% of the population) will be over 85 years old. Climate change gets scant attention The importance accorded to climate change has varied over the reports. Then treasurer Wayne Swan’s IGR in 2010 was the first to highlight it. It was almost ignored in the Abbott-Hockey IGR in 2015. The 2026 IGR executive summary frames energy transition in terms of cost savings from renewables, ability to deal with energy supply bottlenecks globally, and industrial opportunities such as green aluminium. A fuller discussion in chapter 3 notes climate change is leading to more frequent and severe natural disasters and environmental challenges. The brief discussion contrasts with the intergenerational scale of these risks, especially if global warming is higher than the report’s optimistic “Paris-aligned” scenario, in which the world cooperates to keep global warming to 2 degrees. Artificial intelligence and productivity The economy is projected to grow at a slower annual rate of 2% over the next 40 years, down from 3% over the previous 40. Intergenerational reports have analysed economic growth based on three “P"s – population, productivity and participation. Labour force participation has risen gradually and is not expected to change much over coming decades. The key "P” is productivity. Successive reports have become more realistic about the chances of productivity growing in the future as fast as it did in the post-war boom or after the economic reforms of the 1980s and ‘90s. Some economists have criticised the assumption that labour productivity will grow at an average rate of 1.2%, since the average growth rate has only been 0.8% over the past 20 years. The Reserve Bank assumes 0.7% in its forecasts. Possible grounds for expecting a productivity acceleration include a wider adoption of AI. But it is important that AI is not seen as a necessary and sufficient answer to the nation’s productivity problem. AI has potential for businesses to deliver better goods and services at lower cost – that is, productivity – only if business managers know how to use it effectively. The report notes AI could lead us in opposite directions, to either social progress or disruption. One challenge of restoring productivity growth is that many measures will only have an impact well after the next election. Better primary education would improve productivity, for example, but only after the children join the workforce more than a decade later. Encouraging businesses to invest more would help. Geopolitics is front and centre The IGR has noticed – it could hardly fail to – that the world is becoming less safe and predictable. We see more conflict, strategic competition, and restrictions on trade. The United States has increased tariff rates to their highest levels since the 1940s, leading to significant shifts in patterns of world trade. The report argues this creates opportunities arising from Australia’s stable institutions, skilled workforce and natural resources. These are possible if the scale of global disruption remains at current levels; if there are more or more severe political or economic disruptions, the consequences will be much less positive for Australia. Budget outlook still a sea of red The main areas of spending pressure are health and aged care, reflecting the ageing population, and defence, reflecting geopolitical risks. All IGRs have projected persistent deficits (other than the unrealistically optimistic 2015 edition). But spending cuts in this year’s budget mean the deficits are now smaller than had been projected in 2023. Of course, this assumes that the budgeted spending cuts (notably to the National Disability Insurance Sscheme) are actually achieved and that they are not used to fund spending increases elsewhere. Addressing the equity question This is the seventh IGR. More than most, it considers intergenerational equity. That was central to the 2026 budget. The IGR emphasises government tax and superannuation reforms, both of which will help improve equity. Housing affordability is one of the most important equity concerns. Recent budget tax changes – summarised again in this Intergenerational Report – aimed to address this. Each successive generation has had lower rates of home ownership than the previous one. Turning this around will address a key equity concern. The value of an Intergenerational Report is that it provides a longer term perspective on the economy, society and budget. It is a refreshing alternative to short-term political debate.