Intergenerational report highlights key challenges for the future

The Federal Government has released its 2021 Intergenerational Report (IGR), which examines the outlook for the Australian economy and the Government budget over the next 40 years.

It presents a picture of a nation in 2061 where the population is nearly 39 million, and real gross national income (GNI) per person has grown annually by 1.3 percent on average since 2021.

So a more populous and seemingly more prosperous Australia – but what are the key assumptions underpinning these forecasts?

The IGR highlights the importance for Australia’s future of skilled migration, broad engagement in the workforce and innovation for Australia’s economic future.

It sums these up as the “3 Ps – population, participation and productivity”.

A revealing element of the IGR is the trend in the ratio of the population aged 15-64 to the population aged 65 and over.

In 2010-11 this was around 5:1, yet in just the 10 years to 2020-21 it has decreased to less than 4:1.

The IGR forecasts that by 2060-61 the ratio will fall to just 2.7:1.

This steady decline means that progressively fewer people of working age are likely to be contributing to the tax revenues that can support government services for each elderly person.

The IGR’s future population expectations include net overseas migration of on average 235,000 people (about 0.9 percent of the current population size) per year from 2024-25.

As Australia’s immigration rules generally favour the acceptance of younger, well-educated persons, one can speculate what the future dependency ratio might look like if net immigration was lower than forecast, for any reason.

Treasury modelling indicates that the average lifetime fiscal impact of a permanent migrant who is the holder of a primary visa granted under the Skilled stream is overwhelmingly positive, whereas the average for the general population is negative.

On average, these migrants contribute relatively more in income taxes and indirect taxes, and on average they receive relatively less in health care, aged care and transfer payments.

Therefore, attracting skilled migrants remains a critical long-term contributor to the improvement of living standards across the general population.

On participation, the IGR notes that in March 2021 the participation rate was at 66.3 percent, the highest level on record.

However, average hours worked have declined by nearly 10 percent over the last 40 years and Treasury expects this decline to continue.

The largest contribution to the increased participation rate has come from greater female participation in the workforce.

The IGR notes that historically high levels of female participation would need to be sustained over future years in order to offset the impact of the ageing of the general population.

However, Treasury anticipates the female participation rate dropping slightly between now and 2060-61 and continuing to lag male participation by 8 percentage points or more.

This begs the question as to what more can be done from a policy standpoint to instead increase female participation over the next 40 years.

KPMG has consistently advocated for reform of the child care subsidy (CCS) and the paid parental leave scheme as means to support female workforce participation.

The Government’s announcements in the 2021-22 Budget represent a welcome step forward in terms of the CCS and we look forward to the development of further policies to address this challenge.

Productivity is perhaps the greatest of all the issues highlighted in the IGR.

The IGR assumes that over the next ten years the long-run labour productivity growth rate will return to 1.5 percent per year (the 30-year historical average to 2018-19) even though it averaged only 1.2 percent over the seven years to 2018.

The sensitivity of this assumption for the IGR’s forecasts is significant.

Treasury estimates that by 2060-61 GDP would be around 9.5 percent lower if labour productivity growth only remained at 1.2 percent, and that the budget’s underlying cash balance would be lower by a further 2.2 percent of GDP.

The IGR notes that improvements in education to meet the demands of employers will be critical.

It also highlights the acceleration of the adoption of digital technology, bankruptcy reform, the implementation of national licensing and qualification regimes, research and development tax incentives and transport infrastructure investment as government initiatives that will contribute to addressing the productivity challenge.

However, Australia will be competing with other countries to attract increasingly mobile capital to take advantage of these enhancements and so it will need to not just improve, but improve by more than its counterparts do.

The IGR therefore lays down a challenge for all stakeholder groups and individuals in our society to work together to address the “3 Ps” in a constructive and sustainable way.

First published in KPMG Tax Now

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