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Yesterday, the federal Treasury released the fifth instalment of the Intergenerational Report (IGR) – a blueprint for the future of Australia, its outlook and its challenges over the next 40 years.
And there are plenty of challenges to go around.
Health spending is expected to jump to a quarter of all government expenditure by 2060, an ageing population will see lower workforce participation and the fallout from the COVID pandemic (and closed international borders) will see our population meaningfully smaller than it otherwise would have been.
All of these constraints, other things being equal, would result in growing budget deficits from mid-2030 onwards, proving costly for taxpayers and businesses – and putting a handbrake on economic growth.
Added to that, there are real concerns for Australia’s long-term productivity growth – a vital driver of future living standards.
The IGR assumes productivity growth matches the average over the past 30 years. But that’s looking a little optimistic now. Before the COVID pandemic, productivity growth had averaged a touch above 1.5% a year over the past 30 years, but it’s averaged less than 0.5% over the past five.
In part, that’s because the 30-year average productivity growth built into the IGR is flattered by the reform successes of the past. But productivity-enhancing reforms are much harder to come by now, and there are developing productivity headwinds, including climate change and the impact of more than a decade of economic and political volatility on the willingness of businesses to invest.
But none of these hurdles are set in stone. In fact, at its core, the IGR serves as a warning to governments (and Australians) of where the country is headed if we take the path of business (or government) as usual.
And if the IGR presents the challenge to raise productivity, COVID provides the moment to reorganise mechanisms to make that happen.
For example, while COVID has created constraints, it has also loosened others in the way work is done and services are delivered across a range of sectors. So, can business take advantage of technology, or better use it, to engineer a tech-driven productivity boost across the economy?
In an economy without new overseas migrants coming in, managing our people has become the number one business issue. So, can we make the most of flexible working to empower employees to also deliver productivity gains?
And green recoveries are taking centre stage in the COVID-policy response. But can government policy frameworks and investment incentives make Australian businesses global players in the transition?
These are the big policy questions that governments and businesses around the world – and in Australia – need to be asking.
Yesterday’s IGR shows what could happen if we don’t.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.