2021 Intergenerational Report
Australia over the next 40 years

Circulated by
The Honourable Josh Frydenberg MP
Treasurer of the Commonwealth of Australia
June 2021

© Commonwealth of Australia 2021
ISBN 978-1-925832-37-2
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Notes(a) The following definitions are used in this report:- ‘real’ means adjusted for the effect of inflation- real growth in spending is calculated by the Consumer Price Index as the
deflator- one billion is equal to one thousand million.
(b) Figures in tables and generally in the text have been rounded. Discrepancies intables between totals and sums of components are due to rounding.
- estimates midway between rounding points are rounded up- the percentage changes in statistical tables are calculated using unroundeddata.
(c) References to the ‘states’ include the territories.
(d) GDP refers to Gross Domestic Product.
(e) CPI refers to Consumer Price Index.
(f) Real spending per person is expressed in 2020-21 dollars unless otherwise
specified.
(g) Projections are based on the 2021-22 Budget.
(h) In this report, the term Commonwealth refers to the Commonwealth of Australia.
The term is used when referring to the legal entity of the Commonwealth ofAustralia.
The term Australian Government is used when referring to the Government andthe decisions and activities made by the Government on behalf of theCommonwealth of Australia.
(i) The forward estimates refers to 2020-21 to 2024-25, the medium term refers to2025-26 to 2031-32 and the long term refers to 2032-33 to 2060-61.

iii

Contents
Executive summary .............................................................................................. vii
What is the Intergenerational Report?...................................................................xv
Part I: The economy over the next 40 years ............................................................ 1
1.

Economic projections ......................................................................................... 1

2.

Population ........................................................................................................ 13

3.

Participation ..................................................................................................... 33

4.

Productivity ...................................................................................................... 45

5.

Environment ..................................................................................................... 57

Part II: The budget over the next 40 years ............................................................. 69
6.

Budget projections ........................................................................................... 69

7.

Government spending...................................................................................... 89

8.

9.

7.1

Health ..................................................................................................... 94

7.2

Aged care ............................................................................................. 103

7.3

National Disability Insurance Scheme.................................................. 107

7.4

Retirement income system .................................................................. 111

7.5

Income support and family assistance payments ................................ 119

7.6

Education and training ......................................................................... 125

7.7

Other spending .................................................................................... 128

Revenue.......................................................................................................... 131
8.1

Personal income tax............................................................................. 135

8.2

Goods and services tax ........................................................................ 137

8.3

Company and other taxes .................................................................... 138

8.4

Non-tax receipts................................................................................... 140

Major assets and liabilities ............................................................................. 141

Appendix ........................................................................................................... 149v

Executive summary
The Intergenerational Report projects an outlook for the economy and the AustralianGovernment’s budget over the next 40 years. This outlook has been profoundly
affected by the COVID-19 pandemic, which has caused the most severe global
economic shock since the Great Depression.
While Australia’s economic recovery is well advanced, some effects from this shock will
persist for years to come. At the same time, pre-existing structural trends – such as
population ageing – remain ongoing challenges for the economy and the budget.
The economic and fiscal projections highlight some of the long-term risks andopportunities Australia faces, assuming policies remain similar to current settings.
However, government policies do not stand still and can be expected to change overtime in response to the challenges presented in this report. Successiveintergenerational reports have taken more optimistic views about the future asgovernments have responded to long-term challenges.
Australia remains very well placed to overcome these challenges and to take advantage
of opportunities in the future. Australia has a strong economy that is growing. The
Australian Government also has a responsible and sustainable fiscal position whichmeans it can fund essential services and invest for the future.
COVID-19 will have lasting effects on the economy and the budget
Australia entered the COVID‑19 pandemic from a position of economic and fiscal
strength. The budget was in balance for the first time in 11 years with workforce
participation at a record high and welfare dependency at its lowest in a generation.
A strong fiscal position allowed the Government to respond decisively to theonce-in-a-century pandemic with $291 billion in direct economic support. The speed ofAustralia’s economic recovery has exceeded the most optimistic of our expectations,with our economic growth outperforming every major advanced economy in 2020.
Having entered this crisis with a strong fiscal position, the Government continues tohave substantial fiscal capacity to support the recovery and respond to futurechallenges. While we are not yet out of the pandemic, we are better placed than mostother countries in the world to meet the economic challenges that lie ahead.
The economic recovery is well underway, but some effects from the pandemic will
persist. The most enduring effect is likely to be a smaller population reflecting a periodof sharply limited migration and a temporary fall in the fertility rate. Other impacts areless clear and potential upside and downside economic risks remain.

vii

2021 Intergenerational Report

The COVID-19 pandemic has not displaced the pre-existing demographic, technologicaland other trends that will continue to shape the long-term economic and fiscal outlook.
Indeed, the pandemic could accelerate some of those trends.
Economic growth is projected to slow, largely reflecting slower population growth
The Australian economy is projected to grow at a slower pace over the next 40 years
than it has over the past 40 years, though growth per person is projected to be closer
to historical averages.
Slower population growth is the main reason for the expected slowdown in economic
growth. Australia’s total population is projected to reach 38.8 million in 2060-61. Thisis lower than previous projections due to the lower level of migration resulting fromthe COVID-19 pandemic and a lower fertility rate.
Migrants are expected to continue to be the largest source of population growth.
Migration contributes to economic growth and can help offset population ageing.
However, migration needs to be managed well to ensure it supports higher living
standards.
The population will continue to age, largely as a result of improved life expectancies
and low fertility. In 2060-61, 23 per cent of the population is projected to be over 65, arise of around 7 percentage points from 2020-21. The ratio of working-age people tothose over 65 is projected to fall from 4.0 to 2.7 over the next 40 years. Australia iscurrently in the middle of a significant demographic transition, as people in the baby
boomer generation reach 65. This has already driven a rapid fall in the ratio ofworking-age people to those over 65 through the past decade, which will continue forthe next decade.
Ageing will reduce labour force participation. The participation rate is projected to
decline from a record high of 66.3 per cent in March 2021 to 63.6 per cent by 2060-61.
This reflects the increasing proportion of older people in the population, which is
expected to be only partially offset by projected increases in women’s and older
people’s participation.
Productivity has been the most important source of income growth in Australia,
contributing over 80 per cent of growth in real gross national income (GNI) per person
over the past 30 years. The economic projections assume that the labour productivity
growth rate converges to 1.5 per cent per year – consistent with the 30-year historical
average to 2018-19. Achieving this assumption will require an improvement overrecent performance. Productivity growth averaged 1.2 per cent annually over the lastcomplete productivity cycle in the 2010s. Government policies can assist in lifting
productivity, including by helping individuals and businesses take advantage of new
innovations and technologies.
These projected changes in population, participation and productivity mean that real
gross domestic product (GDP) is projected to grow at 2.6 per cent per year over the
next 40 years, compared with 3.0 per cent over the past 40 years. Real GDP per personviiiExecutive summaryis projected to grow at an average annual rate of 1.5 per cent, compared with
1.6 per cent over the past 40 years. Nominal GDP growth is projected to slow to
5.0 per cent per year over the next 40 years, compared with 7.0 per cent over the past
40 years. Real GNI is projected to grow at an average annual rate of 2.3 per cent,compared with 3.3 per cent over the past 40 years. Real GNI per person is projected to
grow at an average annual rate of 1.3 per cent, compared with 1.8 per cent over the
past 40 years.
The larger slowdown in GNI growth than GDP growth reflects an assumption that theterms of trade will decline before stabilising at long-term levels. Over the past 40 years
there have been periods where significant increases in commodity prices and the termsof trade have lifted growth in incomes.
Chart 1

Average growth rates% growth% growth

88
7.0
Past 40 years

6

Next 40 years

6
5.0

4
3.0
2

1.6

1.5

1.8

4

3.3
2.6

2.3
2

1.3

0

0
Real GDP perpersonReal GNI perpersonReal GDP

Real GNI

Nominal GDP

Source: ABS Australian National Accounts: National Income, Expenditure, and Treasury.

ix

2021 Intergenerational Report

Chart 2

Nominal GDP growth

%
10

%
10

8

8
Nominal GDP

6

Prices

6

4

4

2

2

0

0
Real GDP-2
2000-01

2010-112020-212030-312040-412050-51-2
2060-61

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

The likely physical and social effects of climate change, the impacts of mitigation efforts
and the benefits of early adaptation measures will also affect the economy and thebudget over the next 40 years. The transition to lower carbon emissions globally will
mean that some sectors will need to adjust to falling demand for some exports, while
new opportunities will be created in other sectors. The effects will depend on domestic
and global actions, as well as the pace, extent and impacts of climate change.
The budget will improve as the economy recovers, but is projected to remain in deficit
As with previous intergenerational reports, the trajectory of the underlying cash
balance begins with a period of improvement before deteriorating towards the end of
the projection period.
Before the pandemic, the budget had returned to balance and was projected to be insurplus for an extended period. The fiscal response to the pandemic significantly
increased the level of government spending in the short term and the economic
slowdown substantially lowered tax revenue.
In 2020-21, the underlying cash balance is expected to be a deficit of
7.8 per cent of GDP, improving to 2.4 per cent of GDP by 2024-25. Supported by the
economic recovery, the underlying cash balance is projected to improve to a deficit of
0.7 per cent of GDP in 2036-37. The deficit is then projected to widen to 2.3 per cent of
GDP by 2060-61. This reflects growth in spending, mainly on health but also on agedcare and interest payments, while tax receipts are constrained by the tax-to-GDP cap.

x

Executive summary

Chart 3

Underlying cash balance across intergenerational reports% of GDP
4% of GDP
42015 IGR

2

2

0

0
2021 IGR-2-2
2010 IGR-4
2007 IGR

-6

-4
-6

2002 IGR

-8

-8

-10
2000-01

2010-112020-212030-312040-41-102060-612050-51

Source: Treasury.

Growth in interest payments partly reflects the assumption that government bondyields return to higher rates over the medium and long term. The primary balance,
which excludes net interest, is projected to return to surplus, before falling to a deficitof 0.6 per cent of GDP by 2060-61.
Chart 4

Underlying cash balance and primary balance% of GDP2% of GDP
2
Primary balance00

Net interest-2-2Underlying cash balance

-4

-4

-6

-6

-8

-8

-10
2000-01

2010-112020-212030-312040-412050-51-102060-61

Source: Treasury.

Net debt is projected to peak at 40.9 per cent of GDP in 2024-25, before falling to28.2 per cent of GDP in 2044-45 and then increasing to 34.4 per cent of GDP
by 2060-61.

xi2021 Intergenerational Report

Chart 5Net debt% of GDP60% of GDP
60

50

50

40

40

30

30

20

20

10

10

0

0

-10
2000-01

2010-112020-212030-312040-412050-51-102060-61

Source: Treasury.

After falling from a pandemic-induced high, government spending is projected togradually increase over time. Health will comprise the single largest component ofspending, accounting for 26 per cent of spending in 2060-61. Real per person healthspending is projected to more than double over the next 40 years, substantially due torising incomes, changes in preferences and the costs of using new health technology.
Aged care spending is projected to nearly double as a share of the economy by 2060-61.
This is largely driven by demographics over the next decade, after which
non-demographic factors become the predominant drivers of growth.
In the future, more Australians will retire having made superannuation contributions
while working. This will reduce the call for government support through the Age
Pension. However, superannuation attracts favourable tax treatment which reduces
government revenues. The projected combined total of Age and Service Pension
expenditure and superannuation tax concessions is estimated to grow from around
4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61.
The Government is committed to maintaining a sustainable tax burden, with a
tax-to-GDP ratio at or below 23.9 per cent of GDP. Tax receipts are expected to reachthe Government’s tax-to-GDP cap in 2035-36. Personal income tax is projected to growfaster than other sources of tax in reaching this cap. Company income taxes will likely
continue to be volatile and consumption-based taxes will form a smaller proportion of
total taxes than in the past.
Australia remains well placed to meet long-term challenges and future risks
Australia’s performance during the COVID-19 pandemic has demonstrated theresilience of our economy. This has been backed by an economic and fiscal strategy
that stabilised the economy when needed. The focus will move to debt reduction oncethe economic recovery is secure to ensure ongoing fiscal sustainability.

xii

Executive summary

In the years ahead, it will continue to be important to address the structural challenges
facing the economy and take opportunities to lift growth. It will also be prudent tostrengthen the budget over time to ensure Australia is prepared for known pressuresand unexpected risks.
These are long-term challenges that will require ongoing attention. Some immediatepriorities include increasing the capacity of our economy and our workforce byimproving the skills of workers, supporting participation in work, investing ininfrastructure and taking full advantage of digital technologies to boost productivity.
Governments will also need to manage spending pressures by improving the efficiencyof service delivery and ensuring support is targeted to those who need it most,particularly within the key areas of future spending such as health and aged care. It will
also be critical that essential government services are funded by taxes that are as fair,efficient and low as possible.

xiii

What is the Intergenerational
Report?
The Intergenerational Report examines the long-term sustainability of current policies
and how demographic, technological and other structural trends may affect theeconomy and the budget over the next 40 years.
This is the fifth Intergenerational Report, following those released in 2002, 2007, 2010
and 2015.
Past intergenerational reports have raised awareness of the demographic and otherlong-term challenges Australia is likely to face and the implications for economic
growth and fiscal sustainability. The 2002 and 2007 Reports highlighted the futurebudget pressures from a steadily ageing population. The 2010 Report emphasised thechallenge posed by climate change. In the wake of the Global Financial Crisis, the 2015
Report illustrated the long-term sustainability of alternative fiscal policy scenarios.
The projections contained in this report present what could happen over the next
40 years based on detailed analysis of historical trends and current policy settings. They
are designed to capture some of the fundamental trends that will influence economic
and budget outcomes should policies remain similar to current settings. They help tohighlight the significant risks and opportunities in Australia’s future.
All projections are inherently uncertain, particularly over long timeframes, and areunlikely to unfold as outlined in this report. Events will take place that are notanticipated in the report’s assumptions and government policies will change over time.
This report was prepared in especially uncertain times, with the global economic shockassociated with the COVID-19 pandemic continuing to unfold. Against this backdrop,
this report contains sensitivity analysis to highlight the variables that could significantly
affect economic and fiscal outcomes over the next 40 years.

xv

2021 Intergenerational ReportBox 1.

What is fiscal sustainability?

The role of the Intergenerational Report is to examine the long-termsustainability of current policies and how demographic, technological and otherstructural trends may affect economic growth and public finances.
Fiscal sustainability is important for maintaining macroeconomic stability,
reducing economic vulnerabilities and improving economic performance.
Fiscal sustainability is the government’s ability to manage its finances so it canmeet its spending commitments, now and in the future. It ensures future
generations of taxpayers do not face an unmanageable bill for government
services provided to the current generation.
Public finances are considered sustainable when the government can meet its
obligations without having to increase taxes or cut spending to an extent that is
unrealistic or would harm the economy. A stable debt-to-GDP ratio is generally
consistent with fiscal sustainability as it implies the government’s obligations are
growing no faster than its capacity to raise revenue. Lower debt levels are
generally more sustainable than higher debt levels, as they involve lower debt
servicing costs and risks. Part II of this report examines the drivers and risks ofdebt dynamics and the implications for fiscal sustainability.

How do we model current policy over the long term?
This report’s 40-year projections extend the economic and fiscal baseline presented in
the 2021-22 Budget. Projections are made for a range of demographic and economic
parameters taking into account historical averages or long-term trends. These are thenused to project revenue and spending over the next 40 years. Figure 1 shows how theeconomy affects the budget outlook.
The projections in this report are based on current policy settings. The report does notmake assumptions about future policy decisions. Where the operation of policy overtime is well defined, this report makes assumptions about the main variables relevant
for that policy. For example, where an income support payment is indexed to maintainits real value, a combination of demographic and economic projections is used toproject how many people will receive the payment, and inflation projections are used
to project future increases in the rate of the payment.
The long-term operation of government policy is not always well defined. For example,
due to technological progress it is unrealistic to expect government to fund exactly thesame medicines and medical procedures over the next 40 years. For this reason, thereport also uses assumptions based on analysis of historical drivers and information
about possible future trends, including non-demographic drivers such as technologicalxviWhat is the Intergenerational Report?

and behavioural changes. The assumptions underpinning the projections are detailed
in the Appendix.

Figure 1. How the economy affects the budget

Source: Treasury.

Long-term projections necessarily involve the exercise of judgement and simplifying
technical assumptions. This underscores the importance of viewing the projections as
one possible picture of the future based on expected structural pressures and existing
policy settings. In other words, the report presents a world that could be, rather thanwill be. In doing so, it helps governments to prepare for future challenges and takeadvantage of future opportunities.

xvii

Part I: The economy over the
next 40 years
1.

Economic projections

Overview
The COVID-19 pandemic has caused the most severe global economic
shock since the Great Depression. While Australia’s economic recovery iswell advanced, some effects will persist. At the same time, the pandemic
has not displaced the pre-existing demographic, technological and other
trends that will continue to shape the long-term economic outlook.
The Australian economy is projected to grow over the next 40 years at an
average rate of 2.6 per cent per year. This compares with 3.0 per centper year over the past 40 years. Real GDP per person is projected to growat an average annual rate of 1.5 per cent, just below the average of
1.6 per cent per year over the past 40 years. Nominal GDP growth isprojected to average 5.0 per cent per year, compared with 7.0 per centper year over the past 40 years.
Slower population growth is the main reason for the projected slowdown
in Australia’s economic growth. In addition, ageing will reduce
participation rates in the long term.
The projections assume that long-run labour productivity growth
converges to 1.5 per cent per year – consistent with the average growthrate in labour productivity over the 30 years to 2018-19. Achieving this will
require an improvement over recent performance. Government policies
and institutional settings can play an important role in lifting productivity
and ensuring individuals and businesses take full advantage of new
innovations and technologies.

1

2021 Intergenerational Report

Population, participation and productivity shape long-term economic growth
The Australian economy will be shaped by 3 drivers over the next 40 years:• the number of people in the working-age population (population)• the proportion of those who work and their working hours (participation)• the amount of output produced per hour worked (labour productivity).
These are the ‘3Ps’. Combined, they determine the quantity of goods and services theAustralian economy can produce. This is commonly referred to as potential GDP. As
spare capacity in the economy is absorbed over time, real GDP is projected to return topotential GDP. The future size and structure of the Australian economy are key
determinants of the living standards of all Australians. Nominal GDP measures the total
value of the output produced in Australia, by combining real GDP and prices. It is themain determinant of the tax base and, therefore, the government’s capacity to fundservices.
Potential GDP is a useful indicator of the trajectory of the economy over the long term.
While changes in demand over the business cycle can be an important driver of
economic activity in the short term, these temporary deviations in output are of lessimportance when averaged over a 40-year period. GDP is driven over the long term byincreases in the productive capacity of the economy. Policy choices that promote
growth in the 3Ps will increase potential GDP.

2

Part I: The economy over the next 40 years

Figure 1.1 The 3Ps framework

Source: Treasury.

The utility of this framework comes with caveats. The first is that potential GDP is onlya measure of how much the economy can produce at its productive capacity. While
GDP is often used as a measure of the economic wellbeing of a society as it reflects
income and living standards, it is not a holistic measure of either. Alternative measures
have been proposed to capture societal wellbeing, for example through incorporating
outcome indicators such as environmental quality, health and non-market outcomes.
Growth in potential GDP is not the only goal targeted by policy and not the only
measure of Australia’s progress. Population, participation and productivity can alsointeract with each other, with changes in one flowing through to one or more of theothers.
This report builds on the economic and fiscal projections in the 2021-22 Budget.
Employing the same projection methodology as used for the medium-term projectionsin the Budget, this report extends those projections to 2060-61. This extension is basedon projections for population, participation, productivity and prices.
This report is underpinned by information and assumptions about the trajectories of
the 3Ps. A macroeconometric model of the Australian economy is used to combine

32021 Intergenerational Reportthese trend inputs to generate a projection for potential GDP.1 On the nominal side,
key non-rural commodity export prices are projected based on cost curve analysis.
Domestic prices return over time to the mid-point of the RBA’s inflation target band.
The macroeconometric model is used to inform the path that real GDP takes to return
to potential GDP and domestic price inflation takes to return to the mid-point of the
RBA’s inflation target band. The macroeconometric model combines theseassumptions and trend inputs to generate a projection for real and nominal GDP. The
output is then used to inform the assessment of the government’s long-term fiscal
position set out in Part II.
While the Australian economy will experience fluctuations in economic activity overthe next 40 years, this part of the report focuses on the economic implications oflong-term trends in population, participation and productivity. It projects the long-term
path for each of the 3Ps, identifies associated risks and analyses the effects of the
COVID-19 pandemic.

Australia’s economy will continue to grow, but at a slower pace
Real GDP in Australia is projected to grow over the next 40 years, but at a slower pacethan the past 40 years. Real GDP in Australia is projected to grow at an average annual
rate of 2.6 per cent per year from 2020-21 to 2060-61, which is 0.4 percentage points
lower per year than the past 40 years. Should this projected growth rate eventuate, theAustralian economy will be more than two and a half times larger in 2060-61 than it isexpected to be in 2020-21.

Chart 1.1 Size of the Australian economy
$tn
6

$tn
6

5

5

4

4

3

3

2

2

1

1

0
2000-01

2010-112020-212030-312040-412050-5102060-61

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

The projected slowdown in Australia’s real GDP growth rate over the long term largely
reflects declining population growth. Annual population growth is expected to decline
over the next 40 years to 0.8 per cent in 2060-61, lower than the average annual growth
1

4

For further information on the economic projections methodology, see the Appendix.

Part I: The economy over the next 40 years

rate of 1.4 per cent during the past 40 years. The changing composition of Australia’s
population will also have implications for participation. Australia’s ageing population
will reduce the number of working-age people as a share of the population, and theold-age dependency ratio will continue to fall.
This report, consistent with previous intergenerational reports, assumes that labour
productivity growth converges to a historical average rate of growth. In this reportunderlying productivity growth converges to 1.5 per cent per year, the average growthrate in labour productivity over the 30 years to 2018-19.2 Given the current underlying
productivity growth rate is below 1.5 per cent, it is assumed that the transition to thelong-term growth rate of 1.5 per cent per year will take place over the next 10 years.
This is the same assumption as in the 2021-22 Budget. Real wages are projected toincrease in line with growth in labour productivity.
Growth in incomes and living standards will slow if productivity growth remains atcurrent rates. Government policies and institutional settings can play an important rolein lifting productivity and ensuring individuals and businesses take full advantage of
new innovations and technologies.
This report has been prepared as Australia’s economic recovery from the
COVID-19-induced economic recession is well underway. The Australian economy has
recovered strongly from its first recession in almost 30 years, with output andemployment returning to pre-pandemic levels faster than expected and ahead of any
major advanced economy. The COVID-19 pandemic and associated containment
measures, however, have profoundly affected Australian society and the economy, andare likely to shape the future in ways that are not yet apparent. The
COVID-19 pandemic is currently expected to affect the short- and medium-term
economic growth rates, and have minimal effects on real GDP growth beyond 2030.
However, the level of real GDP remains permanently lower than projections madebefore the COVID-19 pandemic.

2

Underlying productivity is also known as labour augmenting technical change. Long-term labour
productivity growth depends on trends in underlying labour productivity and the productive capitalstock. For further information, see the Appendix.

52021 Intergenerational ReportBox 1.1

The impact of COVID-19 on long-term economic growth

The COVID-19 pandemic has had substantial effects on Australia’s economy
throughout 2020 and 2021. Some effects are likely to persist.
The most enduring economic effect of the COVID-19 pandemic and associatedcontainment measures is likely to be from a lower population level. International
border restrictions have sharply limited migration and the COVID-19 pandemic
is also expected to lower the fertility rate in the short term. The lower populationlevel has also had flow-on effects to other elements of the 3Ps, such as theparticipation rate and, to a lesser extent, average hours worked.
The COVID-19 pandemic has had significant short-term effects on the labour
market. The unemployment rate increased by 2.2 percentage points between
March 2020 and July 2020 to peak at 7.4 per cent, while the participation rate
fell by 1.2 percentage points over the same period. Recovering economic activity
and the easing of restrictions saw Australia’s economy grow at the fastest paceon record in the second half of 2020. There are now more people in work andthe participation rate is higher than prior to the pandemic.
It is possible the COVID-19 pandemic has accelerated structural changes to theeconomy that were already underway. For example, aspects of businessdigitalisation that might otherwise have taken years have occurred in a matterof months. This acceleration of digitalisation may in turn boost productivity andcontribute to future economic growth.
However, it is not yet clear if the COVID-19 pandemic, which is having a large
economic impact today, will have a major impact on the main drivers ofAustralia’s economic outcomes over the next 40 years.
The impact of COVID-19 can be illustrated by comparing the projections
produced for this report with the medium-term projections made in the
2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO), which was the lastbudget update published before the onset of the COVID-19 pandemic.
While the impact of the COVID-19 pandemic will subside, the level of real GDP is
projected to be permanently lower than it was in the 2019-20 MYEFO by around
5 per cent in 2029-30. However, outside these immediate impacts, in thelong term productivity and population growth remain the key drivers ofimprovements in potential GDP.

6

Part I: The economy over the next 40 years

Chart 1.2 Real GDP growth compared with 2019-20 MYEFO
%
5

%
5

4

4
2019-20 MYEFO

3

3

2

2

2021 IGR

1

1

0

0

-1

-1

-2
2000-01-2
2004-05

2008-09

2012-132016-17

2020-212024-252028-29

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

Australia’s population is estimated to be smaller than it would have been in theabsence of the COVID-19 pandemic, as a result of reduced net overseas
migration and fewer births (Chapter 2 – Population).
The COVID-19 pandemic has also had a negative effect on productivity over the
past year, however it is uncertain if there will be any lasting effects from theshort-term shocks to productivity. Government tax incentives to bring forward
investment activity have played an important role in supporting capital
expenditure through a period of heightened uncertainty which will help offset
some of the impacts from the pandemic on the capital stock (Chapter 4 –Productivity).

Real GDP per person is expected to grow at 1.5 per cent per year on average
The level of real GDP per person is projected to almost double over the next 40 years.
Real GDP per person is projected to grow over the next 40 years at an average annual
rate of 1.5 per cent, from $76,700 in 2020-21 to $140,900 in 2060-61.
This means that, on average across the economy, a worker’s output in 2060-61 is
projected to be nearly double an equivalent worker’s output this year.
As has been the case over the past 40 years, productivity improvements are projected
to be the primary driver of growth in real GDP per person. As well as having individual
effects, the 3Ps interact with each other. For example, migration directly boosts
population growth and, because migrants tend to be younger and higher skilled, thispopulation growth can also support labour force participation and productivity.

7

2021 Intergenerational Report

Chart 1.3 Drivers of real GDP per person growth
ppt contribution
4
Population

ppt contribution
4
Participation

Productivity

3

3
Past 40 years

2

Next 40 years

1.5

1.5

1.6

1.5

1

1
0.2

0.1

0.2

0.0

0
-0.1
-1

2

0.0

0.0

0

-0.3

Share of
Participation Unemployment Average hours
population 15+
rate
rate
worked-1
Labourproductivity

Real GDP perpersonSource: ABS Australian National Accounts: National Income, Expenditure and Product; ABS Labour Force
Survey; ABS National, state and territory population; and Treasury.

Real GNI per person is expected to grow at 1.3 per cent per year on average
Real gross national income (GNI) per person – the average amount earned by each
Australian – is projected to grow at an average annual rate of 1.3 per cent over the next
40 years, from $77,900 in 2020-21 to $128,900 in 2060-61.
National income is affected by relative international prices, measured by the terms oftrade, in addition to a range of other factors including the drivers of real GDP growth.
Put simply, Australia’s income is affected by the prices received for goods and services
exports and the prices paid for goods and services imports. Real GNI per person grew
more strongly than GDP per person over the past 40 years due to the periods of strong
commodity prices. Over the period ahead, GNI per person is projected to grow slightly
slower than real GDP per person, largely as a result of prices for Australia’s commodity
exports which are projected to fall until 2025-26, before stabilising at long-term levels
thereafter. Real GNI growth will be negatively affected by falls in the terms of trade andslowing real GDP growth.

8Part I: The economy over the next 40 years

Chart 1.4 Average growth rates% growth
8

7.0
Past 40 years

6

Next 40 years

6

5.0

4

2

% growth
8

3.0
1.6

1.5

1.8

4

3.3
2.6

2.3
2

1.3

0

0
Real GDP perpersonReal GNI perpersonReal GDP

Real GNI

Nominal GDP

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

Nominal GDP is expected to grow at 5.0 per cent per year on average
Nominal GDP measures the total value of the output produced in Australia, by
combining real GDP and prices.
Taxes are levied on nominal incomes and expenditure. Changes in incomes, output or
prices all affect the amount of tax collected. In addition, several government payments
are indexed to various price measures. As such, changes in prices also affect the amountof total government payments.
Over the past 40 years, nominal GDP grew at an average of 7.0 per cent per year.
Nominal GDP growth is projected to grow at 5.0 per cent per year over the next
40 years.

Chart 1.5 Nominal GDP growth
%
10

%
10

8

8
Nominal GDP

6

Prices

6

4

4

2

2

0

0
Real GDP-2
2000-01

2010-112020-212030-312040-412050-51-2
2060-61

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

92021 Intergenerational Report

The terms of trade, inflation and wages are assumed to be stable in themedium and long term
The terms of trade measure export prices relative to import prices. They have asignificant influence on Australia’s GNI and nominal GDP. The terms of trade have been
increasing over the past few years, but are below the previous peak in 2011, at theheight of the mining investment boom (Chart 1.6).
Favourable terms of trade – periods when export prices are high relative to importprices – have a positive impact on domestic incomes. In these periods, Australia is able
to buy more imports for a given amount of exports.
The terms of trade flow through the economy via several channels.
• An increase in export prices contributes to higher domestic incomes, including
company profits.
• Higher domestic incomes support consumption and investment, which in turnsupport employment and wages growth.
• Stronger tax receipts from higher domestic incomes (in particular, company profits)
support greater general government revenue.
Consistent with the approach to commodity prices in the 2021-22 Budget, the real
prices of Australia’s commodity exports are expected to fall until 2025-26, before
stabilising at long-term levels. The terms of trade are also projected to return to, andremain around, their 2006-07 level from 2025-26 to 2060-61.
However, there is considerable uncertainty around this projection as unexpectedchanges in commodity demand and supply can generate significant short- andmedium-term commodity price movements. International developments, such as
geopolitical instability and climate change mitigation efforts, may also influence thelong-term growth path of the global economy and change demand for Australia’s
exports.

10

Part I: The economy over the next 40 years

Chart 1.6 Terms of trade
Index

Index

1.2

1.2

1.1

1.1

1.0

1.0

0.9

0.9

0.8

0.8

0.7

0.7

0.6

0.6

0.5

0.5

0.4
2000-01

2010-112020-212030-312040-412050-510.4
2060-61

Note: Indexed to 2018-19.
Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

Domestically, consumer price growth fluctuated widely throughout 2020, largely
resulting from the impacts of the pandemic and associated policy responses. Domestic
price inflation is projected to return over time to the mid-point of the RBA’s target bandof 2-3 per cent. Inflation is then assumed to stay at the mid-point of the RBA’s inflation
target band to the end of the projection period.
Growth in nominal wages reflects the outlook for labour productivity growth andinflation. Nominal wage growth is expected to increase in the near term, rising toaround 4 per cent per year in 2028-29 and remain stable at this rate of growth until
2060-61. This is consistent with the projection for domestic inflation and long-run
labour productivity growth, converging to 1.5 per cent per year.
Shifts in the international environment will also influence the economy and budget
directly through the terms of trade and indirectly through factors such as the extent of
global integration.
In recent decades, Australia has benefited greatly from Asia’s rapid economic growth,
increasing global economic integration, more open trade and geopolitical stability.
Over the next 40 years, changes in the international environment present both upsideand downside risks for the projections contained in this report.
The shift in economic weight to the Indo-Pacific observed in recent decades is expected
to continue over the next 40 years. In part, this will reflect population ageing in Europe
and the United States – although several large Asian economies will face their own
demographic challenges. Shifts in economic weight within the Indo-Pacific are also
expected, which could see the geopolitical environment in the region become lessstable and more contested than in recent decades.

112021 Intergenerational Report

Against this backdrop, there is the potential for international developments that reduce
economic integration, productivity, and growth. A less stable international
environment would require additional resources domestically to ensure national
security and build national resilience.

12

Part I: The economy over the next 40 years

2.

Population

Overview
Australia’s population is projected to grow faster than most otherdeveloped countries and reach 38.8 million in 2060-61. However, for the
first time in an intergenerational report, the population projection is being
revised down.
The COVID-19 pandemic is causing a demographic shock that will beevident in Australia’s population for years to come, with temporarily lower
inward migration as well as expected delays in women having children.
Alongside the shock from the COVID-19 pandemic, the long-run fertility
rate is expected to be lower than previously estimated. Migration is
expected to continue to be the largest source of population growth in thelong term.
Australia’s greatest demographic challenge is the ageing population caused
by increasing life expectancies and falling fertility rates. As the population
ages, there will be fewer people of working age relative to the number ofolder Australians. This presents long-term economic and fiscal challenges,
similar to those faced in most comparable countries.
Migration plays a role in offsetting this demographic challenge by delaying
the effects of the ageing population. However, migration is not a complete
solution to the challenges associated with ageing, given migrants also age.
Migration needs to be managed well to ensure it continues to support
higher living standards.

Australia’s population will continue to grow, but at a slower rate
Australia’s population has grown at an annual average rate of 1.4 per cent over the past
40 years. Restrictions on migration in response to the COVID-19 pandemic are expected
to reduce population growth to a low of 0.1 per cent in 2020-21 – the slowest growthin over a century.
Population growth is expected to recover to 1.3 per cent per year by 2023-24, but willthen gradually slow, falling to 0.8 per cent per year by 2060-61 (Chart 2.1). The
projected slowdown is due to a falling contribution from natural increase and net
overseas migration falling as a share of the population, which is driven by an
13

2021 Intergenerational Report

assumption that the level of net overseas migration remains fixed over the long term
consistent with current Government policy for the permanent Migration and
Humanitarian Programs.

Chart 2.1 Australia’s population growth
%
2.5

%
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2000-01

2010-112020-212030-312040-412050-510.0
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

Continued growth, albeit at a slower rate, means Australia’s total population is
projected to reach 38.8 million in 2060-61. While this is a significant increase, it is lower
than previous projections. This downward revision, the first in an intergenerational
report, is due to the effects of the COVID-19 pandemic on migration, as well as updates
to long-term trends. The most significant of these trends is the fertility rate being
further below the rate required to sustain the size of the population than previously
projected.

Chart 2.2 Australia’s population levels
m
40

m
40

35

35

30

30

25

25

20

20

15
2000-01

2010-112020-212030-312040-412050-51

Source: ABS National, state and territory population, September 2020, and Treasury.

14

152060-61

Part I: The economy over the next 40 years

Policy changes to the Migration Program over the past 2 decades have led to higher
migration levels and faster population growth. Australia’s population has grownsignificantly faster than was projected in 2002. The Australian population reached25.7 million at the end of 2019-20, 20 years earlier than projected in the2002 Intergenerational Report.

Chart 2.3 Population projections across intergenerational reports
m
40

m
40
IGR 2015
IGR 202135

35

IGR 20103030IGR 2007
IGR 2002

25
20
15
2000-01

25
20

2010-112020-212030-312040-412050-5115
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

Migration will continue to drive population growth
Australia’s population growth has been driven by net overseas migration, which
accounted for around 60 per cent of growth in the last decade.3 This is expected toincrease to around 74 per cent by 2060-61.
Net overseas migration is the net gain or loss of population through immigration to,and emigration from, Australia. It is measured by counting people who stay in Australia
for 12 months or more over a 16-month period. This includes individuals on permanentand temporary visas, as well as returning and departing Australian citizens. Net
overseas migration varies with changes in policy, economic conditions and global
movements of people.
Government migration policy influences the size of the population, with the size andcomposition of the permanent Migration Program confirmed each year through thebudget process. The level of net overseas migration in Australia has risen with theplanning levels of the Government’s permanent Migration Program, in addition to anincrease in temporary migration over the last decade. These planning levels increased
from 80,800 places in 1995-96 to 190,000 places in 2012-13, before decreasing to

3ABS, National, state and territory population, September 2020 (2021).
15

2021 Intergenerational Report

160,000 in 2019-20.4 After 4 years at 160,000, the permanent planning level thenreturns to 190,000 in 2023-24. The eventual intake of migrants can be lower than theplanning level.
The COVID-19 pandemic is causing a short-run shock to net overseas migration, which
is forecast to be negative as more people leave the country than enter it. In net terms,
97,000 people are forecast to leave Australia in 2020-21 and 77,000 are forecast to
leave in 2021-22. Following this, net overseas migration is forecast to recover to reach
235,000 people per year by 2024-25 and is assumed to stay at this level until the endof the projection period.
The long-run assumption of 235,000 people per year is based on current Government
policy, with annual planning levels of the permanent Program assumed to continue atthe 2023-24 level of 190,000 people, the Humanitarian Program assumed to continue
at 13,750 people, and flows of temporary migrants, Australian citizens and departing
permanent residents assumed to continue in line with historical averages.5 The
long-run assumption of fixed net overseas migration means that, as the population
grows, the contribution of migration to overall population growth over the projection
period declines each year.

Chart 2.4 Net overseas migration
'000
350

'000
350

300

300

250

250

200

200

150

150

100

100

50

50

0

0

-50

-50

-100

-100

-150
2000-01

2010-112020-212030-312040-412050-51-150
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

4

5
16

H. Spinks, Australia’s Migration Program, Parliamentary Library Background Note
(Canberra: Parliament of Australia, 2010); Department of Home Affairs, Planning
Australia’s 2021-22 Migration Program (Canberra: Department of Home Affairs, 2021).
For further detail on the long-run net overseas migration assumption, see the Appendix.

Part I: The economy over the next 40 years

Chart 2.5 Net overseas migration as a percentage of the population
%

%

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5
2000-01

2010-112020-212030-312040-412050-51-0.5
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

Understanding migration and its effects
To plan for future migration-driven population growth, it is important to consider its
effects on Australia’s economy, fiscal sustainability, environment and planning, andsocial cohesion.

17

2021 Intergenerational Report

Figure 2.1 Framework for understanding the impact of migration

Source: Adapted from Productivity Commission, 2016 Migrant Intake into Australia, Inquiry Report No.77.

Immigration policy settings
The Government decides the policy settings of the Migration Program based on the
supply of potential migrants from other countries and the domestic context. These
decisions include:••••the number of migrants
the types of migrants
the locations where migrants initially settle
the pathways from temporary to permanent migrant and from permanent
migrant to citizen.

These policy decisions, as well as the characteristics of those who apply to migrate toAustralia, play a large role in how migrants participate in the economy and contributeto the overall prosperity of Australia.

18Part I: The economy over the next 40 years

Interaction between permanent and temporary migration
The total level of net overseas migration over time is composed of 2 main factors – thesize of the permanent Migration Program, and the change in the stock of temporary
visa holders.
Temporary migration is demand driven and largely uncapped, limited only by meetingvisa eligibility criteria. At the end of a temporary visa, migrants can apply for a new
temporary visa, apply for a permanent visa, or depart Australia. This leads to an ongoingflow of temporary migrants in and out of the country.
Changes in the flows of temporary migrants can change the size of the stock of
temporary migrants in Australia. Temporary visa holders typically make up the majorityof overseas arrivals in any particular year. However, while some temporary migrants
leave Australia, a significant portion transition into permanency. Permanent migrants
make up the majority of migrants in Australia, when accounting for those who arrive as
temporary migrants and later transition into permanent residency.
Temporary migration provides a pipeline of migrants to the skilled stream of thepermanent Migration Program. Over half of those on temporary skilled visas transition
to permanency.6 Temporary migrants who arrive closer to their peak earning ages, andare more highly skilled, make a significant contribution to the Australian economy.
Permanent migrants who enter the country on temporary skilled visas have muchhigher incomes than those who enter on other temporary visas or directly through thepermanent stream.7
Economic and fiscal impacts of migration
The level and composition of the Migration Program are both important for the way
they influence population change, and Australia’s economy and budget.
As migrants are, on average, younger than the existing Australian population, migration
reduces the average age of the population and slows the rate of population ageing.8
This is not a complete solution to the long-term challenges associated with an ageing
population as migrants also age. However, a well-targeted, skills-focused Migration
Program can better support our ageing population by supplementing the stock ofworking-age people, slowing the transition to an older population, and improving
Australia’s fiscal outcomes. In 2018-19, the latest data available prior to the
COVID-19 pandemic, 83 per cent of net overseas migrants were people of working age,678Treasury and the Department of Home Affairs, Shaping a Nation (Canberra: AustralianGovernment, 2018).
Treasury analysis of the average taxable income (2015-16) of permanent migrants bytemporary visa history using the ABS Multi-Agency Data Integration Project.
Centre for Population, Population Statement 2020 (Canberra: Centre for Population, 2020).
192021 Intergenerational Reportcompared with 65 per cent of the existing population.9 At June 2019, 46 per cent of theAustralian population was younger than 35 years old, compared with 82 per cent of
new migrants.

Box 2.1

Economic and fiscal impacts of proportional migration levels

This sensitivity analysis illustrates the effects of migration on Australia’s
economic and fiscal outlook. Net overseas migration is held at a constant
0.82 per cent of the population after the end of the medium term. As a result,net overseas migration reaches 327,000 people per year in 2060-61, comparedwith 235,000 per year in the baseline population projections.
This sensitivity analysis projects a higher population growth rate and total
population of 40.5 million in 2060-61, effectively replacing net overseas
migration losses during the COVID-19 pandemic over the long term. This is
1.7 million people, or 4.3 per cent, higher than the baseline population
projections. The increase in population is made up of an additional net 1.3 million
migrants and 0.3 million extra births attributed to the additional migrants.

Chart 2.6 Population growth with proportional migration
%
2.5

%
2.5

2.0

2.0

1.5

Proportional migration

1.0

1.5
1.0

2021 IGR
0.5
0.0
2000-01

0.5

2010-112020-212030-312040-412050-510.0
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

920

ABS, Migration, Australia, 2018-19 financial year (2021). The unusual distribution of net
overseas migration due to the COVID-19 pandemic in 2019-20, particularly the large
number of returning Australians, meant that the share of net overseas migration ofworking age was much lower than usual.

Part I: The economy over the next 40 years

The higher overall population due to proportional migration results in an
increase in the level of real GDP of 4.7 per cent by 2060-61.

Chart 2.7 Impact of proportional migration on real GDP growth% GDP growth5% GDP growth
5

4

4
Proportional migration

322021 IGR

3
2

1

1

0

0

-1
2000-01

2010-112020-212030-312040-412050-51-1
2060-61

Source: ABS National Accounts: National Income, Expenditure and Product, and Treasury.

As migrants on average are younger than the overall Australian population,
increasing the level of migration increases the working-age population anddelays the effects of population ageing. This lifts the participation rate in thesensitivity analysis by around 0.6 percentage points by 2060-61. The increased
participation rate flows through to a small positive lift in the level of real GDP perperson of 0.4 per cent by 2060-61. This sensitivity analysis does not take into
account any productivity effect of Australia’s Migration Program. It also does nottake into account other factors that may influence labour force participation
beyond age and gender, such as a worker’s skill or experience. Doing so maychange the contribution of migration to GDP per person.
The increased long-run level of migration and increase in the working-age
population benefits the budget. Under this sensitivity analysis there is projected
to be additional government spending across a variety of categories including
infrastructure and payments to individuals. However, while government
spending increases in nominal terms, it is projected to decrease as a share of theeconomy. This is because the larger population is projected to increase GDP
more than government payments. In addition, taxation receipts are projected tobe larger due to the larger economy. As a result of these 2 factors, the underlying
cash balance is 0.5 percentage points of GDP higher by 2060-61, compared withthe baseline projections.

21

2021 Intergenerational Report

Chart 2.8 Impact of proportional migration on the underlying cash
balance% of GDP2% of GDP2

00
Proportional migration
2021 IGR

-2

-2

-4

-4

-6

-6

-8

-8

-10
2000-01

2010-112020-212030-312040-412050-51-102060-61

Source: Treasury.

The cumulative effect of improved budget positions and a larger economy is areduction in projected net debt as a share of GDP by 4.8 percentage points by
the end of the projection period.

The composition of the Migration Program matters
Treasury modelling shows that permanent migrants who arrive younger and are highly
skilled make a higher economic and fiscal contribution during their time in Australia,
compared with those migrants who arrive later in life or are lower skilled. This is largely
because permanent migrants tend to arrive early in their working life and therefore
spend longer in the workforce, and those who are highly skilled are likely to have highrates of workforce participation and labour productivity. This finding is reflected in
Charts 2.9 and 2.10, which show that migrants selected via the Skill stream deliver ahigher economic and fiscal dividend than those arriving via the Family stream andHumanitarian Program. Chart 2.10 includes both the fiscal benefits of migrants fromadditional tax revenue and the fiscal costs from additional Australian Government
expenditure, including on aged care, education, health, infrastructure, transfer
payments and settlement services. These results do not include the fiscal impacts atthe state and local government level.101022

For further information, see the Appendix.

Part I: The economy over the next 40 years

Aside from age and skill, other migrant characteristics such as English-speaking ability,
complementarity with the existing labour force, and entrepreneurship have also been
associated with higher economic and fiscal contributions.
Charts 2.9 and 2.10 show the Family stream and the Humanitarian Program deliver
lower economic and fiscal dividends, reflecting that these programs are driven by social
objectives. The Family stream supports family reunions, while the Humanitarian
Program provides permanent resettlement to people who are subject to persecution,
substantial discrimination, or significant harm in their home country. While the Skill
stream tends to have higher economic and fiscal benefits, the Family stream andHumanitarian Program have other non-economic benefits, including supporting family
reunion, increasing cultural diversity and fulfilling our international obligations.

Chart 2.9 Lifetime contributions to real GDP (direct and indirect effects)
per permanent migrant, by income$m (NPV)
4.5$m (NPV)

4.2

4.5

4.0

Real GDP
Indirect taxes
Gross operating surplus
Compensation of employees

3.5
3.0
2.5

4.0
3.5
3.0
2.5

2.0

2.0

1.5

1.5

1.5

1.0

1.0

0.4

0.5
0.0

1.0
0.5
0.0

Skilled Primary

Skilled Secondary

FamilyHumanitarian

Note: The modelling only directly captures migrants who arrive aged 21 to 95. The Skill stream is comprisedof primary and secondary migrants. Primary migrants are the main visa holders who satisfy the primary
criteria for the grant of a visa. Secondary migrants are accompanying family of primary migrants, such as
spouses and dependents. NPV stands for net present value. For further information, see the Appendix.
Source: Treasury.

23

2021 Intergenerational Report

Chart 2.10 Lifetime fiscal impact on the Australian Government budget perpermanent migrant, by tax and expenditure type$000 (NPV)$000 (NPV)700

Net impact
Income tax
Indirect taxes
Education
Health and aged care
Transfer payments
Other expenditure

600

500
400
300

700
600

500
400
300

319

200

200

100

100

0

-100

0

-18

-100
-104

-137

-200
-300

-200
-300

-400

-400

-367

-500

-500

-600

-600

-700

-700
Skilled Primary Skilled Secondary

FamilyHumanitarian

Generalpopulation

Note: This chart shows the net lifetime fiscal impact of different cohorts for a selection of key tax and
expenditure types that can be attributed to individuals. Other expenditure includes Australian Government
spending on infrastructure and settlement services. The results do not include all Australian Government
revenue sources (such as corporate tax) or expenses (such as defence) or fiscal impacts at state and local
government level. As estimates are sensitive to assumptions such as the discount rate, they are bestinterpreted as relativities rather than in absolute terms. The Skill stream is comprised of primary andsecondary migrants. Primary migrants are the main visa holders who satisfy the primary criteria for the grantof a visa. Secondary migrants are accompanying family of primary migrants, such as spouses and dependents.
NPV stands for net present value. For further information, see the Appendix.
Source: Treasury.

Managing the costs and benefits of migration
In the post-war era, Australia has been able to manage migration with relatively few
social, political, or economic challenges. While the impact of migration can be
estimated in economic measures such as GDP per person, broader quality-of-life
impacts are more difficult to measure. For example, the contributions of migrants tocultural diversity, community connections or innovation are important but difficult toquantify.

24

Part I: The economy over the next 40 years

The economic and social pressures and capacity constraints that result from an inward
flow of migrants also need to be managed carefully. Migration should be kept at or
below the capacity of the destination city or region to absorb new migrants, taking into
account impacts on incumbent populations.
Sustainable migration provides greater certainty for governments, businesses andindividuals to plan for the future. Higher migration rates bring forward higher demand
for services, natural resources, urban land and infrastructure, which may be in limited
supply and vary significantly based on region. Governments at all levels need to ensurethat planning and infrastructure provision keep pace with current and future migration
rates and ensure that migrants have access to essential services – such as public
transport, support services and housing – and can meaningfully integrate into society.
This requires transparency, consistent decision making and careful planning by all levelsof government. The National Population and Planning Framework, agreed by theAustralian Government, state and local governments in 2020, provides a mechanism topursue these population planning goals.

The total fertility rate is continuing to decline
As a result of the COVID-19 pandemic, the total fertility rate is assumed to fall in the
short term. The total fertility rate is forecast to fall from 1.65 babies per woman in
2019-20 to 1.58 babies per woman in 2021-22 due to economic uncertainty causing
some people to delay having children. In 2023-24 the total fertility rate is assumed totemporarily rise to 1.69 babies per woman as 80 per cent of the delayed births occur,
before gradually declining to 1.62 babies per woman by 2030-31.11
The fertility rate is then assumed to remain at 1.62 babies per woman until 2060-61.
This is a revision down from the 2015 Intergenerational Report, which assumed thetotal fertility rate was 1.90 babies per woman. This previous assumption was based on
a 35-year average that included a temporary period of relatively high fertility between
2004 and 2007. The current assumption is based on a 60-year analysis of the long-term
trend of declining fertility driven by women having children later in life, and having
fewer children than women before them at the same ages.
Over the next 40 years, the fertility rate is projected to remain well below the
replacement rate of 2.1 babies per woman, which is the level required to keep the
population size steady assuming no net overseas migration and unchanged mortality.
Australia’s fertility rate has been below the replacement rate since 1976-77. Despite
this, natural increase has continued to contribute positively to population growth as
the number of women of childbearing age has continued to increase.

11

P. McDonald, A Projection of Australia’s Future Fertility Rates, (Canberra: Centre forPopulation, 2020).
25

2021 Intergenerational Report

Chart 2.11 Total fertility rate
Babies per woman
2.1

Babies per woman
2.1

2.0

2.0

1.9

1.9

1.8

1.8

1.7

1.7

1.6

1.6

1.5
2000-01

2010-112020-212030-312040-412050-511.5
2060-61

Source: Centre for Population, Population Statement (2020) and McDonald (2020).

Fertility rates among women in their 20s have been, on average, declining since theearly 1980s. By contrast, the fertility rate for women in their 30s has remained broadly
stable since the mid-2000s. These trends are a result of the shift towards women having
their first child later in life and having fewer children overall.12

Chart 2.12 Total fertility rate by age cohort
Babies per woman

Babies per woman

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2000-01

2010-11
15-19

2020-2120-29

2030-312040-41

30-39

Source: ABS customised data request (2020) and McDonald (2020).

1226

P. McDonald, op. cit.

40-49

2050-51
TFR

0.0
2060-61

Part I: The economy over the next 40 years

Life expectancies will continue to increase
Life expectancies in Australia have been improving over time (Chart 2.13).13 This is due
to advances in the way medical conditions are diagnosed and treated, as well as
improvements in personal safety which have contributed to declining mortality rates.
Life expectancy at birth is expected to continue to increase from 80.9 years for men
and 85.0 years for women in 2018, to 86.8 years for men and 89.3 years for women by
2061. However, projections have been revised down compared with the2015 Intergenerational Report to reflect the recently observed slowdown in mortality
improvements.
In 2013, dementia became Australia’s second leading cause of death.14 Dementia
prevalence is expected to continue to rise as a result of Australia’s ageing population
over the next 40 years. It is expected to overtake ischaemic heart disease to become
the leading cause of death in coming years.15 Increasing rates of dementia will have asignificant impact on Australia’s health and aged care systems and present one ofAustralia’s most pressing health challenges.
The life expectancy projections are based on the assumption that the trend of mortality
improvement over the past 25 years continues over the next 25 years.16 Thereafter, therate of mortality improvement is expected to slow.

13

14
15
16

This report uses the ‘period’ rather than ‘cohort’ life expectancy method. The ‘period’
method measures life expectancy as the average age to which a person is likely to live given
the mortality rates in a given year. It does not take into account the potential advances inlife expectancy that could happen during a person’s lifetime.
ABS, Causes of Death Australia, 2013 (Canberra, 2015).
ABS, Causes of Death Australia, 2015 (Canberra, 2017).
The projections over the next 25 years are based on mortality improvement rates observed
between the 1991 to 2016 Australian Life Tables.
27

2021 Intergenerational Report

Chart 2.13 Life expectancy at birth
Year
90

Year
90

Females

85

85

Males

80

75
2000-0180

2010-112020-212030-312040-412050-5175
2060-61

Source: ABS Australian Historical Population Statistics; ABS Life Tables: States, Territories and Australia,
2016-18; ABS Life Tables, 2017-2019; and Treasury.

Natural increase is projected to decline
Natural increase – the population change resulting from the number of births minus
the number of deaths – is expected to continue to contribute positively to population
growth (Chart 2.14). This is driven by growth in the number of women of childbearing
age.
Deaths are projected to continue to increase faster than births, growing by an annual
average rate of 1.6 per cent over the 40 years to 2060-61, with births projected toincrease at an average rate of 0.7 per cent over the same period. This means thecontribution of natural increase to population growth will fall to around one quarter ofannual population growth by 2060-61, compared with around 44 per cent of population
growth over the past 20 years.

28

Part I: The economy over the next 40 years

Chart 2.14 Natural increase
'000

'000

180

180

160

160

140

140

120

120

100

100

80

80

60
2000-01

2010-112020-212030-312040-412050-5160
2060-61

Source: ABS National, state and territory population, September 2020, and Treasury.

Population ageing will present economic and fiscal challenges
Australia’s greatest demographic challenge is the ageing population, caused byincreasing life expectancies and falling fertility rates. From 2019-20 to 2060-61, thenumber of people aged 65 and older will double to 8.9 million. In 2060-61, 23 per centof the population is projected to be 65 and older, an increase from 16 per cent in
2019-20. The number of people aged 85 and older will more than triple to 1.9 million.
In 2060-61, 5 per cent of the population is projected to be 85 and older, up from
2 per cent in 2019-20. In 2019-20, there were 6,400 centenarians. In 2060-61, there areprojected to be 40,900 centenarians.

292021 Intergenerational Report

Chart 2.15 Older Australians by level and share of population
m
8

m
8

7

2019-20

17.8%

6

7

2060-61

6

5

5

4

4
14.3%

3

3

2

2

5.0%

1

1
2.1%

0
65-84

0
85+

Source: ABS National, state and territory population, September 2020, and Treasury.

Chart 2.16 Population age pyramid
Australia
85+

2060-6180 - 84

2019-2075 - 79
70 - 74
65 - 69

60 - 64
55 - 59

50 - 54
45 - 49

40 - 44
35 - 39

30 - 34
25 - 29
20 - 24
15 - 19
10 - 14

5-9
0-4

8%

6%

4%
Males

2%

0%

0%
Age group(years)

2%

4%

6%

8%

Females

Source: ABS National, state and territory population, September 2020, and Treasury.

The number of working-age people (aged 15 to 64) as a share of the population is
projected to fall over the next 40 years, in line with an increasing share of people aged
30

Part I: The economy over the next 40 years

over 65. The ratio of working-age people to those over 65 is known as the old-age
dependency ratio. In 1981-82, for every person aged over 65, there were 6.6
working-age people. In 2019-20, for every person aged over 65, there were
4.0 working-age people. This ratio is projected to fall further – by 2060-61, for every
person aged over 65, there will only be 2.7 working-age people. The rapid decline in
the old-age dependency ratio between 2010-11 and 2029-30 is largely due to the baby
boomer generation reaching age 65. The ratio continues to decline from the mid-2030s
after this transition is complete, but does so less rapidly than before.
The falling old-age dependency ratio presents challenges for Australia’s long-term
economic growth and fiscal outlook. A working-age person’s taxes will be required tosupport a greater number of people aged over 65. A larger older population will require
greater government spending in healthcare, the Age Pension and end-of-life support,
and has implications for participation and productivity growth. As the population
continues to age and adds pressure to the budget, government policy will need to adapt
and foster economic growth to overcome these fiscal challenges.

Chart 2.17 Old-age dependency ratio
People aged 15-64
to people aged65+
Baby boomers turning 65
6People aged 15-64
to people aged
65+
6

5

5

4

4

3

3

2
2000-01

2010-112020-212030-312040-412050-512
2060-61

Note: Number of people of traditional working-age (15-64) for every person aged 65 and over.
Source: ABS National, state and territory population, September 2020, and Treasury.

31Part I: The economy over the next 40 years

3.

Participation

Overview
The participation rate has increased over the past 40 years to reach record
high levels of 66.3 per cent in March 2021. This has been driven by asignificant increase in participation by women aged 24 to 54, and older
Australians.
The participation rate is expected to decline to 63.6 per cent by 2060-61 as
the proportion of older Australians in the population increases. However,
the effect of ageing is expected to be partly offset by continued increases
in participation of women. This largely reflects that younger generations of
women participate more than older generations and are expected tocontinue to do so as they get older. While female participation rates haveincreased considerably in Australia in recent decades, there is scope forfurther increases.
The average number of hours worked per week has declined from around35 in 1978-79 to around 32 in 2018-19. This reflects an increase in theshare of part-time workers, largely driven by the increased participation of
women and older Australians, as well as increased use of part-time workby men. These trends are expected to continue (after partly recoveringfrom a significant fall in 2019-20 due to COVID-19), resulting in a projected
decline to an average of 31 hours worked per week by 2060-61.
Technological developments, the continued shift towards a service-based
economy, and broader changes in the occupational structure of theAustralian workforce have the potential to support participation into the
future.

Participation is at record levels
Participating in the labour force brings many benefits to individuals and the broader
economy. Work provides financial security, social connection, and more opportunities
to contribute to society. Maintaining a high rate of labour force participation is central
to supporting future economic growth, easing spending pressures created by an ageing
population, and sustaining revenues for government services.

33

2021 Intergenerational Report

Australians in most age groups are participating in the labour force more than everbefore. In March 2021 the total participation rate reached its highest level on record at
66.3 per cent, up from 64.8 per cent at the end of 2014-15.
The record rate of participation seen in March 2021 is the result of longer-term trends
in the Australian labour market, some of which have spanned several decades.
Increased participation by older Australians has been supported by greater life
expectancy and better health, as well as greater availability of part-time and lessphysically demanding jobs.

Chart 3.1 Male participation
%
100

80

60

25-34

35-44
45-54

15-24

55-64

Chart 3.2 Female participation
%
100

%
100

80

80

60

60

%
100

45-54
35-44
15-24

80

60

25-34
40

40

40

40
55-64

20

20
65+

0
Jun-78

Sep-92

Dec-06

20

20
65+

0
Mar-210
Jun-78

Sep-92

Dec-060
Mar-21

Note: Data are seasonally adjusted.
Source: ABS Labour Force.

Australia’s migration policy settings have supported participation. These policies havetargeted young skilled migrants and resulted in migrants generally arriving in Australia
at ages with relatively high participation rates (Chapter 2 - Population).
While participation has increased across most age groups, the largest contribution has
been from increased participation by women. Female participation has been boosted
by several factors, notably changing social attitudes, declining fertility rates, changes ingovernment policies (particularly child care), and increasing availability of part-timeand flexible working arrangements. However, there are differences in women’s
increased participation at different life stages, reflecting that factors affecting
participation are not the same across all ages.

Projections of future participation rates
This report uses a new methodology to project participation rates: participation rates
at later stages of life for a given generation are based on the observed participation forthat generation at younger ages. In this model, changes in aggregate participation rates
34

Part I: The economy over the next 40 years

mainly reflect 2 trends: the changing demographic structure of the workforce (inAustralia’s case, an ageing population), and the changing propensity to participate in
the workforce between different birth cohorts.
In the first trend the participation rate typically follows a familiar profile through life;
starting low during school age, peaking around middle age, and tapering towards
retirement. As the population ages there will be more people in the later stage of thisprofile, thus lowering the overall participation rate.
The second trend reflects how life cycle participation profiles have shifted up or downfrom one generation to another. Participation rates are higher for more recent
generations of women and lower for recent generations of men. Upward shifts inparticipation for women have more than offset the downward shifts for men, resulting
in a positive impact on overall participation. These generational cohort effects havecontributed to moderating the effect of the ageing population.
The total participation rate is projected to decline from 66.3 per cent in March 2021 to
63.6 per cent in 2060-61. The decline is due to the negative effect of ageing on theparticipation rate being only partially offset by higher participation for younger, andfuture, generations.

Chart 3.3 Historical and projected labour force participation rates
%
85

%
85

Age 15-64
80

80

75

75

70

70
Age 15 +65
60
1980-81

1990-91

2000-01

2010-112020-212030-312040-4165

2050-5160
2060-61

Note: For further information, see the Appendix.
Source: ABS Labour Force and Treasury.

35

2021 Intergenerational Report

The participation rate for those aged 15 to 64 is projected to increase over the next
2 decades and then remain broadly stable. This projected increase is mainly due to theincreased participation rates of women aged 40 years and over. This reflects the higher
likelihood of younger generations of women participating in the labour force, who are
expected to continue participating later in life. This means that as these generations
age and replace older generations, the participation rate will increase.
Over the past 40 years, participation rates have increased in most age groups.
However, over the next 40 years, participation rates are projected to significantly
increase only at ages 40 and over, with little change at younger ages. Both historicalchanges and projected changes are mainly due to changing workforce participation
patterns for women. Higher participation at certain ages will be more than offset by
population ageing, resulting in a projected decline in the total participation rate.

Chart 3.4 Participation rates over the life cycle
%
100

%
100

90

90

2060-61

80

80
2019-20

70

70

1980-81

60

60

50

50

40

40

30

30

20

20

10

10

0
15-19

0
20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70+

Source: ABS Labour Force and Treasury.

The total participation rate has consistently outperformed the projections in pastintergenerational reports, with projected participation rates revised up in each reportsince 2007 (Chart 3.5). The 2002 Intergenerational Report projected that the labour
force participation rate would fall to 61 per cent by 2020. However, the participation
rate reached a high of 66.3 per cent in March 2021. The stronger than expected
outcomes and the adoption of a new methodology results in projected participation
remaining higher for longer before the effects of ageing dominate.

36Part I: The economy over the next 40 years

Chart 3.5 Participation rates across intergenerational reports
%
68

%
68

66

2021 IGR

64

64

62

2015 IGR

60

2010 IGR

58

62
60
58

2007 IGR

56
54
2000-01

66

2002 IGR
2010-112020-212030-312040-412050-5156
54
2060-61

Source: ABS Labour Force and Treasury.

While the participation rate measures the share of the population that is either working
or actively looking for work, the size of the economy depends on what proportion of
those wanting to work cannot find employment – the unemployment rate. In thisreport it is projected that the unemployment rate falls to 4¾ per cent and remains
there.
The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be
4¾ per cent, based on analysis suggesting that the NAIRU was between 4½ and
5 per cent prior to the COVID-19 pandemic. This is lower than in the2015 Intergenerational Report, which assumed a NAIRU of 5 per cent. A lower NAIRU
increases the supply of available labour in the economy and in turn increases potential
output.17
The workforce is ageing but working longer
Population ageing is projected to significantly lower the total participation rate. Prior
to COVID-19, the participation rates for men and women aged 65 years and over werearound 20 and 10 per cent, respectively, compared with a total participation rate ofaround 66 per cent. Due to low fertility rates and increased life expectancy, the shareof the population aged 65 years and over is expected to increase from 16 per cent in
2019-20 to 23 per cent by 2060-61 (Chapter 2 – Population).
There has been an increase in the proportion of older people who remain engaged in
the workforce. This likely reflects changing social attitudes towards older workers,
improved health at older ages and an increase in less physically demanding
employment opportunities. The increase in the share of part-time jobs has likely also

17

H. Ruberl et al., ‘Estimating the NAIRU in Australia’, Treasury Working Paper 2021-01 (2021).

37

2021 Intergenerational Reportcontributed to older people transitioning from full-time work to part-time work before
retirement. The current generation of older women has had significantly higher levelsof workforce engagement throughout their lives, and this has likely increased theirworkforce participation at older ages.
The gradual increase to the female Age Pension eligibility age beginning in the 1990s is
also likely to have had an effect. There were significant increases in female participation
at ages 60 years and over between 1995 and 2013.
More recently, further increases in the Age Pension eligibility age for both men andwomen have been legislated. These most recent changes can be expected to affectfuture participation rates.
Participation by women is likely to continue increasing
The sustained increase in the female participation rate in Australia has been larger thanprojected in previous reports but is broadly mirrored by the experience of similarcountries. However, the female participation rate remains well below that of males. In
2019-20, the participation rate for women aged over 15 was 60.5 per cent, comparedwith 70.4 per cent for men. As participation rates for women aged over 40 are expected
to increase, the gap between female and male participation is expected to narrow byaround 2 percentage points by 2060-61. Continued policy support could further
encourage female participation.

Chart 3.6 Historical and projected participation rates, by gender
%
80

%
80

75

75
Male

70
Total

65

70
65

60

60
Female

55

55

50

50

45

45

40
1980-81

1990-91

2000-01

2010-112020-212030-312040-412050-5140
2060-61

Note: For further information, see the Appendix.
Source: ABS Labour Force and Treasury.

Improvements to women’s participation and economic security are not just meaningfulat an individual and societal level but could significantly increase potential GDP and
thereby add to Australia’s economic growth. It is estimated that 20 to 40 per cent ofper person growth in the United States between 1960 and 2010 may be due to the38

Part I: The economy over the next 40 years

reduction of barriers faced by women and minority groups that prevented making thebest use of people’s talents in the economy.18
Changes in social attitudes and legislation over past decades have allowed women tojoin the labour market and gain educational qualifications to enter skilled professions.
Women are now more likely to have a non-school qualification than men (70 per centof women compared with 68 per cent of men), and to have a Bachelor degree or above(39 per cent compared with 31 per cent).19

Chart 3.7 Share of total
employment by industry

Chart 3.8 International
comparison of female participation
rates (ages 15-64)

%
20

%
80

%
80

%
80
New ZealandServices (RHS)
15

Manufacturing (LHS)

10

5Construction (LHS)
Agriculture (LHS)

70

75

60

70

50

65

United Kingdom

75

Canada70

Australia
United States

65

Mining (LHS)0
Feb-91

Feb-01

Feb-11

40
Feb-21

60
2000

2004

2009

2014

60
2019

Note: Female participation rates comparisons are for ages 15-64 (rather than for ages 15 and over) as thisallows for a more accurate comparison between countries with different demographic structures.
Source: ABS Labour Force and OECD Labour Force Statistics.

Improvements in female participation have also been supported by significant
structural changes in the economy, in particular the types of jobs available. The shareof employment in the services industries, in which women are strongly represented,
has steadily increased from around 70 per cent in 1990 to around 80 per cent today.
An increase in part-time work has improved flexibility for men and, in particular, forwomen, allowing them to participate in the paid workforce alongside unpaid domestic
and care work.
A key demographic driver of increased female participation over recent decades has
been changes in fertility decisions, with women having fewer children and having themlater in life. With peak fertility rates moving from ages 25-30 to ages 30-34, there has

18
19

C. Hsieh et al., ‘The allocation of talent and U.S. economic growth’ Econometrica, 87/5 (2019),
1439-1474.
ABS, Education and Work, Australia May 2020 (2020).

392021 Intergenerational Reportbeen a corresponding increase in the full-time participation of women in their late
20s.20 There has also been an increase in full-time participation by women at peakfertility age, with more women working while pregnant and returning to work after
pregnancy.21 Attitudes towards women returning to work after having children havealso shifted; there is increased societal support for women combining work andparenting responsibilities.22
Government policies, such as increasing female Aged Pension eligibility ages andimproving access to child care services, have played a role in increasing female labour
force participation. The participation rate for mothers in couples with children under 4
is 68 per cent, compared with 87 per cent for coupled women in the same age groupof 25-44 without young children. However, the participation rate for mothers withyoung children has been increasing at a faster rate, with the gap decreasing fromaround 27 percentage points in 2005 to 18 percentage points in 2020.23
While female participation rates have increased considerably in Australia in recent
decades, further improvement is possible (Chart 3.8). Primary caring responsibilities
continue to fall disproportionately to women. Women are much more likely than men
to adjust their paid work after having a child. Paid work patterns for most men remain
essentially unchanged when they become fathers.24 There is still a significant gap in theamount of unpaid care work undertaken by mothers and fathers, even beyond the earlyyears of child rearing. This may present ongoing barriers to mothers increasing theirworkforce participation.
While the gender wage gap has narrowed in recent years, women’s average weekly
ordinary time full-time earnings remain $242 less than men’s.25 The wage gap persists
even in industries where women are over represented.26 The persistence of a genderwage gap has the potential to dampen incentives to participate in the labour force andentrench economic disadvantages for women, such as reducing women’s ability toaccumulate retirement savings.
A focus for recent policy reform has been child care availability and affordability, andreducing high workforce disincentives for second income earners. Policy settings,
workplaces and society have come some way in supporting more flexible andfamily-friendly work arrangements. The COVID-19 pandemic has also significantly

20
21
22

23
24
25
26

40

Centre for Population, Historical single year of age fertility rates, for Australia and bystate/territory, by financial year (2019).
ABS, Pregnancy and Employment Transitions, Australia, Nov 2017 (2018).
Australian Institute of Health and Welfare, Australian Families Then & Now: How we worked(2020). Melbourne Institute, The Household, Income and Labour Dynamics in Australia Survey:
Selected Findings from Waves 1 to 17 (2019).
Treasury analysis of ABS Labour Force Survey microdata.
Australian Institute of Family Studies, Fathers and Work: A Statistical Overview, Research Summary
May 2019 (Canberra: AIFS, 2019).
Workplace Gender Equality Agency, Australia's Gender Pay Gap Statistics 2021.
Workplace Gender Equality Agency, Gender segregation in Australia's workforce, 2019.

Part I: The economy over the next 40 years

disrupted the balance between work and home life, while potentially accelerating
trends towards more flexible work.

Box 3.1

The impacts of the COVID-19 pandemic on participation

Restrictions and precautionary behaviour by consumers and businesses due tothe COVID-19 pandemic reduced activity across the economy. The participation
rate fell by 3.4 percentage points and unemployment increased by
1.8 percentage points between January 2020 and May 2020. However, theparticipation rate has since rebounded above pre-COVID-19 levels as economic
activity has recovered.
The impacts of the COVID-19 pandemic on population – particularly, sharply
reduced migration – may have ongoing implications for participation. These
impacts will depend on the time taken for migration to return to pre-pandemic
levels, the characteristics of new migrants, and how these migrants interact withthe domestic labour market in years to come.
The COVID-19 pandemic may have accelerated trends in the nature of work that
could further reduce barriers to participation through increased flexibility.
Remote work had been slowly gaining acceptance in some sectors but was
rapidly and widely adopted in 2020 as businesses responded to the pandemic.
The prevalence of remote working is likely to persist with early research finding
more widespread acceptance for working from home (facilitated by
improvements in supporting infrastructure) will remain even while many
workers return to their workplaces.27 Higher adoption and acceptance of remote
working practices may improve participation as they allow greater flexibility andare more accommodating of individual life and family commitments. Remote
work enables smoother matching between workers and employers acrossgeographical boundaries. These changes have great potential to improve not justparticipation, but also Australia’s productivity and economic growth.

Working hours are declining
Economic output is not only a function of how many people work, but how much each
person works on average. The average number of hours worked per week per worker
has declined from around 35 in 1978-79 to around 32 in 2018-19. This is largely due toan increase in the share of part-time employment – reflecting the increased
participation of women and older workers – as well as an increased incidence of male27

J. Barrero, N. Bloom, and S. Davis, ‘Why working from home will stick’, National Bureau of
Economic Research Working Paper No. 28731 (2021).

41

2021 Intergenerational Report

part-time work. This also reflects the increased flexibility of the labour market and theshift towards service-oriented jobs.
Average hours worked per week fell significantly in 2019-20 due to the effects
of COVID-19, but has since recovered to its pre-pandemic level. Over the long term, theaverage number of hours worked per week is projected to decline further to 31
by 2060-61. The decline reflects a projected ongoing increase in part-time employment
and growth in the proportion of women in the labour force, as they work fewer hours
on average than men. The projected increase in participation by older Australians also
contributes to falling hours worked, as they generally work fewer hours when they do
work.

Chart 3.9 Average hours worked

Hours
40

Hours
40

Chart 3.10 Share of employedworking part-time
%
50

%
50
Female

Male
35

40

40

35

Total

30

30

Average
20

30

Male

Female25
Sep-7820

30

Nov-92

10

Jan-0725
Mar-210
Jun-7810

Sep-92

Dec-060
Mar-21

Source: ABS Labour Force and Treasury.

Reasons for working part-time differ by gender. For men, the main reason is studying.
Over time, an increasing share of men have also reported working part-time due topreferences, or because their preferred job is part-time. By comparison, women are
most likely to report working part-time due to caring responsibilities (28 per centcompared with 5 per cent of male part-time workers).

42

Part I: The economy over the next 40 years

Chart 3.11 Main reason for working
part-time, men%
45
40
Studying

35

30

20
15
10

%
45

%
45

%
45

40

40

40

35

35

30
Preference25

Job requirement
Other
Couldn't find work

5
Caring responsibilities

Chart 3.12 Main reason for working
part-time, women

30

25

25

20

20

15

15

10

10

5

5

0
0
2001 2004 2007 2010 2013 2016 201935
Caring responsibilities

Preference

25
Studying

Other

30

Job requirement

20
15
10

Couldn't find work

5002001 2004 2007 2010 2013 2016 2019

Source: Household, Income and Labour Dynamics in Australia Survey, Release 19.0.

The future of work
Alongside demographic changes and increases in female workforce participation, theoccupational structure of the Australian labour force has also undergone radical
changes. Compared with 50 years ago, the number of people working has more thandoubled. However, today’s workforce is comprised of a very different mix of jobs.
In 1966, machinery operators and drivers comprised around 11 per cent of the labour
force and technicians and tradespersons around 21 per cent. Today they have almost
halved to around 6 and 14 per cent of the labour force respectively. Meanwhile,
professionals have doubled as a share of the workforce while community and personal
service workers have nearly tripled.28
The main drivers of these shifts include increasing global interconnectedness,
technological change and automation. Increased international trade has altered what
Australia manufactures onshore, alongside creating entirely new export industries andfreeing up labour for the expanding domestic services sector.
These changes have implications for participation: the increase in non-manual
labour-intensive work has boosted female labour force participation as well as allowing
older people to remain in the workforce longer. Similarly, technology enabling flexible
work means jobs can now be more accommodating of individual life and family

28

Based on Treasury analysis of ABS Census data from 1966 to 2016, following M. Coelli & J. Borland,‘Job Polarisation and Earnings Inequality in Australia’, Economic Record, 92/296 (2016), 1-27. These
occupations reflect ANZSCO major occupation groups.

432021 Intergenerational Reportcommitments, enabling those with caring responsibilities or higher barriers toparticipation to participate more.
Increasing global interconnectedness and technological change require a highly skilledworkforce. The compositional shift in employment brought about by these changes has
increased the share of jobs requiring highly skilled workers over the past 50 years. In
1966, the share of the workforce employed in a job requiring a highly skilled employee
was 31 per cent. This increased to 45 per cent in 2016.29
New technologies will mean jobs are redesigned to take maximum advantage of thecapabilities new technologies enable. Governments will need to reduce unnecessary
regulations or occupational licensing restrictions which hamper job redesign and hinder
the adoption of productivity-enhancing processes and technologies. Businesses will
also need to invest in improving managerial expertise to best manage how theseenhancements are integrated into organisational work practices.
Australia’s workforce already has a high level of educational attainment, which
positions it well to deal with future shifts in technology. As technology continues toreshape tasks and occupations, ‘lifelong learning’ and continual reskilling will beneeded to ensure people have the skills to take advantage of new processes, jobs andoccupations driven by technological change.
Ensuring businesses contribute to a lifelong skills system that is responsive to thechanging demands of the labour force will help build a resilient and adaptable
workforce that can support future economic growth.
Governments can support a culture of lifelong learning by ensuring the education andtraining system is responsive to change and provides appropriate opportunities forreskilling. Policies such as the new National Skills Agreement currently being negotiatedcan improve the operation and efficiency of training, through ensuring individuals haveopportunities to upskill and reskill. The Agreement will improve the relevance andquality of skills training, and help to reduce skills shortages, while facilitating
employment growth and better labour market outcomes (Chapter 7,
Section 6 – Education and Training).
Education and employment policies have great potential to maximise the productive
use of skills, enable the labour market to operate in a way which minimises skill
mismatch between employers and employees, and boost labour market dynamism andproductivity growth.

29

44

Based on Treasury analysis of ABS Census data from 1966 to 2016, following M. Coelli & J. Borland,
op. cit.

Part I: The economy over the next 40 years

4.

Productivity

Overview
Labour productivity has contributed more than 80 per cent of growth inreal gross national income per person over the past 30 years.
This report assumes that the long-run labour productivity growth rate
returns to 1.5 per cent per year – consistent with the 30-year historical
average to 2018-19.
Labour productivity growth has slowed since around 2005, averaging
1.2 per cent annually over Australia’s last complete productivity cycle. Thisis below the historical average and is around half the growth experienced
during the 1990s productivity boom.
The slowdown in Australia’s productivity growth is not unique and has beenbroadly consistent with that experienced in most other advanced
economies. No single factor explains the ongoing slowdown.
An improvement over recent productivity performance is needed to raise
productivity growth and ensure growth in income and living standards.
Given the widespread global trends in productivity it is unlikely thatdomestic policy factors explain all of the productivity slowdown. However,productivity can be supported at all levels of government through policy
and regulatory reform. Policies can lift productivity by supporting a
dynamic and competitive economy and allowing individuals and businesses
to take advantage of new innovations and technologies.

Productivity growth is essential for improved living standards in the future
Productivity is a measure of how efficiently an economy turns inputs into outputs.
Productivity grows when things are done more efficiently today than yesterday. When
there is productivity growth, an economy produces more outputs from the sameamount of inputs.
The most common measure of productivity is labour productivity. It measures thequantity of goods and services produced per hour of work. Labour productivity growthis essential to improving national income and real wages. People can use their growing
wages to buy more goods and services, save and invest, and have greater freedom to45

2021 Intergenerational Reportchoose how they spend their time. In turn, higher wages increase tax revenues and thecapacity of government to deliver services to the community.
Labour productivity has been the most important source of income growth in Australia
over the past 30 years, contributing over 80 per cent of growth in real gross national
income (GNI) per person. It is projected to remain the most important source of income
growth in the future.

Chart 4.1 Contributions to real GNI per person growthppt
3.5

Real GNI growth per person
Labour productivity
Terms of Trade
Labour utilisation
Net foreign income

3.0
2.5

ppt
3.5
3.0
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5
1980s

1990s

2000s

2010s

2020s

2030s

2040s

2050s

Note: Chart derived from calculations of real GNI, real Gross Domestic Income (GDI) and real GDP.
Source: ABS Australian System of National Accounts 2019-20; ABS Labour Force; ABS unpublished data; andTreasury.

Given its importance to living standards, the evolution of productivity over the next
40 years is a key component of the economic projections in this report.
This report, consistent with previous intergenerational reports, assumes that labour
productivity growth converges to a historical average rate of growth. In this reportunderlying productivity growth converges to 1.5 per cent per year, the average growthrate in labour productivity over the 30 years to 2018-19. Given the current underlying
productivity growth rate is below 1.5 per cent, it is assumed that the transition to thelong-term growth rate of 1.5 per cent per year will take place over the next 10 years.

46

Part I: The economy over the next 40 years

Labour productivity growth has slowed
Labour productivity growth has slowed over the past few decades, in line with global
trends. Growth over the last complete productivity growth cycle averaged 1.2 per centper year, which was below the 30-year historical average to 2018-19.30

Chart 4.2 Labour productivity growth and productivity cycles
%
5

%
5

Average growth per cycle

4

Annual growth in labour productivity

3

430 year annual average growth

3

2

2

1

1

0

0

-1
1986-87-1
1990-91

1994-95

1998-99

2002-03

2006-072010-11

2014-152018-19

Source: ABS Australian System of National Accounts, 2019-20, and Treasury.

Labour productivity growth can be calculated as the sum of capital deepening andmultifactor productivity (MFP).31 Capital deepening is a measure of the change in theamount of capital per unit of labour, while MFP measures the efficiency with which
labour and capital inputs are used together in producing output. While there has beena reduction in capital deepening, most of the slowdown in labour productivity growthis due to a decline in MFP growth. In the most recent complete productivity cycles, MFP
growth was lower than in the 3 cycles that covered the 1990s.

30

31Australia’s last complete productivity cycle ran from 2011-12 to 2017-18. Movements in productivity
are best evaluated over productivity growth cycles, which more accurately highlight underlying
structural trends by abstracting from temporary business cycle fluctuations. Productivity growth
cycles are based on multifactor productivity (MFP) growth estimates. For more information, see the
ABS National Accounts glossary.
While the use of MFP and capital deepening is a widely used way of thinking about labour
productivity, the long-term projections in this report disaggregate labour productivity slightly
differently. For further information, see the Appendix.

47

2021 Intergenerational Report

Chart 4.3 Decomposition of labour productivity by productivity cycles
%
3

%
3

Labour productivity
Capital deepening
Multifactor productivity

2.4
2.0

1.9

1.9

2

2
1.2
1.0

1

1

0.6

0

0
1981-82 to
1984-85

1984-85 to
1988-89

1988-89 to
1993-94

1993-94 to
1998-99

1998-99 to
2003-04

2003-04 to
2011-122011-12 to
2017-18

Note: Whole of economy MFP estimates are based on ABS estimates of the market sector.
Source: ABS Australian System of National Accounts, 2019-20, and Treasury.

Considering productivity in the international context
A slowdown in productivity growth is not unique to Australia. Other advanced
economies are facing similar situations, with Australia’s slowdown in productivity
broadly consistent with that experienced in most other advanced economies.
While comparisons between countries can be difficult because of differences in
economic, institutional and policy environments, considering productivity performancein other advanced economies provides useful insights into Australia’s productivity
prospects.
The United States is considered the productivity frontier for international comparisons.
While there is a persistent gap between Australian and US aggregate productivity
levels, this gap has tended to be relatively stable over time, and productivity growth
rates have been broadly similar over the long run.

48

Part I: The economy over the next 40 years

Chart 4.4 International comparisons of labour productivity levels
GDP/hour worked
80

GDP/hour worked
80

70

70
Australia

60

60

Canada50

50

United States
United Kingdom

40

40

30

30
New Zealand

20
10
1971

20

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

10
2019

Note: Productivity levels are measured as GDP per hour worked using output-side real GDP at chainedpurchasing power parities (in 2017 USD).
Source: Treasury analysis of Penn World Table data, version 10.0.

Box 4.1

International productivity projection methodologies

Australia’s approach to determining its assumption for productivity is similar tocomparable countries.
• The Canadian Department of Finance reviewed its long-term labour
productivity assumption in 2018 leaving it at 1.2 per cent per year, which isbased on a historical average taken over the period 1970-2017.
• The New Zealand Treasury downgraded its long-run assumption of labour
productivity growth in December 2019 to 1.2 per cent per year, based on an
analysis of historical trends, placing more weight on the historical averageand less weight on convergence prospects.
• The United Kingdom’s Office of Budget Responsibility (OBR) downgraded its
long-term labour productivity growth assumption to 1.5 per cent inMarch 2020. This was based on an analysis of historical data, comparisons ofother forecasting institutions’ projections, and international comparisons.
The OBR places more weight on recent trend data.
• The United States Congressional Budget Office (CBO) projects long-run MFP,
instead of labour productivity. Downgrades in MFP led to a downgrade in thelabour productivity assumption in September 2020 to 1.3 per cent per year.
This reflected the effect of long-term demographic trends, slower expected
improvements in educational attainment and labour quality, a projected
increase in federal borrowing which will reduce growth, and climate change.
The CBO places greater weight on recent trend data.

49

2021 Intergenerational Report

Slowing productivity is driven by several factors
There is no single factor that has driven the recent global slowdown in productivity
growth. Rather, it may reflect a mix of factors including:• declining economic dynamism, which lowers productivity by- slowing the rate of innovation and technology adoption, or- slowing reallocation of resources – both capital and labour – from lessproductive to more productive firms• structural shifts in the composition of the economy including the increasing size ofthe services sector and population demographics• the nature of recent technologies and difficulties in their measurement• lower business investment• slower growth in educational attainment and labour quality, given a large portionof the labour force is already highly educated.32
A dynamic economy is one where resources are able to move between productive uses.
In a dynamic economy, firms can enter, compete, innovate, and either thrive or exit.
This creates competitive pressures, incentivises firms to innovate and improve theirperformance, and broadly helps funnel resources into their most productive uses.
As such, economic dynamism helps to drive productivity growth.
Measures of dynamism have declined over recent decades in Australia and overseas.
Rates of business entry have declined, job switching rates have slowed, and measuresof competitive pressures have declined. While there is no consensus about why,
potential explanations include increased use of digital technologies, increased barriers
to entry for new firms, and insufficient access to finance.33
There is evidence that declining dynamism can account for some of the slowdown in
productivity growth in Australia. First, the flow of resources – capital and labour – fromless productive to more productive firms has slowed, dragging on aggregate
productivity.34
Second, Australian firms appear to be slower to adopt world-leading technologies. As aresult, non-mining businesses in Australia have fallen further behind global frontierfirms and appear to be catching up more slowly.35

32
33
34
35

50

Congressional Budget Office, The 2021 Long-Term Budget Outlook (Washington DC, March 2021).
F. Calvino, C. Criscuolo & R. Verlhac, ‘Declining business dynamism: structural and policy
Determinants’, OECD Science, Technology and Industry Policy Papers No. 24, November 2020.
D. Andrews & D. Hansell, ‘Productivity-enhancing Labour Reallocation in Australia’, Economic Record
97/317 (2021), 157-169.
M. Quinn, ‘Keeping pace with technological change: the role of capabilities and dynamism’, Speech
to the OECD Global Forum on Productivity, Sydney, 20 June 2019.

Part I: The economy over the next 40 years

Finally, the slowdown in reallocation and adoption was larger in sectors wherecompetitive pressures fell by more. This suggests that declining competitive pressuresand dynamism explain part of the slowdown in productivity in Australia.36
Ongoing structural shifts in economic activity to the services sector are also potentiallydragging on overall productivity growth. The services sector now comprises the
majority of employment in Australia. While there is substantial variation across services
industries, and measurement of productivity in services is inherently challenging as it
depends on measuring the quality of services provided, some have experienced
persistently low productivity growth.37 As the population ages, there will be a further
shift in the services sector towards services that cater to an older population, which
tend to be less capital intensive and have slower productivity growth.
Recent technological advances such as artificial intelligence and digital platforms – andtheir associated inputs and outputs – are difficult to properly measure, which could
lead to productivity mismeasurement. This could account for part of the slowdown, but
is not likely to be enough to explain all the slowdown in productivity growth. 38
Additionally, there may be a lag between technological progress and productivity
growth, particularly as ‘general purpose technologies’ such as artificial intelligencerequire significant complementary investments and it can take a long time before
productivity gains are realised.39
In the context of technological advances, improvements in education to meet thedemands of employers will be critical. However, the United States CBO has found thatslower increases in educational attainment have weighed on productivity growth andare likely to restrain it in coming decades. While this is not the experience in Australia
to date, Australia may experience similar slower increases in educational attainment
over coming decades.

The long-term labour productivity growth assumption
Long-term labour productivity growth depends on trends in underlying productivity
and the productive capital stock.40
Historical trends in growth can be a reasonable guide to future prospects for
productivity. In Australia, while there are short-term deviations, productivity over thelong run has been growing at a relatively steady and constant pace (Charts 4.1 and 4.2).

36
37
38
39

40

J. Hambur, ‘Product market power and its implications for the Australian Economy’, Treasury
Working Paper No. 2021-03 (2021).
Productivity Commission, ‘Productivity Insights: Things you can’t drop on your feet – An overview ofAustralia’s services sector productivity’, PC Insights, 15 April 2021.
C. Syverson (2017), ‘Challenges to Mismeasurement Explanations for the US Productivity Slowdown’,
Journal of Economic Perspectives 31(2), 165-86.
E. Brynjolfsson, D. Rock, and C. Syverson (2018), ‘The Productivity J-Curve: How Intangibles
Complement General Purpose Technologies’, National Bureau of Economic Research Working Paper
No. 25148.
For further information, see the Appendix.

512021 Intergenerational Report

Where there are structural changes in productivity growth, an assumption based on
the long-term historical growth rate will reflect adjustments to these changes over time
as new information or data is incorporated.
This report assumes that underlying productivity growth converges to 1.5 per centper year – consistent with the average growth rate in labour productivity over the
30 years to 2018-19. The convergence takes place over the next 10 years.
The gradual transition to the long-term growth rate recognises that while the pace of
future productivity growth is uncertain, it tends to move within the bounds of historicalperformance. Averaging productivity growth over a sufficiently long period alsosmooths out cyclical volatility.
While every methodology for determining the long-term productivity assumption has
strengths and weaknesses, the use of the 30-year average is still the most appropriate
for the long-term projections used in this report. Gauging the long-term effects ofpolicy choices on the fiscal baseline is best supported by a productivity assumption thatslowly adjusts to underlying structural changes and minimises volatility or
responsiveness to shorter-term or cyclical factors.
This approach is also in line with international best practice. While some details – suchas time periods – may vary, similar methodologies that assume productivity will growin line with a historical average have been adopted by other government and financial
institutions to model future productivity growth.
Any lasting effects of the COVID-19 pandemic are highly uncertain. On the upside,
accelerating technological changes – such as a greater shift towards
working-from-home and online business models – could spur innovation andproductivity growth in some sectors. However, the COVID-19 pandemic also has thepotential to exacerbate pre-existing challenges for productivity growth, such as
growing market concentration, reduced levels of firm entry and exit, and less job
switching. Further, the pre-existing challenges that have dampened productivity
growth in recent decades may continue to weigh down on productivity into the future.
In recognition of these uncertainties, this report considers an alternative to thebaseline projections. A lower growth sensitivity analysis reflects a future where muchof the current slow-down in productivity growth is due to persistent structural issues.
In this sensitivity analysis, productivity continues to grow at a rate similar to the mostrecent productivity cycle of 1.2 per cent, rather than 1.5 per cent.

52Part I: The economy over the next 40 years

Box 4.2

Lower productivity growth sensitivity analysis

This sensitivity analysis examines the impact of lower long-term underlying
productivity growth. Growth in underlying productivity is assumed to converge
to the average of the most recent productivity cycle of 1.2 per cent by 2024-25
and remain at that rate of growth for the remaining period. This is below thehistorical 30-year average to 2018-19 of 1.5 per cent assumed in this report.

Chart 4.5 Impact of lower productivity growth on real GDP growth
%
5

%
5

4

4
2021 IGR

3
2

Lower productivity growth

3
2

1

1

0

0

-1
2000-01

2010-112020-212030-312040-412050-51-1
2060-61

Source: ABS Australian National Accounts: National Income, Expenditure and Product, and Treasury.

In this sensitivity analysis, the level of real and nominal GDP are both projected
to be around 9½ per cent lower by the end of the projection period. Nominal GNI
per person is also projected to be $32,000 lower by the end of the projection
period compared with the baseline.
Lower GDP results in lower projected tax receipts, with the tax-to-GDP cap being
reached 2 years later compared with the baseline projections. Lower
productivity is also projected to reduce wages by 9¼ per cent by the end of the
projection period. This results in lower indexation rates for some government
payment programs.
While total government spending is projected to be slightly lower, spending does
not fall to the same extent as tax receipts. The underlying cash balance is,therefore, projected to be 2.2 percentage points of GDP lower at the end of the
projection period compared with the baseline.

532021 Intergenerational Report

Chart 4.6 Impact of lower productivity growth on the underlying
cash balance% of GDP2% of GDP2

02021 IGR-20-2

Lower productivity growth

-4

-4

-6

-6

-8

-8

-10
2000-01

2010-112020-212030-312040-412050-51-102060-61

Source: Treasury.

Net debt is 22.7 percentage points higher at the end of the projection period asa share of GDP. This reflects higher government borrowing associated withweaker budget positions, and the smaller economy. This is slightly offset by
reductions in the government’s cost of borrowing, due to the assumption thatthe government’s long-run cost of borrowing is consistent with nominal GDP
growth.

Policy can raise productivity and income growth
All levels of government have a role to play in boosting productivity growth throughpolicy and regulation that facilitates efficient investment in technology, improves
market efficiency and competitiveness, and lifts the health and capability of ourworkforce. By providing strong institutions and a predictable policy environment,
government can increase certainty, encouraging investment and efficient risk-taking.
The Government is accelerating reforms and investments to enable greater adoptionof digital technologies to support the goal of Australia becoming a leading digital
economy by 2030.
The Government is also continuing to implement reforms to make the economy more
dynamic and productive. This includes recent reforms to bankruptcy, which encouragefirms to innovate and experiment, a uniform scheme for automatic mutual recognitionof state-based occupational licenses and registrations to increase labour market
flexibility, and a ‘patent box’ to encourage companies to develop and retain innovation
ideas in Australia, complementing the $2 billion investment in the Research andDevelopment Tax Incentive announced in the 2020-21 Budget. The Government has
54Part I: The economy over the next 40 years

also committed to boosting skills by investing in apprenticeships, higher education
short courses, vocational education and training. This will open new opportunities andjobs for Australians, allow more innovation and adoption, and foster growth in labour
reallocation and productivity.
Continued investments through the Government’s infrastructure investment pipeline
will further support productivity growth by bringing consumers closer to more markets
and bring workers in contact with more employment opportunities. The Government’s
pursuit of open and free trade will provide further access to global markets,
encouraging businesses to be more competitive, to innovate, and to adopt newtechnologies and methods supporting productivity growth.
The Government is committed to increasing productivity in non-market sectors,41 byensuring diversity, choice, and responsiveness in the delivery of government services
to spur innovation and quality.42
This commitment to pro-productivity policies and an environment that supports
productivity growth aims to ensure sustained increases in output, wages and living
standards into the future.

41
42

Non-market sectors refer to Health Care and Social Assistance, Education and Training, and Public
Administration and Safety.
Productivity Commission, ‘Shifting the Dial: 5 Year Productivity Review’, Inquiry Report No. 84(Canberra, Productivity Commission: 2017) and I. Harper et al, 2014 Competition Policy Review (‘theHarper Review’), Final Report (Canberra, Australian Government: 2015).

55

Part I: The economy over the next 40 years

5.

Environment

Overview
The natural environment is central to the quality of life enjoyed byAustralians and to the state of the economy. It provides natural resourcesthat are direct inputs into Australia’s productive capacity and supports
activity in a range of sectors. Over the next 40 years, Australia will continue
to respond and adapt to environmental challenges that will affect theeconomy and the budget.
Climate change presents a significant challenge to the naturalenvironment. Rising global temperatures and other changes to the climate
will impact locations, sectors and communities in diverse ways driving both
structural adjustments and corresponding innovation. Connecting
innovation and investment in climate-resilient development cansignificantly increase the adaptive capacity of our regions, towns and cities.
Such solutions will require effective action by governments, businesses andcommunities, to keep the economy strong now and into the future.
Mitigation efforts will require a step-change in innovation and global
collaboration to make new energy technologies commercial and scalable.
Australia is working with our trading and strategic partners to make low
and zero emissions technologies globally scalable and commercially viable.
Australia has made, and continues to make, a significant contribution to
global emissions reduction efforts, reducing emissions faster than many
similar advanced economies, as well as the OECD and G20 averages.
Australia is at the forefront of adopting low emissions technologies, withthe highest level of solar photovoltaic capacity per person of any country
in the world, and more solar and wind generation capacity per person than
any country outside Europe.
Effectively managing the broader pressures on the environment – including
on oceans, waste and water management – and biodiversity, will also
improve economic prospects and our quality of life.

A healthy environment provides essential inputs into Australia’s productive capacityand directly influences potential GDP. These inputs include provisioning services, such
57

2021 Intergenerational Reportas food, fibre and fuels. The environment also provides regulating and supporting
services such as soil formation, pollination, and water filtration, as well as recreationaland cultural benefits.
Historically, the benefits of natural capital have not been fully recognised or valued.
Natural capital is difficult to observe and measure, and is often not fully accounted forin economic decision making, leading to environmental degradation.43 Without moreaction to maintain and improve natural capital, future generations will not benefit fromit to the same extent.
The Independent Review of the Environment Protection and Biodiversity Conservation
Act 1999 found that Australia’s natural environment and iconic places are in decline
and are under increasing threat, and that the current environmental trajectory isunsustainable.44
To protect the environment, the Australian Government funds actions including habitat
protection and pollution controls, as well as regulating harmful activities. The
Government is continuing to invest in adaptation, mitigation and environmental
protection, including $20 billion in new and emerging low emissions technologies overthe decade to 2030.
The Government is reforming Australia’s environmental laws to better protect theenvironment, and has undertaken a number of initiatives to increase environmental
resilience, such as the National Landcare Program, the $100 million Oceans Leadership
Package to protect Australia’s oceans, the National Soil Strategy, and the $66 million
Agriculture Biodiversity Stewardship Package.
The Government is also improving the measurement and valuation of Australia’s
natural assets. This will better enable the environment to be considered in commercial
decisions, reducing environmental degradation and supporting greater private
investment.

Climate change
Australia’s leading scientific and climate institutions have concluded that Australia’s
land temperature has warmed on average by about 1.4°C since national records began
in 1910.45 While climate change is often commonly understood as global warming, italso includes an increase in the severity and frequency of many kinds of extreme
weather events, rising sea levels and changing rainfall patterns.46 Responding to climatechange requires both climate mitigation and climate adaptation.

43
44
45
46

58

P. Dasgupta, Final Report – The Economics of Biodiversity: The Dasgupta Review (London: HM
Treasury, 2021).
G. Samuel, Independent Review of the EPBC Act – Final report (Canberra, Department of Agriculture,
Water and the Environment, 2020), 1.
Bureau of Meteorology & Commonwealth Scientific and Industrial Research Organisation, State of
the Climate 2020 (Canberra, Australian Government: 2020), 2.
ibid, p. 2.

Part I: The economy over the next 40 years

Climate mitigation
Climate mitigation refers to efforts to prevent further increases in global temperatures.
The extent to which additional future warming can be avoided will depend on the
success and timeliness of global climate mitigation efforts.
Australia, in concert with the rest of the world, is taking action to reduce emissions inline with the Paris Agreement. Australia has reduced its own emissions faster thanmany similar countries, as well as the OECD and G20 averages, making a significant
contribution to global emissions reduction efforts.47 Exports of our low emissions
technology support rising prosperity and mitigation efforts in our region. There will be
opportunities for Australia to expand into new energy exports, such as clean hydrogen,with the Government already providing over $850 million in support of this growing
industry.
Climate adaptation
Notwithstanding global efforts to reduce emissions, responding to the impacts ofclimate change will be required and is a shared responsibility across all levels ofgovernment, community, and businesses. It will require adapting to current and future
impacts and an expected increase in the frequency and intensity of natural disasters
and extreme temperatures.
Adaptation includes being more climate- and disaster-resilient and will require changes
to the way Australians live and businesses operate. Planning for these impacts will help
improve economic resilience.
The Government is implementing a broad range of reforms in response to the Royal
Commission into National Natural Disaster Arrangements which will improve
Australia’s disaster preparedness and resilience. Key measures include establishing a
National Recovery and Resilience Agency, enhancing Emergency Management
Australia, and establishing the Australian Climate Service.
Economic and sectoral impacts of a changing climate
Climate change is expected to have physical effects and transition effects on Australia’s
economy. Physical effects are impacts caused directly by a changing climate. Transition
effects relate to the impacts of global and domestic efforts to reduce greenhouse gas
emissions. This includes the costs of Australia’s own mitigation efforts, as well aschanges to demands for our exports due to mitigation actions by our trading partners.
There could also be impacts on global capital flows.
A reduction in real GDP associated with climate change would have a fiscal impact
through reducing taxation revenue, as well as increasing pressure on expenditure.
Other revenue sources such as fuel excise and mining royalties could also be affected

47

World Resources Institute CAIT, Historical GHG emissions, 2018 update.

59

2021 Intergenerational Reportby changes in demand and consumption related to a global transition away from fossil
fuel use.
Any reduction in GDP is likely to be unevenly distributed across sectors and regions.
The agricultural sector is particularly vulnerable to the physical effects of climatechange, the resources sector is particularly vulnerable to the transition effects, and thefinancial sector is vulnerable to both.
Impacts on the agricultural sector
The impacts of climate change are already being felt by the agricultural sector.
Agriculture industries are developing methods to better understand and manage thephysical impacts of climate change, for example through changes to crop selection, land
management, and improving water efficiency. Adaptation efforts have reduced but noteliminated the impact of climate change over the past 20 years.48
The global effort to mitigate and adapt to climate change is also presenting market
opportunities to the agriculture sector. As economies transition towards lower
emissions, opportunities may emerge for agriculture industries that can demonstrate
more emissions-efficient production systems.49
Impacts on the resources sector
The global effort to reduce emissions is likely to have both positive and negative
impacts on Australia’s resources sector. 129 countries have committed to net-zeroemissions by 2050, including key trading partners such as Japan and South Korea, while
China has committed to carbon neutrality by 2060. In 2019-20, these 3 countries
accounted for 87 per cent of Australia’s LNG export value, 74 per cent of Australia’s
thermal coal export value and 55 per cent of Australia’s metallurgical coal export
value.50
These commitments by other countries, if fully implemented, are likely to reducedemand for unabated fossil fuels over some decades. The global transition is also likely
to lead to increased demand for clean energy and associated critical minerals exports,
and the creation of new markets such as clean hydrogen and carbon capture andstorage. These new or expanded markets will present new opportunities for Australia.

48
49
50

60

N. Hughes, D. Galeano & S. Hatfield-Dodds, The Effects of Drought and Climate Variability on
Australian Farms (Canberra: ABARES 2019), p. 7.
J. Greenville, H. McGilvray, and K. Burns, Global Responses to Climate Change: Opportunities forAustralian Agricultural Producers (Canberra: ABARES 2020).
Office of the Chief Economist, Department of Industry, Science, Energy and Resources, Resources
and Energy Quarterly — Historical data.

Part I: The economy over the next 40 years

Impacts on the financial sector
The financial sector plays an important role in helping the economy adjust to climatechange through appropriately pricing risks and encouraging the reallocation of capitalto more sustainable areas.
More frequent and severe climate-related natural disasters will increase costs for the
insurance sector, with flow on effects to insurability and insurance affordability,
potentially making it more difficult for households to hold adequate insurance. 51
Changing weather systems may make parts of Australia more difficult to insure, unlessthere are effective investments to build resilience. Climate change is also complicatingrisk assessment for the insurance and financial services sector, as past experience isbecoming less of a guide to future risks.
Some changes are already taking place in the insurance sector, with claims relating tonatural disasters in the past decade having doubled those made in the decade prior inreal terms.52 In Northern Australia, where disaster risk is generally higher, homeinsurance premiums have risen much faster than the rest of the country, and there has
been a rise in the number of uninsured homes.53 To improve the accessibility andaffordability of insurance in cyclone-prone areas, the Australian Government has
committed to establishing a reinsurance pool to cover cyclone and related flood
damage, backed by an annually reinstated $10 billion Government guarantee.54
The financial sector is also exposed to transition risks from the adjustment to alow-emissions economy globally which could lead to falling demand in some sectors,
prompting write-downs in the value of assets.
Australia’s financial regulators have recognised that climate change is exposing thefinancial system to risks that will rise over time. To respond to these risks, regulators
are working on strengthening the identification and management of climate-related
risk and improving disclosure.55
Government action on climate change
Australia is part of global efforts to reduce emissions to net zero. The Government has
committed to reducing emissions by 26-28 per cent below 2005 levels by 2030 and toreaching net zero as soon as possible, preferably by 2050, consistent with the global
goals of the Paris Agreement. Australia is on track to meet and beat its 2030 Paristarget.

51
52
53
54
55

Royal Commission into National Natural Disaster Arrangements (Commonwealth of Australia),
Report (Canberra: Australian Government, 2020), Final Report, 417.
Reserve Bank of Australia, Financial Stability Review — October 2019 (3 October 2019), 57.
Australian Competition and Consumer Commission, Northern Australia Insurance Inquiry — Final
Report (Canberra: ACCC, 2020), 29 & 270.
Treasury, Reinsurance pool for cyclones and related flood damage consultation paper (Canberra:
Treasury, 2021), 2.
C. Armour, ‘Managing climate risk for directors’ ASIC News Centre (February 2021).

61

2021 Intergenerational Report

To date, Australia has reduced greenhouse gas emissions by 20.1 per cent compared to2005 levels. Emissions per person are 46.7 per cent lower than 1990 levels, while theemissions intensity of the economy is 66.1 per cent lower.56

Chart 5.1 Renewable energy capacity per person installed in 2020
Capacity (watts)
300

Capacity (watts)
300

250

250

200

200

150

150

100

100

50

50

0

0
Australia

China

USA

EU

World

Source: International Renewable Energy Agency Renewable Capacity Statistics 2021; World Bank Population
Estimates and Projections dataset; Department of Industry, Science, Energy and Resources.

Energy transition
Underpinned by the Government’s renewable energy policies, Australia deployed newrenewable energy almost 8 times faster than the global average per person in 2020 andhas the highest uptake of rooftop solar in the world. In 2020, a record 7 gigawatts of
new renewable generation was installed across Australia,57 and a record 64.7 terawatt
hours of electricity was generated from renewables (including rooftop solar). This is
14 per cent higher than the previous record set in 2019.58 At the same time, renewableenergy is getting cheaper, most notably utility scale solar, which has seen costs fall byover 75 per cent since 2014.59
The Government is supporting continued strong investment in, and connection of, newrenewable projects by supporting investment in the reliable generation technologies
needed to ensure the reliable integration of renewables into the grid. This includes a$1.4 billion equity investment in the development of the 2,000 megawatt Snowy 2.0
pumped hydro expansion to the Snowy Hydro Scheme, and up to $600 million to
56

57
58
59

62

Department of Industry, Science, Energy and Resources, Quarterly Update of Australia’s National
Greenhouse Gas Inventory: December 2020 (Canberra: Department of Industry, Science and Energy,2021) 3.
Clean Energy Regulator. Quarterly Carbon Market Report — December Quarter 2020 (10 March
2021).
Australian Energy Statistics. Table O Electricity generation by fuel type 2019-20 and 2020.
BloombergNEF, New Energy Outlook (NEO), 2020. Historic LCOE benchmark dataset.

Part I: The economy over the next 40 years

deliver Snowy Hydro’s Hunter Power Project gas generator in NSW. The Government isalso supporting all major priority transmission projects identified in the Australian
Energy Market Operator’s Integrated System Plan, including Humelink, QNI, and a$250 million program to support Marinus Link, Project Energy Connect and VNI West.
Australia’s policies to further reduce emissions
Beyond 2030, further reductions in greenhouse gas emissions across the world
economy are required to reach the Paris Agreement’s global temperature goal ofholding the increase in global average temperature to well below 2°C, while pursuingefforts to limit the temperature increase to 1.5°C.
The Government is focusing on new and emerging technologies that will allow Australia
to capitalise on opportunities to develop new industries and jobs. This includes byworking with other nations to accelerate the development and deployment ofemissions reduction technologies through the $565.8 million technology partnershipfund.
The Technology Investment Roadmap will help accelerate the commercialisation of
new and emerging low emissions technologies. Low Emissions Technology Statements
will be released annually under the Roadmap to update and refine priority technologies
with the potential to deliver strong economic and abatement outcomes for Australia.
In the first Statement released in September 2020, 5 initial priority technologies wereidentified — clean hydrogen, carbon capture and storage, long duration energy
storage, low carbon materials including low emissions steel and aluminium, and soil
carbon measurement.
The Roadmap complements other Australian initiatives to advance clean energy
generation and reduce emissions. These include the ongoing work and investment ofClean Energy Finance Corporation and the Australian Renewable Energy Agency, which
finance renewable energy projects; and the Emissions Reduction Fund which
incentivises Australian businesses to cut the amount of greenhouse gases they create
and undertake activities that store carbon. The Emissions Reduction Fund has delivered
more than 66 million tonnes of abatement,60 and a record 16 million tonnes wereaccredited in 2020.61
The Future Fuels Fund will increase electric vehicle charging and hydrogen refuelling
stations to support consumer choice. More than $850 million of investment has been
provided to grow Australia’s clean hydrogen industry.
The Roadmap will guide around $20 billion of Government investment over the next
10 years and drive around $80 billion of total new investment in low emissions
technologies in Australia by 2030.

60
61

Clean Energy Regulator, 12th Auction April 2021- Scheme performance (23 April 2021).
Clean Energy Regulator, Quarterly Carbon Market Report – December Quarter 2020, 9.

632021 Intergenerational Report

Climate adaptation action in Australia
Regardless of the future success of global mitigation efforts, some climate change
impacts are unavoidable. Over the next 40 years, Australia will need to manage theseclimate risks through strategic environmental management and adaptation to protect
communities and strengthen the resilience of the economy. Early investment in
adaptation will mean Australia is better prepared and safer from current and futureclimate change, and will remain an attractive place to do business.
In 2012, the Council of Australian Governments agreed the roles and responsibilities
for adaptation at each level of government.62 The Australian Government is primarily
responsible for providing national science and information, managing Commonwealthassets and programs, providing national leadership on adaptation reform andmaintaining a strong, flexible economy and well-targeted social safety net.
The Australian Government’s National Climate Resilience and Adaptation Strategy(NCRAS) outlines the risks of a changing climate and a set of principles to guide effective
adaptation practice and resilience building. A new NCRAS to provide a roadmap
towards climate resilience is being developed through 2021.
The new $210 million Australian Climate Service will support better planning andpreparedness for climate and natural hazards, and better response and recovery todisasters. While the next phase of the $149 million National Environmental Science
Program includes a Climate Systems Hub and a mission to undertake applied research
on climate change science and adaptation.
Australia is working with the international community to support greater climate
adaptation action. As a member of the global Adaptation Action Coalition (AAC),
Australia supports the AAC’s commitment to practical climate adaptation strategies
that deliver on-ground support for vulnerable communities, knowledge sharing and a
joint approach to the protection of ecosystems and World Heritage properties from thephysical effects of a changing climate.
Australia has also joined the Coalition for Climate Resilient Investment (CCRI), working
with the investment sector to better consider physical climate risks and create resilient
investment solutions. The CCRI will develop tools to help investors make climate-smart
investments in resilient infrastructure which supports stronger economic growth whilesafeguarding Australian communities.

Broader environmental issues
Beyond climate change, there are other pressures on the environment. The effective
management of these pressures into the future will have implications for economic
growth, government spending and quality of life.

62

64

Council of Australian Governments, Roles and responsibilities for Climate Change Adaptation inAustralia (2012).

Part I: The economy over the next 40 years

OceansAustralia’s oceans support marine industries, including shipping, energy, mineralproduction, fisheries and tourism. The ocean economy also supports emerging
industries, including carbon sequestration, offshore aquaculture, marine renewableenergy and desalination. By 2025, marine industries are projected to contribute around$100 billion each year to the Australian economy.63 In addition to climate change,pollution (including plastic waste) and illegal fishing are causing degradation to theocean environment.
To prevent further degradation of oceans, and maintain and expand their economic
potential, long-term planning, action and international cooperation are required.
The $100 million Oceans Leadership Package includes investments in blue carbon
ecosystems which play a critical role in carbon capture and storage, as well as
expanding and better managing our marine parks and iconic species.
Other measures include the development and implementation of the International Planof Action to Prevent, Deter and Eliminate Illegal, Unreported and Unregulated Fishingand the Reef 2050 Long-Term Sustainability Plan. The 25-year commitment to theInternational Coral Reef Initiative brings together managers of 75 per cent of theworld’s coral reefs. This initiative will develop ocean accounts to capture the value andbenefits of the ocean, ensuring that these are recognised in ocean policy, law anddevelopment.
Waste management
Effective waste management protects the natural environment by making efficient use
of waste materials, reducing the demand for new natural resources, and keeping
harmful materials out of the environment. Around 60 per cent of Australia’s waste isrecycled.64 While the amount of waste generated per person is declining, and recovery
rates from recycling have improved slightly, overall waste continues to rise, with theincrease largely driven by population growth.
The Australian Government has set a clear goal to move towards a more sophisticatedapproach to waste management and recycling. The Government has passed significant
new laws to phase in the ban of the export of 645,000 tonnes of unprocessed waste(glass, plastic, tyres and paper) that is shipped overseas each year and has set an
80 per cent average recovery target for all waste streams. The National Waste Policy
Action Plan sets out how we will make this transition and achieve our targets. It is
supported by the National Plastics Plan and the National Food Waste Strategy.
Significant investments are supporting progress towards Australia’s targets and driving
the transformation of Australia’s waste and recycling capacity, including $190 million
63
64

K. Evans, N. Bax & D. Smith, ‘Marine Environment’ State of the environment 2016 (Canberra:
Department of the Environment and Energy, 2016).
J. Pickin et al, National Waste Report 2020 (Canberra: Department of Agriculture, Water and theEnvironment, 2020).

65

2021 Intergenerational Reportfor the Recycling Modernisation Fund and $67 million to upgrade organic waste
processing.
Water management and security
Australia is the world’s driest inhabited continent. It has high per person water use andhigh streamflow variability.65 Climate change will exacerbate the existing challenge inmanaging and sharing water between competing uses like agriculture, industry,
communities, and the environment.
Implementation of the National Water Initiative and the Murray-Darling Basin Plan will
improve the efficiency and sustainability of how water is managed. These frameworks
will need to remain fit-for-purpose and continue to account for the impacts of thechanging climate.
A range of federal initiatives are supporting the agriculture sector to build resilienceand adapt to the impacts of climate change on water management and security. This
includes the $5 billion Future Drought Fund and $3.5 billion for the National Water Grid
Authority.
Recent Government investments to support a healthier river system include theSustaining Riverland Environments Program and $1.3 billion to recover water for theenvironment in the Murray-Darling Basin.
Biodiversity
The Independent Review of the Environment Protection and Biodiversity Conservation
Act 1999 found that the population of threatened species is continuing to decline, andthe number of threatened species listed is growing. Since 1999, approximately 4 times
more species listed as vulnerable have become more threatened than those that haveshown an improvement.66
Biodiversity plays a critical role in increasing the resilience of natural capital.
The environment is a complex set of ecosystems that need to operate in balance.
A diverse ecosystem with many different species is better able to respond and adapt tochanges, and to continue to support natural capital.67 Australia’s unique ecosystems
also have immense cultural value and support our economy, including the tourism
industry.
The Government’s 2021-2031 Threatened Species Strategy is a 10-year blueprint forprotecting Australia’s biodiversity, establishing a national prioritisation framework forthreatened species and focussing on key native habitats. This Strategy will focus on
recovery of 100 species and 20 priority places through key action areas, such as

65
66
67

66

I. Prosser, Water: Science and Solutions for Australia (Melbourne: CSIRO Publishing, 2011), 1-9.
G. Samuel, op.cit, 40.
P. Dasgupta, op. cit, 69-72.

Part I: The economy over the next 40 years

mitigating new and established threats, conserving and restoring habitat, emergency
preparedness and response and climate adaption and resilience.

67

Part II: The budget over the next
40 years
6.

Budget projections

Overview
The economic crisis associated with the COVID-19 pandemic has placed
significant demands on public finances in Australia and around the world.
While Australia’s stronger-than-expected economic recovery has flowed
through into the fiscal position, the effects of the pandemic on the budget
are expected to remain into the long term.
The underlying cash balance is projected to be in deficit over the next
40 years, with the deficit initially improving before widening to 2.3 per centof GDP by 2060-61. The primary balance, which excludes net interest, isprojected to return to surplus before deteriorating to a deficit of
0.6 per cent of GDP by 2060-61.
The initial improvement in the fiscal outlook reflects a projected return tostrong economic growth, lower payments and higher receipts following the
COVID-19 pandemic. From the 2030s, spending as a share of GDP is
projected to grow (particularly health, aged care and interest payments)
while tax receipts are constrained by the tax-to-GDP cap, reflecting theGovernment’s commitment to maintaining a sustainable tax burden.
Consistent with the trajectory of the underlying cash balance, both grossand net debt are projected to initially improve before deteriorating again.
By 2060-61, gross debt is projected to be 40.8 per cent of GDP and net debt
is projected to be 34.4 per cent of GDP. The Government’s medium-term
fiscal strategy focuses on growing the economy in order to stabilise andreduce debt as a share of GDP once the economic recovery is secure. Whilecurrent levels of debt remain low by international standards, this will help
to mitigate the pressures projected to arise over time, including from anageing population.

692021 Intergenerational Report

Australia’s fiscal trajectory depends on the performance of the economy andgovernment policy settings.
As outlined in Part I, population, participation and productivity trends are expected toremain the key drivers of Australia’s long-term economic outlook. These trends also
affect the budget directly and indirectly. For example, government payments arecommonly indexed by economic variables such as prices and wages and often increase
with population growth. Government receipts fluctuate largely in line with theeconomy as businesses and individuals tend to earn less and pay less tax during
downturns and earn more and pay more tax when economic conditions are stronger.
The COVID-19 pandemic has affected the economic and fiscal outlook. As a result of
the pandemic, Australia’s economy is projected to be smaller than it otherwise would
have been over the next 40 years. While the fiscal position is projected to improve as
the economy recovers, receipts strengthen and the fiscal support provided in response
to COVID-19 tapers off, this improvement is not projected to persist. This is due topayments increasing as a share of the economy over time while receipts areconstrained by the Government’s tax-to-GDP cap of 23.9 per cent.

Underlying cash balance
The underlying cash balance is the government’s total earnings received from taxes andassets, less the cost of programs and interest payments on debt. The underlying cash
balance is projected to be in deficit over the next 40 years. While the underlying cash
balance improves initially, it then deteriorates in the long term.

Chart 6.1 Underlying cash balance% of GDP
2
0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10
2000-01

Source: Treasury.

70% of GDP2

2010-112020-212030-312040-412050-51-102060-61

Part II: The budget over the next 40 years

In 2020-21, the underlying cash balance is expected to be a deficit of 7.8 per cent of
GDP. This reflects the effects of the COVID-19 pandemic on government finances. The
underlying cash balance is projected to improve to a deficit of 0.7 per cent of GDP in
2036-37, reflecting the impact of the expected economic recovery on tax receipts,
withdrawal of temporary support measures and the continued low cost of borrowing.
In 2035-36, tax receipts are expected to reach the tax-to-GDP cap. However, payments
are projected to continue to increase as a share of GDP, largely due to continuing
increases in health, aged care and interest payments. Overall, these factors contributeto the projected deficit widening to 2.3 per cent of GDP by 2060-61.

Chart 6.2 Payments, receipts and the underlying cash balance% of GDP% of GDP
35

15
Payments (LHS)

30

10

25

5
Receipts (LHS)

20

0

15

10
2000-01

Underlying cash balance (RHS)

2010-112020-212030-312040-412050-51-5-102060-61

Note: Net Future Fund earnings are excluded from receipts before 2020-21.
Source: Treasury.

The underlying cash balance trajectory has similarities to those in previous reports(Chart 6.3). It begins with a period of improvement before deteriorating towards theend of the projection period. There are 2 main differences between the underlying cash
balance trajectory in this report and those in previous reports.

71

2021 Intergenerational Report

The first difference is that the initial period of improvement occurs over a longer period
compared with previous reports. This is predominantly due to tax receipts being
projected to increase for longer before reaching the tax-to-GDP cap, reflecting thenature of the shock. The longer period of improvement in the underlying cash balanceis also driven by the assumption that government bond yields transition to a long-run
trend from a lower rate and at a slower pace, compared with previous reports. This
results in lower interest payments early in the projections.
The second difference is that the trajectory deteriorates less towards the end of the
projection period as payments in the long run grow more slowly than in previous
reports. This reflects lower non-demographic growth, particularly for health, comparedwith previous reports.

Chart 6.3 Underlying cash balance across intergenerational reports% of GDP
4% of GDP
42015 IGR

2

2

0

0
2021 IGR-2-2
2010 IGR-4
2007 IGR-6-6

2002 IGR-8-10
2000-01

Source: Treasury.

72

-4

-8

2010-112020-212030-312040-412050-51-102060-61

Part II: The budget over the next 40 years

Box 6.1

Impact of COVID-19 on the budget

The COVID-19 pandemic is expected to have a long-term fiscal impact.
Understanding the magnitude and duration of this impact helps to ensure
Australia is adequately prepared for future shocks.
The budget impact of COVID-19 can be illustrated by comparing the projectionsin this report with the medium-term projections in the 2019-20 Mid-Year
Economic and Fiscal Outlook (MYEFO), which was the last budget update
published before the onset of the pandemic.68
While the economic projections in this report assume the pandemic subsides,
the size of the economy is projected to be permanently smaller than in the
2019-20 MYEFO due to the impact of the pandemic on the population (Box 1.1
in Part I).
As a result, government receipts are lower as a share of the economy but also in
nominal terms over the forward estimates and medium term. In the long term,
tax receipts are projected to reach the tax-to-GDP cap but at a lower level as aconsequence of the economy being permanently smaller.
The Government’s temporary measures to support the economy and jobs
increased payments significantly in the forward estimates. Beyond the forward
estimates, projected payments remain higher than at the 2019-20 MYEFO partly
due to Government commitments to the provision of essential services, including
the NDIS, aged care and child care.
Together, these factors result in the underlying cash balance being significantly
lower than projected in the 2019-20 MYEFO and this lower balance persistingover time. At the 2019-20 MYEFO, the underlying cash balance was projected to
be a surplus of 1.7 per cent of GDP in 2029-30. This compares to a deficit of
1.7 per cent of GDP in 2029-30 projected in this report. This difference isequivalent to around $109 billion.

68

Not all changes in projections since the 2019-20 MYEFO are due to the effects of the pandemic. There
have been changes to modelling methodology and to government policy and economic conditions
unrelated to COVID-19.

73

2021 Intergenerational Report

Chart 6.4 Underlying cash balance% of GDP2% of GDP2

00
2019-20 MYEFO-2-22021 IGR

-4

-4

-6

-6

-8

-8

-10
2000-01-10
2004-05

2008-09

2012-132016-17

2020-212024-252028-29

Source: Treasury.

In the 2019-20 MYEFO, gross debt was projected to be 14.6 per cent of GDP in
2029-30 compared with 51.4 per cent of GDP in this report.

Chart 6.5 Face value of gross debt
% of GDP60% of GDP60

50

502021 IGR

40

40

30

30

20

20
2019-20 MYEFO

10
0
2000-01100
2004-05

2008-09

2012-132016-17

2020-21

Source: Australian Office of Financial Management and Treasury.

74

2024-252028-29

Part II: The budget over the next 40 years

Primary balance
The primary balance includes the same expenditure and receipts as the underlying cash
balance but excludes interest payments and receipts. By excluding net interest, theprimary balance can highlight imbalances between government receipts and spending.
The primary balance is expected to be a deficit of 7.1 per cent of GDP in 2020-21, before
returning to balance in 2033-34 and reaching a surplus of 0.4 per cent of GDP in
2035-36. The primary balance is projected to remain in surplus until 2047-48 before
falling to a deficit of 0.6 per cent of GDP in 2060-61 (Chart 6.6). These projected primary
surpluses and small primary deficits in the long term indicate Australia’s fiscal
sustainability. They show the capacity of government to fund ongoing spending needs
largely from receipts.
The difference between the underlying cash balance and primary balance projections
reflects net interest. This difference is relatively small initially due to the low cost of
borrowing. However, government bond yields are assumed to rise from the medium
term, which increases projected interest payments as debt is issued or refinanced.69
Net interest is projected to increase from 0.7 per cent of GDP in 2020-21 to 1.7 per centof GDP by 2060-61. This increase is sufficiently large for the projected primary balance
to be in surplus between 2033-34 and 2047-48 while the underlying cash balanceremains in deficit.

Chart 6.6 Primary balance, underlying cash balance and net interest% of GDP2% of GDP
2
Primary balance00

Net interest-2-2Underlying cash balance

-4

-4

-6

-6

-8

-8

-10
2000-01

2010-112020-212030-312040-412050-51-102060-61

Source: Treasury.

69

A bond’s yield is the return an investor receives each year over the bond’s term to maturity.

75

2021 Intergenerational Report

Net debt
Net debt is the sum of interest-bearing liabilities less the sum of selected financial
assets. Net debt is a broader measure of fiscal sustainability than gross debt as it
includes cash-like assets on the government’s balance sheet as well as the market valueof Australian Government Securities (AGS) on issue. It provides an indicator of thegovernment’s ability to meet its future debt obligations.
Net debt is projected to peak at 40.9 per cent of GDP in 2024-25, before falling to28.2 per cent of GDP in 2044-45 and then increasing to 34.4 per cent of GDP by
2060-61.

Chart 6.7 Net debt
% of GDP
60
50

50

40

40

30

30

20

20

10

10

0

0

-10
2000-01

Source: Treasury.

76% of GDP
60

2010-112020-212030-312040-412050-51-102060-61

Part II: The budget over the next 40 years

Previous intergenerational reports projected similar profiles with net debt as a share of
GDP initially improving, before increasing over the long term. While net debt as a shareof GDP increases towards the end of the projection period in this report, this growth isslower than in most previous reports. This difference reflects a longer period of
improvement in the underlying cash balance, lower interest costs and slower growth inpayments as a share of GDP over the 40-year period.

Chart 6.8 Net debt across intergenerational reports% of GDP
70% of GDP
70

60

60
2002 IGR

50

40

50

2021 IGR

30

30
2007 IGR

20

20

2010 IGR

10

10

0

0

-10
-20
2000-0140

2015 IGR
2010-112020-212030-312040-412050-51-10-202060-61

Source: Treasury.

772021 Intergenerational Report

Australia entered the COVID-19 pandemic with a lower net debt-to-GDP ratio thanmany advanced economies and currently has a lower debt burden than a majority ofcomparable countries. In 2021, total government net debt (including state governmentdebt) is estimated to be 48.8 per cent of GDP, less than half the average of G20
advanced economies.

Chart 6.9 International comparisons of net debt, 2021
% of GDP180% of GDP
180

160

160

140

140

120

120

100

100

80

80
48.8

60

60
30.0

40

40

20

20

0

0
CanadaAustralia(Total)Australia(Cth)Germany

UnitedKingdom

UnitedStatesJapan

Advanced
G20

Note: International comparisons of government debt are not directly comparable to other debt metrics
included in this report because international comparisons prepared by the IMF include total government debt(inclusive of state and local debt), include slightly different assets and liabilities, and are prepared on acalendar year basis. The Australian Government debt figure is based on debt as at 30 June 2021, rather thana calendar year basis. It is reported on a Uniform Presentation Framework basis, so it includes slightly different
assets and liabilities to IMF measures.
Source: IMF estimates, April 2021, and Treasury.

Gross debt
Gross debt is an important indicator of fiscal sustainability. The face value of gross debt
is the amount the government owes on maturity to investors holding AGS. The level ofgross debt changes when bonds are issued, repurchased or mature.
Australian Government gross debt has risen sharply. As a share of GDP, it is now higher
than at any time since the 1950s when Australia was still paying down debt associatedwith the Second World War. Gross debt is projected to peak at 51.5 per cent of GDP in
2028-29, before falling to a low of 36.8 per cent of GDP in 2047-48. This is driven by
low borrowing costs relative to economic growth, and primary surpluses. Gross debt isthen projected to rise to 40.8 per cent of GDP by 2060-61.

78

Part II: The budget over the next 40 years

Gross debt can also be measured in market value terms, which is the price AGS could
be sold for in financial markets. The market value of gross debt is projected to decline
from a high of 53.2 per cent of GDP in 2024-25 and follow the same trajectory as theface value of gross debt at the end of the projection period.

Chart 6.10 Gross debt
% of GDP60% of GDP
60

Market value

50

50Face value

40

40

30

30

20

20

10

10

0
2000-01

2010-112020-212030-312040-412050-5102060-61

Source: Final Budget Outcome; Australian Office of Financial Management; and Treasury.

A key focus of the Government’s medium-term fiscal strategy is to grow the economy
in order to stabilise and then reduce debt as a share of the economy. The transition to
the medium-term fiscal strategy will occur once the economic recovery fromthe COVID-19 pandemic is secure. Stabilising and reducing debt as a share of theeconomy will help counteract the fiscal pressures projected to arise over time.
While the response to the COVID-19 pandemic has resulted in a rapid increase ingovernment borrowing, historically low yields on government bonds mean that interest
payments are assumed to remain below 0.9 per cent of GDP until 2024-25. These
payments are then projected to increase over time as government debt is financed, andreissued, at higher rates. This reflects an assumption that the 10-year bond yield
gradually converges to around 5 per cent by 2039-40, consistent with long-term
nominal GDP growth.

792021 Intergenerational Report

Over much of the medium and long term, the cost of borrowing on the total stock of
AGS is therefore at or below nominal GDP growth, as the average yield on total
portfolio issuance is below that on new issuance. This curbs total interest payments on
government debt. Interest payments are projected to increase over the projection
period and reach 1.9 per cent of GDP by 2060-61. The sensitivity of the fiscal projection
to assumptions about future yields is discussed in Box 6.3.

Chart 6.11 Interest payments on government debt
% of GDP
2.5% of GDP
2.5

2.0

2.0
Interest
payments

1.5

1.5

1.0

1.0
Yields areheld constant

0.5

Yields transition
0.0
1990-91

2000-01

Source: Treasury.

80

2010-112020-212030-31

The 10-year bondyield is held at around
5 per cent, consistent
with long-term
nominal GDP growth2040-412050-510.5

0.0
2060-61

Part II: The budget over the next 40 years

The trajectory of gross debt as a share of the economy will depend largely on future
economic growth, the primary balance and yields on government debt. Chart 6.12
illustrates that the largest positive contribution to gross debt is projected to come from
GDP growth, which declines slightly over time as discussed in Part I. Projected primary
surpluses also improve the debt-to-GDP ratio between 2033-34 and 2047-48 before
primary deficits increase debt as a share of GDP.

Chart 6.12 Contributions to changes in gross debt
% of GDP
10

GDP growth
Primary balance
Net interest payments
Balance sheet transactions
Change in gross debt

8
6

% of GDP
10
8
6

4

4

2

2

0

0

-2

-2

-4
2000-01

2010-112020-212030-312040-412050-51-42060-61

Note: Components below the horizontal axis in the chart contribute to reductions in the debt-to-GDP ratio,
while components above contribute to increases in the debt-to-GDP ratio.
Source: Treasury.

812021 Intergenerational Report

These projections reflect an underlying assumption that the 10-year government bondyield remains at or below the rate of economic growth over the next 40 years. This is atechnical assumption and should not be interpreted as a forecast. This assumption isconsistent with past experience, where yields on Australian Government 10-year bonds
have been lower than nominal GDP growth in 31 of the last 50 years, averaging
0.6 percentage points lower over this period. The bond yield assumptions also reflect
developments in global bond yields in recent decades.

Chart 6.13 Nominal GDP growth and the nominal 10-year bond yield
%
25
20

%
25
Nominal GDP growth

20

15

15
Nominal 10-year bond yield

10
5

5

0

0

-5
-10
-15
1969-70-5Interest rate-growth differential

1979-80

1989-90

Source: Reserve Bank of Australia and ABS.

82

10

-10
1999-00

2009-10-15
2019-20

Part II: The budget over the next 40 years

Box 6.2

The trend decline in government borrowing costs

Notwithstanding a recent uptick, global government bond yields have been
trending downwards for several decades. Australian bond yields have generally
moved in line with this global trend. Because Australia is a small open economy,
the government’s cost of borrowing can be thought of as a function of a common
global real yield determined in the international sovereign bond market plus acountry-specific risk premium and the expected rate of inflation. While the rateof inflation in many countries, including Australia, has trended down over thisperiod, real yields – yields adjusted for inflation – have also trended downwards.

Chart 6.14 Real 10-year government bond yields
%
10

%
10
Australia

8

8

6

6

4

4

2

2

0

0

-2
Mar-89

United States
Mar-93Mar-97Mar-01Mar-05Mar-09Mar-13Mar-17-2
Mar-21

Note: Real interest rates constructed using ‘core’ inflation (consumer price index excluding volatile
items (Australia) or food and energy (United States)).
Source: Bloomberg; US Bureau of Labor Statistics; ABS; and Reserve Bank of Australia.

In broad terms, the downwards trend in global real interest rates is thought tobe caused by a sustained excess supply of funds (savings) relative to demand(investment). In turn, this results in a lower cost of funds – the interest rate.
Economic researchers have identified several factors as likely being the mostimportant drivers of this savings-investment imbalance: an ageing population, a
slowdown in trend productivity growth, and an increased demand for safe
assets.70
Rising living standards have meant that life expectancy has increased in many
countries across the world, including Australia (see Chapter 2 – Population).
Theory suggests that increased life expectancy initially raises savings as people
accumulate assets to support themselves during longer periods of retirement,
putting downwards pressure on interest rates. These savings are then drawn

832021 Intergenerational Report

down as people retire, which could eventually begin to put upwards pressure on
interest rates over the longer term.
Many countries have experienced a slowdown in productivity growth since the
Global Financial Crisis (see Chapter 4 – Productivity). Slowing productivity growth
reduces the returns to capital and, therefore, investment demand. It also reduces
expected household incomes and wealth, discouraging consumption today andencouraging saving for future consumption. The combination of reduced
demand and increased supply of funds puts downwards pressure on yields.
Another factor that may be contributing to the trend decline in yields is increased
demand for ‘safe assets’. In response to the financial crises of the 1990s and2000s, many emerging market economies accumulated precautionary foreignexchange reserves, and regulatory changes required financial institutions to holdmore safe assets as collateral. The combined effect is that demand for safe assets
has outstripped supply.
From a fiscal sustainability perspective, changes in public debt as a share of GDP
are driven by the difference between yields and economic growth, along withthe primary balance. A higher interest rate on government debt increases thecost of servicing newly issued debt.71 However, if economic growth exceeds
these yields, it may be sufficient to improve debt as a share of the economy overtime even if the primary balance is in deficit.

70

71

84

Other factors that have been put forward include increasing inequality, investment-specific technicalchange, expansionary monetary policies and global deleveraging. Furman, J., & Summers, L., ‘A
reconsideration of fiscal policy in the era of low interest rates.’ Peterson Institute for International
Economics. Online publication. (November 2020).
The fact that the Australian Government primarily issues at a fixed interest rate means that changes
in interest rates will affect the servicing costs of newly issued or refinanced debt, and not theservicing costs of already existing debt.

Part II: The budget over the next 40 years

Box 6.3

Sensitivity of fiscal projections to yield assumptions

Under the baseline projections, the 10-year government bond yield is assumed
to gradually converge to a long-run rate of around 5 per cent, consistent with thenominal GDP growth rate, over the period from 2025-26 to 2039-40.
There are both upside and downside risks to this baseline projection. The
following analyses the sensitivity of the fiscal projections to different yieldassumptions, while holding other economic parameters unchanged.
A lower yield assumption assumes that the 10-year bond yield remains at current
levels until 2031-32, before converging to the long-run rate of around 5 per centby 2046-47.
The higher yield assumption assumes that the 10-year bond yield immediately
converges from current levels over 5 years to the long-run rate.

Chart 6.15 10-year bond yield assumptions
%
7

%
7

6

6

Higher yield assumption

552021 IGR

4

4

3

3

2

2
Lower yield assumption

1
0
2000-01

2010-112020-212030-312040-411

2050-5102060-61

Source: Reserve Bank of Australia and Treasury.

Under the lower yield assumption, the cost of servicing government debt isreduced, which results in a projected improvement in the underlying cash
balance of around 0.4 percentage points of GDP by 2060-61. This reduces grossdebt by 8.3 percentage points of GDP by 2060-61.
Under the higher yield assumption, there is a projected deterioration in theunderlying cash balance that builds to around 0.6 percentage points of GDP by
2060-61. This would increase gross debt by 14.0 percentage points of GDP by
2060-61.

85

2021 Intergenerational Report

Chart 6.16 Impact on underlying cash balance of alternative yieldassumptions% of GDP2% of GDP2
Lower yield assumption

002021 IGR-2-2

Higher yield assumption
-4

-4

-6

-6

-8
2000-01

2010-112020-212030-312040-412050-51-82060-61

Source: Treasury.

Chart 6.17 Impact on gross debt of alternative yield assumptions% of GDP% of GDP

70

70

60

Higher yield assumption

50

60
50

2021 IGR

40

40

30

30
Lower yield assumption

20

20

10

10

0
2000-01

2010-112020-212030-312040-41

Source: Australian Office of Financial Management and Treasury.

86

2050-5102060-61

Part II: The budget over the next 40 years

Net financial worth
Net financial worth is the government’s financial assets (liquid assets and equity
investments) minus its total liabilities. A negative net financial worth means that the
government holds more liabilities than financial assets.
Net financial worth projections follow a similar profile to the other debt metrics
explained above. Net financial worth is expected to be -46.4 per cent of GDP in 2024-25.
Net financial worth then improves to -31.8 per cent of GDP in 2044-45 as thegovernment pays down debt as a share of the economy. Net financial worth thendeteriorates to -38.5 per cent of GDP by 2060-61, as debt increases again as a share of
the economy.

Chart 6.18 Net financial worth% of GDP0% of GDP
0

-10

-10

-20

-20

-30

-30

-40

-40

-50
2000-01

2010-112020-212030-312040-412050-51-50
2060-61

Source: Treasury.

Fiscal strategy
The immediate priority of the Government’s economic recovery plan is to supportconfidence, employment and economic growth to minimise the impact of
the COVID-19 pandemic.
Past experience indicates that the budget can take many years to recover from
economic shocks. In part, this reflects the long-lasting impact that a shock can have on
the labour market and earnings. This underscores the importance of securing a strong
recovery to limit these long-term effects.
Once the economic recovery is secure and the unemployment rate is back to pre-crisis
levels or lower, the Government’s medium-term fiscal strategy aims to stabilise andthen reduce debt as a share of the economy. This will ensure Australia retains thecapacity to respond to future shocks without compromising fiscal sustainability.

872021 Intergenerational Report

It is important to rebuild this fiscal space over time to ensure we can respond to adverse
events, while carefully balancing the cost to the economy. Historically, countries withmore fiscal space have responded to crises with more expansionary fiscal policy, andhave experienced less severe downturns.72 Australia entered the crisis induced by the
COVID-19 pandemic in a stronger fiscal position than most other advanced economies,
which provided the flexibility to respond decisively.
Having adequate fiscal policy space is particularly important for Australia as a small
open economy that currently has limited conventional monetary policy space and issubject to fluctuations in its terms of trade and cost of capital caused by global factors.

72

88

Ò. Jordá, M. Schularick, & A. M. Taylor ‘Sovereigns Versus Banks: Credit, Crises, and Consequences’
Journal of the European Economic Association, 14(1), 45–79. (February 2016); C. D. Romer &D.H. Romer ‘Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial
Crises’. Economica, 85(337), 1-40. (January 2018).

Part II: The budget over the next 40 years

7.

Government spending

Overview
Total government spending as a share of the economy is projected to fallfrom a pandemic-induced high, before gradually increasing as a share of
the economy over the next 40 years.
Real government spending per person is expected to be $22,420 in
2021-22, increasing to $38,680 by 2060-61.
Health and aged care are projected to be the fastest growing areas ofspending over the next 40 years. Growth in these areas reflects pressuresfrom the ageing of the population as well as non-demographic factors suchas technology, changing consumer preferences and rising incomes.
Strong growth in health and aged care spending is partially offset by slower
growth in payments to individuals, Age and Service Pension, and education
spending. While these will remain substantial components of government
spending, they are expected to account for a smaller share of total
spending over time.
Interest payments are projected to increase over the next 40 years. This
results from the need to fund higher spending over time as well as an
assumption that government bond yields will return to higher rates in thelong term.

Projections for demand-driven programs, such as health and payments to individuals,
are based on current policy settings projected over the long term with reference tolong-term demographic and economic growth trends. Projections for non-demand
driven programs such as infrastructure and defence grow in line with the economy andare assumed to remain a constant share of GDP in the long run.
In the absence of policy changes, nominal government spending is generally not very
responsive to changes in the economy in the short term. While payments to individuals
are typically countercyclical – increasing when the economy worsens and decreasing
when the economy improves – many other areas of government spending are not as
responsive.
The trajectory of government spending depends heavily on long-standing policy
settings and overarching trends and pressures. In the longer term, changes to economic
892021 Intergenerational Reportvariables such as population and prices will affect government spending. Many
government payments are indexed, which means that changes in prices influence theamount of total government spending. Changes to the size and age structure of the
population also directly affect the demand for government services and have flow-on
effects for total government spending.
Australia is currently in the middle of an important demographic transition, as people
in the baby boomer generation reach 65. This has already driven a rapid fall in the ratioof working-age people to those over 65 in the past decade, which will continue for the
next decade. The effect of population ageing on a given area of government spending
will depend on several factors, including the composition of recipients, how demand
for services varies with age, and how demand is expected to change in the future. For
instance, as the baby boomer generation ages, demand for health services will
increase, and there will be an increasing demand for aged care. In contrast, other areasof government spending such as payments to families and education will see a
reduction in growth.

Chart 7.1 Increase in age-groups – 5-year moving average
'000
90

'000
90

65-74
75-84

80

80

70

70
85+

60

60

50

50

40

40

30

30

20

20

10

10

0
2000-01

2010-112020-212030-312040-412050-5102060-61

Source: ABS Demographic Statistics and Treasury.

Projections of total spending
Australian Government support during the pandemic means that total government
payments in 2020-21 are expected to reach 32.1 per cent of GDP. Spending has notbeen this high since the Second World War. However, since support during the
pandemic is targeted and temporary, total spending as a share of the economy isexpected to fall quickly as the economy recovers.
Total spending is projected to decrease to 26.2 per cent of GDP in 2024-25. Payments
increase gradually from the 2030s as a share of the economy, and by 2060-61 total
government spending is projected to be 27.7 per cent of GDP. The increase in payments
as a share of GDP is mainly driven by growth in health spending, but also aged care90

Part II: The budget over the next 40 years

spending and interest payments. Increases in these payments more than offset
decreases in some other payment categories as a share of GDP, such as payments toindividuals and education.

Chart 7.2 Government spending% of GDP% of GDP
34

34

32

32

30

30

28

28

26

26

24

24

22

22

20
2000-01

2010-112020-212030-312040-412050-5120
2060-61

Source: Treasury.

Total payments, in real terms, are projected to grow at 2.5 per cent a year on average
from 2021-22 to 2060-61. This compares to real average annual growth of 3.4 per centover the past 40 years.
Australian Government real spending per person is projected to nearly double over the
next 40 years. Real government spending per person is projected to increase from
$22,420 in 2021-22 to $38,680 by 2060-61.
The projected trajectory for government spending has similarities with previous
intergenerational reports. Previous reports projected spending profiles that increased
as a share of GDP over the long term, reflecting spending pressures from ageing andother non-demographic factors (Chart 7.3). A key difference in this report comparedwith previous intergenerational reports is that projected payments in the long run growmore slowly. This reflects lower non-demographic growth, particularly for health,compared with previous reports.
Aside from 2020-21 and 2021-22, the level of total payments is projected to be lower
than it was in the 2015 Intergenerational Report. This reflects lower population
projections and weaker price and wage growth, which affects indexation of
government payments. Lower levels of projected spending also reflect ongoing efforts
to constrain spending growth and target spending to priority areas. However, total
payments as a share of the economy are projected to be higher than in the 2015 Report,
reflecting both the projections of a smaller economy as a result of
the COVID-19 pandemic and structural spending increases in the NDIS, aged care andchild care.
912021 Intergenerational Report

Chart 7.3 Government spending across intergenerational reports% of GDP
35% of GDP
35
2002 IGR

2007 IGR

2021 IGR

30

2010 IGR

25

2015 IGR

20

15
2000-01

30

25

20

2010-112020-212030-312040-412050-5115
2060-61

Note: Interest and GST payments have been incorporated into the 2002 and 2007 Intergenerational Reportprojections for comparability.
Source: Treasury.

Changes to the composition of government spending
As a share of GDP, health spending is projected to increase from 4.6 per cent in 2021-22
to 6.2 per cent in 2060-61, substantially due to rising incomes, changes in consumer
preferences and the costs of using new health technology. Aged care spending is
projected to significantly increase, albeit from a much smaller base, from 1.2 per centof GDP in 2021-22 to 2.1 per cent of GDP in 2060-61. This is largely driven bydemographics over the next decade, after which non-demographic factors become thepredominant drivers of growth.
Meanwhile, spending on the Age and Service Pension is projected to fall from
2.5 per cent of GDP in 2021-22 to 2.1 per cent of GDP in 2060-61. Other payments toindividuals are also projected to fall from 3.9 per cent of GDP in 2021-22 to 2.7 per centof GDP in 2060-61. While increasing in absolute and real terms, these payments
decrease as a share of GDP since nominal GDP is expected to grow faster than thosepayments, which largely depend on a combination of indexation rates (including CPI),
wage cost indexes and population growth.
Interest payments are projected to increase from 0.8 per cent of GDP in 2021-22 to
1.9 per cent of GDP in 2060-61. This results from the need to fund projected higher
spending over time as well as an assumption that government bond yields will return
to higher rates in the medium and long term (Chapter 6 ─ Budget projections).

92Part II: The budget over the next 40 years

Chart 7.4 Composition of government spending over time
% of GDP7% of GDP7

6

62021-222060-61

5

5

4

4

3

3

2

2

1

1

0

HealthPayments toindividuals(excl. Age
Pension)Age andServicepensions

Defence

Education

Aged care

NDIS

InfrastructureInterest
payments

Other
payments(excl NDIS
state and
GST)

0Note: Other payments in this chart includes a range of payments such as funding for the Australian PublicService, superannuation, official development assistance, law and order, the arts, community development
and tourism. It excludes GST payments and state government contributions to the NDIS.
Source: Treasury.

The composition of total spending is expected to change over the next 40 years. Health,aged care, and interest payments are projected to increase as a proportion of total
spending over time. This is partly offset by slower growth in Age and Service Pension,other payments to individuals, and education. This results in these payments falling asa share of total spending over time. Health accounts for the largest compositional shift
over the next 40 years. It is projected to increase from 19.0 per cent of total
government spending in 2021-22 to 26.0 per cent in 2060-61.
Other pressures on government spending are likely to become more prominent overthe next 40 years. These include challenges posed by climate change and other risks to
the natural environment. There will also be spending pressures, as well as opportunities
for efficiencies and new solutions, presented by technological changes.

932021 Intergenerational Report

7.1

HealthThe Australian, state and local governments share responsibility for the health system.
The Australian Government is the largest single source of funding for the system,
providing around 41 per cent of total health spending. State and local governments
contribute around 27 per cent, with private contributions making up the remaining
32 per cent.
In Australia, health spending has generally grown faster than the rest of the economy
over the past 40 years. This trend of rising health spending as a share of GDP can be
attributed to demographic and non-demographic factors. These factors include anageing population, rising incomes and technological advancement. The response to
COVID-19 has had a significant effect on near-term health spending and has seen the
introduction of technologies, like telehealth, that will shape the health system andpublic consumption into the future.
Australian Government health spending is projected to continue to increase as a shareof GDP from 4.1 per cent in 2018-19 to 6.2 per cent in 2060-61. Real per person healthspending is also projected to increase from $3,250 in 2018-19 to $3,970 in 2031-32,
continuing to grow to $8,700 in 2060-61. This spending varies by age with people aged
over 55 years using the health system at a higher rate than the average person(Chart 7.1.2).

Chart 7.1.1

Historical health spending% of GDP12
10% of GDP
12
PrivateState and other
Australian Government

8

8

6

6

4

4

2

2

0
1985-86

1996-97

Source: AIHW health spending database.

94

102007-080
2018-19

Part II: The budget over the next 40 years

Chart 7.1.2

Australian Government health spending by major programs
and age in 2019-20

Index
4.5

Index
4.5

4.0

4.0

3.5

3.5

PBS

3.0

3.0

2.5

2.5

MBS

2.0

2.0
Hospitals

1.5

1.5

1.0

1.0
Private health insurance

0.5

0.5
85+

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0.0
0-4

0.0

Note: Index of average cost per person in 2019-20. A value of 1 denotes the average person’s spending oneach health program.
Source: Department of Health.

Past intergenerational reports have projected that spending on health would rise to
between 5 and 8 per cent of GDP by the end of their projection periods. However, theprojected outlook for health spending has generally been lower over successive
reports.

Chart 7.1.3

Health spending projections across intergenerational
reports% of GDP9% of GDP
92002 IGR

8

82007 IGR

7

2010 IGR

2021 IGR

6
52015 IGR

4

3
2000-01

7
6
5
4

2010-112020-212030-312040-412050-5132060-61

Source: Treasury.

95

2021 Intergenerational Report

Components of current health spending
Major health programs funded by the Australian Government include the Medicare
Benefits Schedule (MBS) and the Pharmaceutical Benefits Scheme (PBS). In addition,
the Australian Government makes a major contribution to the funding of public
hospital services provided by state governments, subsidises the cost of private healthinsurance and provides financial support for medical research, public health,Indigenous health services and medical workforce development.
Medicare has been Australia’s universal health care scheme since 1984. It funds
medical services, public hospitals, and medicines. Medicare guarantees all Australians
access to a wide range of health and hospital services at low or no cost, including healthservices provided by GPs, medical specialists, nurses, and other allied healthprofessionals. In total, over 428 million MBS services were provided in 2019-20, withtotal benefits of $24.7 billion. On average, more than 8 out of every 10 visits to the GP
involved no out-of-pocket cost for the patient in 2019-20.
The PBS subsidises the cost to patients of a wide range of prescription medicines. The
PBS is a demand driven program. Advances in medical technology and the developmentof new treatments are leading to more medicines being made available to Australians.
At the same time, the Government has implemented PBS pricing policies to keep thecosts of these medicines low for the Government and consumers.
The Australian Government provides a significant contribution to assist states with thecosts of delivering public hospital services. Funding for public hospital services was
agreed through the 2020-25 Addendum to the National Health Reform Agreement(NHRA) which was signed in May 2020. Under the NHRA the Australian Government is
expected to invest more than $130 billion in demand driven public hospital funding
over 5 years from 2020-21. Advances in medical technology and treatment innovations
are leading to life-saving treatments being made available in hospitals around thecountry.
Private health insurance is an important part of the Australian health system, with
13.9 million Australians covered by either general or hospital treatment policies and$21.9 billion in total private health insurance benefits provided in 2019-20. In 2020-21,
the Australian Government will spend around $6.7 billion in means-tested subsidies tomake private health insurance more affordable.

96Part II: The budget over the next 40 years

The Australian Government makes significant investments in medical research to
improve the health of Australians by supporting the development of new medicines,
treatments, and devices. The Medical Research Future Fund (MRFF) was established in2015 to provide a sustainable source of funding for Australian health and medical
research. The Australian Government contributed to the MRFF until it reached$20 billion in July 2020. The Future Fund invests this money and every year theGovernment uses some of the returns from this investment to pay for medical research
initiatives. The Government has released a 10-year investment plan that outlines how
the MRFF will provide over $5 billion for medical research over the decade to 2027-28.
Real spending across these major health programs has increased steadily over the past2 decades, albeit with differences across the programs. Public hospital spending by theAustralian Government has increased the fastest, with average growth of 4.4 per centper year which is more than double the rate of population growth. Growth in private
health insurance spending by the Australian Government has been more moderate,
growing at 3.4 per cent per year over the period, with MBS and PBS spending growing
at average rates of 4.2 per cent and 3.8 per cent per year, respectively.

Chart 7.1.4

Australian Government real spending on major programs

$b
30

$b
30

25

25
MBS

20

20
Hospitals

15

PBS

15

10

10

5
0
2000-01

5

Private health insurance0
2003-04

2006-072009-10

2012-132015-162018-19

Note: Total spending in 2020-21 dollars. Data exclude spending on veterans’ health.
Source: Treasury.

972021 Intergenerational Report

Healthcare reform
The Government has implemented major reforms over the past decade to ensure
Australians are able to access the essential health services they need while maintaining
a sustainable health system. Activity-based funding introduced as part of the2011 NHRA has delivered improved efficiency of public hospital funding while ensuringhigh-quality care is delivered across Australia.
Recognising the joint responsibility for different aspects of the health system, national
partnership agreements (such as the NHRA) between the Australian Government andthe states include performance and accountability measures to further improve theefficiency of the healthcare system.
Ongoing reform and monitoring of the MBS and PBS have ensured that these programs
continue to operate efficiently while supporting access to new treatments andmedicines. In 2020, the MBS Review Taskforce completed its review of over 5,700 itemson the MBS. In the 2020-21 and 2021-22 Budgets, the Government committed morethan $20 million to support the implementation of the Taskforce recommendations andto establish an ongoing review process. This will continue to ensure the MBS meets thegoals of affordable and universal access, best practice healthcare, and value forindividual patients and the health system. Reforms to the way the Government pays
for medicines listed on the PBS have ensured that Australians have been able to accessnew and innovative medicines while maintaining affordability for consumers andsustainability for the Government.
There has also been an increased focus on primary health care at the local level,
immediate investments in infrastructure to alleviate pressure on the public hospitalsystem and better integration and smoother transitions for patients across the healthsystem.

Drivers of future health spending
As in other developed countries, Australian Government spending on healthcare has
generally grown faster than GDP. Underpinning increases in real health spending aredemographic factors (such as population growth and ageing) and non-demographic
factors such as technology, changing consumer preferences and rising incomes(Chart 7.1.5). Government policy decisions on the design of health programs also havea significant impact on total health spending.
Demographic factors are projected to account for just under half the increase in real
spending per person over the next 40 years. This reflects that older people need to use
more health services, so as the population ages health system costs increase.
In 2019-20, Australian Government spending on Medicare and the PBS for the average
person aged 85 years and older was around 3 times higher than the average across all
ages. Recent evidence suggests those aged 65 and over were 4 times more likely to98Part II: The budget over the next 40 years

have co-morbidities than people aged 15 to 44.73 Compared with the previous 40 years,
demographic changes are projected to contribute less to health expenditure growth.
This is due to the expected moderation of population growth and the diminishing effectof ageing over the projection period.
The cost and prevalence of chronic conditions are relevant to future health spending.
Chronic conditions are long lasting with persistent effects, and include conditions suchas arthritis, back pain, cardiovascular disease, diabetes, and mental health conditions.
These conditions tend to develop gradually and become more common with age. In
2017-18, 1 in 2 Australians had 1 or more of 10 selected chronic conditions. As the
population ages, chronic conditions will increase overall health spending. Most care forchronic conditions is provided in the primary health care setting by general and allied
health practitioners. Effective primary health care is important to help prevent
unnecessary hospitalisations from chronic conditions and improve health outcomes.
The Government has invested an additional $2.3 billion in the National Mental Healthand Suicide Prevention Plan, which will provide critical services and supports toimprove mental health services, with a focus on prevention, early intervention and anational network of mental health treatment centres. The Productivity Commission’s
2020 Inquiry Report into mental health estimated that the direct cost to the Australianeconomy of mental illness and suicide is up to $70 billion per year. The productivity
implications of mental ill-health include people requiring time off work to maintaintheir wellbeing and reduced productivity in the workplace due to psychological distress.
Health costs have also been growing independently of the size and ageing of the
population. Non-demographic growth factors place pressure on government toincrease spending on health in excess of what would be expected from demographic
changes. These factors, such as rising incomes and technological advancement,
contribute to an increased quantity and quality of health services and products
consumed and demanded. Governments must choose how to respond to thesepressures. Several studies have found that changes in national income are the largest
driver of government spending on health internationally.

73

51 per cent compared with 12 per cent. Source: Australian Institute of Health and Welfare,
Australia’s Health 2020 (Canberra: AIHW, July 2020).

992021 Intergenerational Report

Chart 7.1.5

Drivers of real Australian Government health spending –average annual growth%
5.0

Non-demographic factors
Demographic factors

%
5.0

4.0

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

0.0
1985-86 to 2018-19

2019-20 to 2060-61

Note: The chart displays average annual growth rates of the different factors contributing to real AustralianGovernment health spending projections (2020-21 dollars).
Source: Treasury.

In terms of price, while new treatments are often initially more expensive thanpre-existing treatments, they can improve patient outcomes and be more cost effectivein the long term. This is particularly the case when taking whole-of-patient care costs
into account. For example, genomic testing is a costly emerging technology. It is likely
to be used more frequently in the future due to its potential to diagnose healthconditions and diseases earlier, as well as to provide better prevention and treatment
options than traditional approaches. As the cost of this new technology falls over time,
it is likely to become more cost-effective for a wider range of conditions.
Improvements in health technology affect the quantity and price of health services. By
enabling interventions that were previously not possible, technology can boost the
supply of, and demand for, health services.
These non-demographic factors have been more significant drivers of the growth inhealth spending than demographic factors and this trend is projected to continue.
Non-demographic factors are projected to account for just over half the increase in real
spending per person over the next 40 years.

100Part II: The budget over the next 40 years

Components of future health spending
The major components of Australian Government health spending are projectedindividually for 10 years into the future. From 2032-33 onwards, total AustralianGovernment health spending is projected in aggregate based on the long-term trend in
spending on health by all levels of government. By using information on healthspending by age and gender, these projections account for the diverse ways Australians
engage with the health system. These projections suggest that the AustralianGovernment health budget will face greater pressure over the longer term.
Funding for public hospitals is projected to be the fastest growing component ofAustralian Government health spending, nearly doubling in nominal terms between
2020-21 to 2031-32. In real terms, Australian Government funding for public hospitals
is projected to grow from $880 per person in 2020-21 to $1,190 per person in 2031-32.
MBS spending is projected to increase by 70 per cent between 2020-21 and 2031-32,
with real spending per person projected to increase from $1,110 to $1,280 over theperiod. Real spending on the PBS is projected to increase from $540 to $590 per person
over the period.

Chart 7.1.6

Australian Government health spending by components% of GDP
7
Other
Private health insurance
6
Public hospitals
PBS
5
MBS

% of GDP
7
Total
6
5

4

4

3

3

2

2

1

1

0
2000-01

2010-112020-212030-312040-412050-5102060-61

Source: Treasury.

Government policy settings can directly influence the speed with which innovative
treatments and clinical care are developed and adopted in clinical settings. For
instance, the MRFF has served as a source of funding for initiatives such as the‘Genomics Health Futures Mission’ to improve testing and diagnosis for many diseases,
help personalise treatment options to better target and improve health outcomes, andreduce unnecessary interventions and health costs. Other innovative treatments
include medicines that can be taken in the community setting that replace therapies
that would have been given in a hospital setting. For example, new oral anti-cancer
medicines are being made available through the PBS, such as ibrutinib for chronic1012021 Intergenerational Report

lymphocytic leukaemia, which can be used instead of chemotherapy-immunotherapy
infusible regimens.
The COVID-19 pandemic demonstrated how decades of investment have built aworld-class health system that supports positive health outcomes for Australians andis agile to respond to community health needs. While uncertainty remains about futurerisks to the health of Australians, investments in medical research will support theAustralian health system to continue to innovate and prepare to respond.

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Part II: The budget over the next 40 years

7.2

Aged care

The Australian Government provides funding for residential aged care and a range ofcommunity aged care services, including care in the home. In 2018-19, the AustralianGovernment funded around 80 per cent of total aged care spending, with user
contributions largely making up the remaining 20 per cent.
Aged care is provisioned across a spectrum of support ranging from limited assistancewith daily tasks at home through to intensive supervision within a residential aged carefacility. The Commonwealth Home Support Programme (CHSP) provides entry-level
home support for older Australians needing assistance to continue living
independently. The Home Care Packages Program assists people living at home andoffers choice and flexibility in the way care and support are provided. Residential agedcare provides a range of supported accommodation services for older Australians who
are unable to continue living independently in their own homes.
Australian Government spending on aged care has increased by over 40 per cent in realterms since 2012-13. While the number of people living in residential aged carefacilities has remained relatively stable in recent years, the number of people accessinga Home Care Package has increased markedly, growing from around 60,000 in
June 2015 to around 170,000 by December 2020.
The reforms announced as part of the 2021-22 Budget will deliver a substantial
structural increase in the level of funding for aged care. By 2023-24, AustralianGovernment spending on aged care is expected to be around $4.5 billion higher
per year as a result of the reforms (an increase of around 17 per cent). This represents
an increase in annual spending equivalent to around 0.2 percentage points of GDP.
The number of older Australians requiring aged care services is expected to increase as
the population ages. In the near term, the impacts of the baby boomer generation
moving into their 70s and 80s will be particularly marked. A key driver of aged carespending is the number of people over the age of 70. The number of people aged 70
and over is expected to more than double over the next 40 years, reaching around
6.9 million people by 2060-61.
However, the relative impact of population ageing will fall over the next 40 years, andnon-demographic factors are projected to become the dominant driver of spending
growth in aged care over the long term. This is a result of slowing growth in the numberof people aged 70 and over in the generation following the baby boomer generation.
Non-demographic factors include pressures arising from changing consumer
preferences, higher real incomes, and the changing incidence of frailty and disease
among users of the aged care system. Historically, non-demographic factors haveplaced pressure on government spending over and above what might be expected as aresult of demographic factors alone.

1032021 Intergenerational Report

Chart 7.2.1

Aged care spending% of GDP
2.5% of GDP
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5
2010-112020-212030-312040-412050-510.5
2060-61

Source: Treasury.

Aged care spending is expected to increase substantially as a share of the economy,
from 1.2 per cent of GDP in 2020-21 to 2.1 per cent of GDP in 2060-61 (or $113 billion
in 2020-21 dollars). This reflects population growth and ageing, as the baby boomer
generation enters aged care eligibility age, and non-demographic factors. Realper person aged care spending is projected to increase from $5,460 to $12,500 for
people aged 65 and over. These projections are on average 0.2 percentage points of
GDP higher than was expected at the time of the 2015 Intergenerational Report.

Drivers of aged care spending
Transformation of the aged care sector
The Government is making major reforms to the aged care sector that will occur instages over many years. The Government has already made large investments toimprove the safety and quality of residential aged care services and improve accessthrough additional home care packages. Other initiatives will also improve workforce
recruitment, retention, and quality in the aged care sector.
The Government’s reforms to aged care will be underpinned by a new
consumer-focused Aged Care Act, supported by strengthened governancearrangements. The role of the Independent Hospital Pricing Authority will also be
expanded to help ensure that aged care costs are directly related to the care provided.
These transformations cater to changing community expectations about how andwhere care is delivered, which will increase aged care costs.

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Part II: The budget over the next 40 years

Box 7.2.1

Royal Commission into Aged Care Quality and Safety

The Royal Commission into Aged Care Quality and Safety was established on
8 October 2018 to examine:• the quality of aged care services currently provided• the extent of substandard care, including mistreatment and all forms of abuse• how best to deliver aged care services• the future challenges and opportunities for delivering accessible, affordable,
safe and high-quality aged care services in Australia.
The Final Report of the Royal Commission was tabled in Parliament on
1 March 2021 and included 148 recommendations for major reform of the agedcare system.
The Government response to the Final Report of the Royal Commission has
accepted or accepted-in-principle 126 of the 148 recommendations. In addition,
there are a further 4 recommendations where the Government supports analternative approach to implementation. A small number of recommendations
continue to be considered.
The 2021-22 Budget included a record increase in funding for aged care services
of $17.7 billion over the next 5 years.
The response to the findings and recommendations of the Royal Commission has
significantly increased Australian Government spending on aged care and willcontinue to do so in the medium and long term.

In addition to the Royal Commission, the COVID-19 pandemic has reinforced theimportance of Australia having a robust aged care sector that can manage – and adapt
to – unforeseen, sudden health shocks.
Changing needs and preferences
The aged care system will also need to respond to changing preferences andcommunity expectations about how and where care is delivered. Continuous reforms
to aged care since the mid-2000s, such as increasing availability of care in the home,have been accompanied by a shift in Australians’ care preferences as they age. The
majority of older people prefer to remain in their own home, delaying entry into
residential care until later in life, if at all.
This preference has increased demand for home care packages, including demand forhigher level supports in the home. Changes to the overall burden of disease in old age
have also affected residential care needs. At least half of residential aged care residents

1052021 Intergenerational Report

have a dementia diagnosis and are more likely to have higher care needs than residents
without dementia.
The increased preference for care in the home has contributed to individuals enteringresidential aged care being typically older with higher levels of frailty, lower levels ofacuity and requiring increased levels of care. Residential aged care providers are having
to change from offering predominantly low care over a longer period towards high care
for a shorter period. The average length of stay in residential aged care has decreased
gradually from 3.30 years in 2003 to 2.96 years in 2019. The average length of support
in home care was 5 months shorter than in permanent residential care. Gender also
plays a role in the length of time spent in care. Women spend 5 months longer in homecare on average than men and 10 months longer in residential care.
Risks and uncertainties
There are uncertainties around the long-term projections of aged care spending. Manyinterrelated factors will determine aggregate spending, including developments inlabour productivity and wages in the sector, demand, and consumer preferences.
Technological improvements in the delivery of care have the potential to reduce costpressures in the system. The ability of aged care providers – both in-home andresidential – to leverage these improvements to provide cost-effective models of care
will be a key determinant of the extent to which these advancements place downward
pressure on government spending over the long term.
The implementation of the Government’s response to the Final Report of theRoyal Commission will require further consideration. For example, the Government has
committed to undertake further work on the design of the in-home care program which
will require careful consideration to ensure the system remains sustainable.
Developments in wages for the aged care workforce will be another key determinantof costs in the system over the long term.

106Part II: The budget over the next 40 years

7.3

National Disability Insurance Scheme

The National Disability Insurance Scheme (NDIS) is a mechanism to provide reasonable
and necessary supports for people with disability. It provides support to Australians
with permanent and significant disability, their families and carers.
The NDIS has been available since 1 July 2013, with trial sites in 4 states, and begantransitioning towards full scheme in July 2016. As at 31 March 2021 there were
450,000 participants in the scheme, with around half of these receiving support for the
first time.74
This is the first Intergenerational Report in which the NDIS has been available across allof Australia. Uncertainty remains around the full cost of the scheme as participant
numbers continue to grow at a higher-than-expected rate. The scheme is projected tomature (that is, no remaining unmet need) by the end of the decade and growth is then
expected to be in line with population projections.
The Australian and state governments jointly fund the scheme which is administeredby the National Disability Insurance Agency (NDIA). The NDIS is funded under the termsof full scheme bilateral agreements between the Australian and state governments(except Western Australia which operates under a transition agreement until
30 June 2023, with a full scheme bilateral agreement expected to commence from
1 July 2023).
Total government spending on the NDIS is projected to increase from 1.2 per cent of
GDP in 2020-21 to 1.5 per cent of GDP in the medium term as the scheme reaches
maturity. This is before levelling out at 1.4 per cent of GDP in the long term whenparticipant growth is in line with population forecasts and costs increase by a
combination of CPI and Average Weekly Earnings (Chart 7.3.1). This is nearly
30 per cent higher than the 2015 Intergenerational Report, which projected NDIS
spending to be broadly stable at 1.1 per cent of GDP between 2019-20 and 2054-55.
Average real spending per NDIS participant is now projected to increase from $56,620
in 2020-21 to $80,830 in 2060-61. The median real spend per NDIS participant wasaround $25,000 in 2020-21.
It is expected that state government spending will fall as a proportion of total scheme
costs from 40 per cent in 2020-21 to around 25 per cent in 2060-61. This reflects thatstate government contributions are growing at a fixed rate which is lower than theoverall growth rate of the NDIS. The Australian Government’s share of spending willgrow from 0.7 per cent of GDP in 2020-21 to around 1 per cent by 2031-32.

74

National Disability Insurance Agency, NDIS Quarterly Report to Disability Ministers, March 2021.

1072021 Intergenerational Report

Chart 7.3.1

Total government NDIS spending% of GDP
1.6% of GDP
1.6

Total
Australian GovernmentState governments

1.4

1.4

1.2

1.2

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0
2014-150.02024-252034-35

2044-452054-55

Note: Total government spending includes spending by the Australian Government and state governments.
The Australian Government contribution does not include payments made under the DisabilityCare Australia
Fund or NDIA agency costs.
Source: Department of Social Services; NDIA annual reports (2013-14 to 2019-20); and Treasury.

Drivers of NDIS spending
The drivers of NDIS spending are the average cost per participant and the number ofparticipants in the scheme. The average cost per participant is a function of both aparticipant’s plan and a participant’s utilisation rate (the amount of their plan aparticipant actually uses).
It is expected that average participant costs will increase as the scheme matures,
because:• often an individual’s needs will increase over time, due to ageing and thedegenerative nature of some disabilities• over time, participants tend to utilise a greater portion of their plan budgets.
However, recent average participant costs have grown at a higher-than-expected rate.
Average annualised payments per participant have increased by 12.5 per cent per year
between 2018 and 2021, well above wage increases in the sector which ranged
between 1.4 and 2.3 per cent per year.75
Participant numbers have also increased at a rate faster than previously estimated.
There are now 450,000 participants in the scheme, with participant numbers
continuing to grow at higher rates than population growth, meaning the number ofparticipants at scheme maturity will be much higher than the Productivity

75

108

National Disability Insurance Agency, op. cit, Figures 3 and 4.

Part II: The budget over the next 40 years

Commission’s initial estimate of 411,000. Growth is particularly high in children andthose aged over 65 compared with earlier estimates.
Participant growth across all age cohorts is expected to slow over the next decade,reflecting the NDIS reaching maturity, with the existing pool of eligible people withsignificant and permanent disability having already joined the scheme. Once thescheme reaches maturity, growth in the number of participants is expected to bebroadly in line with overall population growth, but average participant costs are
expected to continue to grow at a faster rate than CPI, as NDIS support costs are largely
driven by wage costs.
Certain cohorts of participants naturally incur higher costs. For example, those insupported independent living arrangements represent only around 5 per cent of allparticipants but around a third of total scheme costs. In response to the interim reportfrom the Royal Commission into Aged Care Quality and Safety, the Government has
committed to have no people under the age of 65 living in residential aged care by2025. The NDIS has reduced the number of young people in residential aged care by
30 per cent over the last 3 years.76 Supported independent living costs are likely to growas more young people leave residential aged care facilities.
Another cause of higher-than-expected participant growth is because participants are
not exiting the scheme due to improvements in their level of function at the expected
rate.
Under the baseline projection participant growth slows from the current pace to
2 per cent annual growth at the end of the medium term. Similarly, the growth in the
average cost per participant is expected to track economic factors (a combination of
wage growth and CPI) by the end of the medium term.
As the scheme is still maturing, projections are subject to significant uncertainty.
Further, total scheme costs are affected by policy changes and the administrativedecisions of the NDIA.

Risks and uncertainties
An independent review in 2019 identified opportunities to make NDIS processes
simpler, more straightforward and remove legislative barriers to positive participant
and provider experiences. The 2019 review noted that some people with disability havefinancial barriers to producing information to support NDIA decision making about theireligibility for the scheme and supports in their plans. More recent analysis by the NDIA
found those with higher socio-economic status tended to receive higher plan budgets.
This is most likely due to the cost of obtaining evidence to prove functional ability.77
The Australian Government is consulting on the best way to resolve issues of fairness
and consistency.

76
77

National Disability Insurance Agency, op cit.
ibid., Figure 2.

1092021 Intergenerational Report

The Government Response to the Royal Commission into Violence, Abuse, Neglect andExploitation of People with Disability will likely place additional pressure on the NDIS.
The Royal Commission will report to Government by September 2023. Population
ageing and reforms to aged care will likely increase demand on the care workforce.
Coupled with increasing demand across the broader care sector this will place upwards
pressure on disability sector staffing costs and, therefore, NDIS costs. Given the NDIS isa significant area of government spending – and a relatively new scheme compared toother government programs – it will be important to closely monitor and review NDIS
data on an ongoing basis to ensure financial sustainability into the future.

110

Part II: The budget over the next 40 years

7.4

Retirement income system

Australia’s retirement income system consists of 3 pillars: the Age Pension, thesuperannuation guarantee, and voluntary savings. These pillars work together toprovide all Australians with an adequate retirement income.
The Age Pension is a taxpayer-funded, means-tested payment that provides a safety
net to ensure older Australians with limited means achieve a minimum standard ofliving. The Age Pension also supplements the retirement incomes of many through apart pension.
The superannuation guarantee is a form of compulsory savings through which
employers are required to contribute a portion of an employee’s earnings to asuperannuation fund.
Voluntary savings include all other private savings – voluntary superannuation
contributions, housing, and other financial and non-financial assets – only some ofwhich are saved for the purpose of generating retirement income.
Most Australians’ retirement incomes are a combination of 2 or 3 of the above pillars.
The Age Pension is the main component for many people.
The Australian Government directly supports the retirement income system by funding
the Age Pension, mandating provision of the superannuation guarantee, and providing
tax concessions on superannuation and other forms of voluntary savings. Outside theretirement income system, the Government also provides support to older Australians
through subsidised health and aged care.
The Retirement Income Review recently reported on the current retirement income
system, providing a fact base in the context of Australia’s ageing population. The
Review found the retirement income system is effective, sound and broadly
sustainable, but it can be improved. The Review also found that the superannuation
system largely supports intergenerational equity by encouraging people to rely on theirown savings to meet their retirement income needs.

The Age Pension
The Age Pension is a non-contributory payment with eligibility based on age andresidence requirements. The rate of payment is dependent on the current level of aperson’s income or assets (means test), rather than on past income or contributions
made during an individual’s working life. The targeting of support through eligibility
criteria and the means test has kept expenditure levels contained and ensuressustainability of the Age Pension for future generations, particularly in the face of anageing population.

111

2021 Intergenerational Report

Over the next 40 years, spending on the Age and Service Pension is projected to fallfrom around 2.7 per cent of GDP in 2020-21 to 2.1 per cent of GDP in 2060-61,78
reflecting the maturation of the superannuation system.79 Compulsory superannuation
has been effective in increasing individual retirement savings and reducing reliance on
the Age Pension as a primary source of retirement income. As younger generations
retire with greater superannuation savings, the total proportion of older Australians
receiving the Age Pension will continue to decline.
The proportion of older Australians receiving the Age Pension declines even though thenumber of older Australians increases. The total number of Australians of Age Pension
age and over is expected to roughly double to over 8 million by 2060-61, yet the
proportion of people of Age Pension age and over receiving the Age Pension is
projected to decline by over 10 percentage points by 2060-61.
The trend towards more people receiving a part-rate pension (rather than the full-rate
pension) is expected to continue, with the proportion of all Age Pension recipients
receiving a part-rate pension projected to rise by around 25 percentage points toalmost 60 per cent in 2060-61.

Chart 7.4.1

Persons of Age Pension age or over, by pension category

%
100

%
100
No pension

80

80Part-rate (income-tested)

60

60Part-rate (assets-tested)
40

40

20
0
2020-2120

Full-rate2030-312040-412050-5102060-61

Note: Age Pension recipients include Age, Service, Carer and Disability pension recipients. For further
information, see the Appendix.
Source: Treasury.

78
79

112

Projections incorporate Age Pension and similar payments to veterans and war widows.
All Treasury modelling in this chapter is consistent with current policy and includes the legislated
increase in the superannuation guarantee to 12 per cent by 1 July 2025, increasing the Age Pension
eligibility age to 67 years by 1 July 2023, and increasing the superannuation preservation age to
60 years by 1 July 2024. The modelling also accounts for the impacts of COVID-19 Early Release ofSuperannuation.

Part II: The budget over the next 40 years

The superannuation system
Since the introduction of compulsory superannuation in 1992, employers have beenrequired to make minimum payments to a complying superannuation fund to help
employees save for retirement. This rate is currently 9.5 per cent and is legislated torise to 12 per cent by 1 July 2025.
Australians are also able to make additional voluntary contributions to superannuationin order to boost their retirement incomes. Superannuation benefits are generally
preserved until the age of 55 years (increasing to 60 years by 1 July 2024).
The superannuation system is still maturing, but around 16 million Australians alreadycollectively own around $3 trillion in superannuation assets. This stock of retirement
assets is the fourth largest in the world. It is an important pool of savings for investment
and for funding retirement incomes. The value of these savings will continue to growas the system matures into the 2040s.
As at 31 March 2021 the superannuation system had assets under management valued
around 157 per cent of GDP.80 It is projected this will grow to around 244 per cent of
GDP by 30 June 2061. Of this amount, it is estimated that almost three-quarters offunds under management will be held in the accumulation phase.

Chart 7.4.2

Total value of superannuation assets under management% of GDP% of GDP

300

300

250

250

200

200

150

150
Accumulation phase

100

100

50
0
2020-2150
Retirement phase2030-312040-412050-5102060-61

Note: Includes superannuation balances for defined contribution funds for people over 25 years. Excludes
defined benefits, regulatory capital and life office statutory funds. For further information, see the Appendix.
Source: Treasury.

During the COVID-19 pandemic, eligible individuals were able to access up to $20,000of their superannuation under the Government’s COVID-19 early release scheme. At
80

Treasury calculations based on Australian Prudential Regulation Authority, Quarterly
Superannuation Statistics (March 2021) and ABS Australian National Accounts: National Income,Expenditure and Product (March 2021).

113

2021 Intergenerational Report

the conclusion of the scheme, over 3 million people were approved by the Australian
Taxation Office to withdraw their superannuation under the scheme, to a total value of$37.8 billion. While the early release scheme provided a vital means of support forpeople in financial distress during the pandemic, it is projected to result in only amodest reduction in total funds under management.
Superannuation flows and balances
A maturing superannuation system will see most Australians retire with higher
balances. This is due to future retirees benefiting from contributions and strongsuperannuation returns over a longer period. Drawdowns from superannuation are
estimated to increase over time from around 2.3 per cent of GDP in 2020-21 to
6.0 per cent of GDP in 2060-61. However, while drawdowns from superannuation are
expected to increase as the population ages, the total size of superannuation assets
under management is expected to continue to grow due to growth in contributions andearnings.

Chart 7.4.3

Flows into and out of superannuation accounts% of GDP16% of GDP
16
Earnings (net of fees and taxes)

12

12Contributions (net of taxes)

8

8

4

4
Drawdowns and dissipation of savings

0
2020-212030-312040-412050-5102060-61

Note: For further information, see the Appendix.
Source: Treasury.

Treasury projections suggest that the median superannuation balance at retirement
will increase from around $125,000 in 2020-21 to around $460,000 in 2060-61, as
measured in 2020-21 dollars. In 2020-21 around two-thirds of Australians retiring will
have a superannuation balance under $250,000. In 2060-61, it is projected that only aquarter of Australians will retire with a superannuation balance below this amount, asmeasured in 2020-21 dollars. This is due to a maturing superannuation system.

114

Part II: The budget over the next 40 years

Chart 7.4.4

Distribution of superannuation balances at retirement%100$1,600,000 +$1,000,000 to $1,599,999

80$750,000 to $999,999$500,000 to $749,999

60

40$250,000 to $499,999

20

%
100

80

60

40

20
Below $250,000

02020-212030-312040-412050-5102060-61

Note: Values are in 2020-21 dollars and deflated by average weekly earnings. Superannuation balances
include amounts in both the accumulation and retirement phase. For further information, see the Appendix.
Source: Treasury.

The Retirement Income Review noted that differences in retirement savings between
men and women reflect the accumulated economic disadvantages faced by women inworking life. On average, compared with men, women have lower wages, are more
likely to work part-time, take more career breaks, and experience worse financial
impacts from divorce. These factors contribute to the gender gap in superannuation
balances at retirement. The main driver of the gap will continue to be the working life
earnings gap between men and women, rather than retirement income systemsettings.
The gender gap in superannuation balances is expected to narrow substantially as thesuperannuation system matures and women benefit from greater labour force
participation. In the future, more women will have superannuation and spend more
years contributing to their superannuation, including through higher voluntary
contributions.

115

2021 Intergenerational Report

Chart 7.4.5

Density

Projected distribution of superannuation balances atretirement by gender2021

DensityDensity

2061

Density

Women

Men

Women
Men

0

500
1,000
Balance at retirement ($'000)

1,500

0

500

1,000

1,500

Balance at retirement ($'000)

Note: Values are in 2020-21 dollars, combined for the 3 trailing years, and deflated by Average Weekly
Earnings. Superannuation balances include amounts in both the accumulation and retirement phase. For
further information, see the Appendix.
Source: Treasury.

Superannuation tax concessions
Superannuation is generally taxed more concessionally than other forms of savings,
such as bank deposits, given superannuation cannot be accessed until retirement.81
Superannuation contributions and fund earnings in the accumulation phase are
generally taxed at the concessional rate of 15 per cent, while benefits in the retirement
phase are tax exempt.
The cost of superannuation tax concessions represents forgone tax revenue for thegovernment.
Projections of contributions concessions are a function of wage growth, contributions
rates and population growth; all of which are projected to remain broadly stable in thelong term. Although contributions under the superannuation guarantee are legislated
to rise from 9.5 per cent to 12 per cent by 1 July 2025, contributions concessions areprojected to remain steady as a proportion of GDP over the period to 2060-61.
Earnings concessions projections are dependent on both the growth of thesuperannuation system and the forecast rates of return. As both are assumed to exceed
GDP growth, earnings concessions are projected to increase in the long term.

81

116

With some small exceptions for early release of superannuation, including those made during the
COVID-19 pandemic.

Part II: The budget over the next 40 years

Overall, tax concessions as a proportion of GDP are projected to increase from around
2.0 per cent in 2020-21 to 2.9 per cent in 2060-61. The increase is driven primarily byearnings tax concessions rising from around 1.0 per cent of GDP in 2020-21 to
1.9 per cent of GDP in 2060-61, while contributions tax concessions are projected toremain largely unchanged at 1.0 per cent of GDP during the same period (Chart 7.4.6).
Aggregate cost of the retirement income system
The total projected cost of Age Pension expenditure and superannuation tax
concessions together is expected to increase from around 4.5 per cent of GDP in
2020-21 to 5.0 per cent of GDP in 2060-61. As a result of the maturing of thesuperannuation system, government spending on the Age Pension is projected to
decline as a proportion of GDP but the cost of superannuation tax concessions is
projected to grow. By around 2040, the cost of superannuation tax concessions will
exceed the cost of Age Pension expenditure.
While the aggregate cost of the retirement income system is projected to increase, thisis against a backdrop of an ageing population. In addition, the maturing superannuation
system should generally also result in future retirees being better off than current
retirees, with more income available to support their living standards during
retirement.

Chart 7.4.6

Cost of the retirement income system% of GDP6% of GDP
6

5

5

4

Earnings tax concessions

4

3

Contributions tax concessions32

2
Age pension expenditure

102020-212030-312040-411

2050-5102060-61

Note: Includes service pensioners. For further information, see the Appendix.
Source: Treasury.

Gradual changes have helped the system remain sustainable over time. Such changes
have included gradually increasing the Age Pension age to 67 years and improving
Age Pension targeting through means testing. In the 2016-17 Budget, a number ofchanges were made to the taxation of superannuation, including limiting the amountthat can be held in the concessionally-taxed environment. The Government has also1172021 Intergenerational Report

implemented short-term changes such as revisions to the minimum drawdown rates in
response to the COVID-19 pandemic. The flexibility and responsiveness of the system
helps protect it, and all Australians, against short-term and long-term shocks andchanges that might affect their retirement incomes.

118Part II: The budget over the next 40 years

7.5

Income support and family assistance payments

The Government provides income support to individuals who require assistance. These
payments fall across 2 broad groups: working-age payments and family payments.
These are in addition to the Age Pension, which is discussed in Section 7.4.
Income support and family payments totalled around $83.5 billion in 2021-22, which isaround 3.9 per cent of GDP. The 2 largest components are the Disability Support
Pension and the Family Tax Benefit, with expenditure of $17.7 billion and $18.6 billion
in 2021-22 respectively.

Chart 7.5.1

Composition of payments to individuals% of GDP
1.0% of GDP
1.0
2018-190.8

2019-202060-61

0.6

0.8
0.6

0.4

0.4

0.2

0.2

0.0

0.0
FamilyTax
BenefitDisability JobSeeker Child Care Carer Parenting YouthPaidParentingSupport Payment Subsidy Payment Payment Allowance Parental Payment
PensionSingleandLeave Partnered
AustudyNote: Excludes the Age Pension.
Source: Treasury.

Payments to individuals are projected to be 2.7 per cent of GDP by 2060-61(Chart 7.5.2). Across the total Australian population (not just payment recipients), real
spending per person on payments to individuals is projected to increase from $3,240 in
2021-22 to $3,710 in 2060-61. The 2015 Intergenerational Report projected spendingon payments to individuals to fall from 4.6 per cent of GDP in 2014-15 to 3.4 per centof GDP by 2054-55. The relative reduction in family assistance payments through the
Family Tax Benefit, Child Care Subsidy and Paid Parental Leave is due to demographic
changes. The proportion of the population aged less than 15 is projected to fall from
18.4 per cent in 2021-22 to 15.8 per cent in 2060-61. The subsequent rise in the
proportion of the population aged above 16 results in a larger cohort receiving theCarer Payment in 2060-61.

1192021 Intergenerational Report

Chart 7.5.2

Payments to individuals% of GDP% of GDP

6

6

5

5

4

4

3

3

2
2000-01

2010-112020-212030-312040-412050-512
2060-61

Source: Treasury.

The primary drivers of spending on payments to individuals are the number ofrecipients and the amount of the payment. Population is the main factor in determining
the number of recipients and the majority of payments are indexed to CPI. As GDP
growth is projected to be greater than CPI growth, payments are projected to fall as aproportion of GDP.
As part of the COVID-19 response, additional income support has been provided toassist individuals and families. This has resulted in a temporary increase in government
spending on payments to individuals in the short term. However, this is not expected
to affect spending over the medium and long term. The Government is providing
around $34.0 billion in support over 5 years from 2019-20 through the social security
system with measures including the temporary Coronavirus Supplement, Economic
Support Payments and the expansion to income support payment eligibility criteria.
Following this temporary additional support, the Government permanently increased
the rates of working-age payments, including JobSeeker Payment, by $50 per fortnightfrom 1 April 2021. This has resulted in a structural increase in government spending on
payments to individuals.

Working-age payments
The Government provides assistance to people of working age who are in need. This
includes people who are unable to earn an income because of disability or caring
responsibilities.
The Government also provides income support to assist job seekers unable to support
themselves. This is targeted to those most in need and designed to encourage
self-reliance and participation in the labour force.
The main payments to people of working age are the Disability Support Pension,
JobSeeker Payment, Parenting Payment, Carer Payment, and Youth Allowance.
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Part II: The budget over the next 40 years

Working-age payments are projected to decline from 2.5 per cent of GDP in 2021-22 to
1.9 per cent of GDP in 2060-61. The 2015 Intergenerational Report projected thatworking-age payments would fall from 2.8 per cent of GDP in 2014-15 to 2.4 per centof GDP in 2054-55. Changes to spending on working-age payments since the2015 Intergenerational Report reflect greater targeting of payments, including
participation requirements, Family Tax Benefit indexation freezes, as well as adding andextending waiting periods for some payments.
Total JobSeeker Payment expenditure rose in 2019-20 and 2020-21 as a result of theadditional temporary support in response to the COVID-19 pandemic. This included thefortnightly Coronavirus Supplement, a once-off $750 Economic Support Payment andexpanded eligibility criteria. The number of people receiving unemployment benefits
peaked during 2020 at around 1.5 million in May 2020. This is expected to return tolower levels over the long term. As at 11 June 2021, there were around 1 million
JobSeeker Payment recipients. Compared with 2018-19 (prior to COVID-19), JobSeeker
Payment expenditure falls as a percentage of GDP by 2060-61 as payment rates areindexed to CPI, which is forecast to grow more slowly than nominal GDP.

Chart 7.5.3

Working-age payments% of GDP
4.0% of GDP
4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5
2000-01

2010-112020-212030-312040-412050-511.5
2060-61

Source: Treasury.

In early 2020, reforms to working-age payments replaced 7 different payments with
the JobSeeker Payment and strengthened participation requirements for job seekers.
The new arrangements deliver a more equitable social security system by ensuring
people in similar circumstances have similar participation requirements and payments.
At the time of transition, recipients on other payments had no change to their payment
rate or received a higher rate if they transferred to the Age Pension, with no material
impact on long-term government spending.

1212021 Intergenerational ReportBox 7.5.1

Changes to the JobSeeker Payment

In response to COVID-19, the Government temporarily expanded eligibility
criteria for certain income support payments, including the JobSeeker Payment,
waived asset testing and waiting periods to receive payment, adjusted mutual
obligation requirements, increased the income free area and partner income
test, and introduced the Coronavirus Supplement. The amount of theCoronavirus Supplement was gradually reduced as economic conditions
improved. From 27 April to 24 September 2020 the rate was $550 per fortnight.
From 25 September to 31 December 2020 the rate was $250 per fortnight. And
from 1 January to 31 March 2021 the rate was $150 per fortnight.
The Government permanently increased the rates of working-age payments,
including JobSeeker Payment, by $50 per fortnight from 1 April 2021. The
JobSeeker Payment income free area was also permanently increased to$150 per fortnight from 1 April 2021, and mutual obligation requirements were
strengthened. These changes result in a structural increase to working-age
payments.

Family payments
Payments to families include the Family Tax Benefit, Child Care Subsidy and Paid
Parental Leave scheme. The Family Tax Benefit is designed to assist low- andmiddle-income families with the costs of raising dependent children.
The Government also provides funding for early childhood education to help parents
balance their work, training and caring responsibilities. The Government supports childcare so parents can work, study, learn, volunteer or transition to work. In 2018, theGovernment implemented the New Child Care Package which replaced the previous
Child Care Benefit and Child Care Rebate. The Package introduced a single
means-tested Child Care Subsidy for families, paid directly to approved child careproviders and aimed at supporting workforce participation. These arrangements aredesigned to ensure that more financial support is targeted to the families who work themost and earn the least.

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Part II: The budget over the next 40 years

Box 7.5.2

Changes to Child Care Subsidy

In the 2021-22 Budget, the Government announced changes to the Child Care
Subsidy to reduce workforce disincentives and help families to makeemployment and care choices that work best for them. From July 2022, wherefamilies have multiple children aged 5 and under in child care, the Child Care
Subsidy will be increased by 30 percentage points for the second or subsequent
child, up to a cap of 95 per cent. The annual cap will also be removed for all
families.
Families with multiple children in formal child care arrangements face workforce
disincentives due to the out-of-pocket expense associated with having multiple
children in child care. The changes to the Child Care Subsidy are intended toreduce disincentives, resulting in additional child care hours used and greaterlabour force participation.

Paid Parental Leave provides parents with financial security to take time off work tocare for their baby during the early months of life, while supporting women to maintaintheir connection with the workforce and facilitate women’s labour force participation.
Spending on assistance to families is projected to fall from 1.4 per cent of GDP
in 2021-22 to 0.7 per cent in 2060-61 (Chart 7.5.4). Demographic change is a key driverof the reduction in spending on family assistance. The proportion of the population
aged less than 15 is projected to fall from 18.4 per cent in 2021-22 to 15.8 per centin 2060-61.
Improvements in the targeting and sustainability of family payments also contribute to
the fall in projected spending on assistance to families. For example, the2017-18 Budget introduced a consistent 30-cents-in-the-dollar income test taper forfamilies receiving Family Tax Benefit Part A with a household income in excess of theHigher Income Free Area (currently $98,988) from 1 July 2019.

123

2021 Intergenerational Report

Chart 7.5.4

Family assistance payments% of GDP
2.0% of GDP
2.0

1.8

1.8

1.6

1.6

1.4

1.4

1.2

1.2

1.0

1.0

0.8

0.8

0.6

0.6

0.4
2000-01

Source: Treasury.

124

2010-112020-212030-312040-412050-510.4
2060-61

Part II: The budget over the next 40 years

7.6

Education and training

The Australian Government provides funding for the delivery of education and training
services to support human capital, improve productivity and labour market outcomes,
and social opportunity. Education and training services in Australia comprise schools,
vocational education and training (VET) and higher education.
Across all levels of government, the Australian Government provides slightly more thana third of total education and training spending, with state and local governments
contributing slightly less than two thirds.
Australian Government spending on education is estimated to be around 1.9 per centof GDP, or around $40 billion, in 2021-22. Schools spending is expected to make up
more than half of that spending, with this share remaining relatively constant over the
next 40 years. Higher education spending is expected to make up around a quarter,with its share increasing slightly over the next 40 years. VET spending makes up theremainder.
The bulk of Australian Government education spending is on government andnon-government schools delivered as specific purpose payments to state governments
under the needs-based funding model. Funding for non-government schools isprincipally provided by the Australian Government, whereas funding for government
schools is primarily provided by state governments. The Australian Government is
expected to spend around $24.4 billion on government and non-government schools
in 2021-22.
The Australian Government is the main government provider of funding for higher
education institutions. This is delivered through: the Commonwealth Grant Scheme,
which subsidises tuition costs; research block grants, which support higher education
research; and a range of smaller supporting and enabling programs. The AustralianGovernment also provides financial assistance to students through the Higher
Education Loan Program (HELP) which removes up-front cost barriers to higher
education (Chapter 9 – Major assets and liabilities).
The Australian Government and state governments share responsibility for funding the
VET system. The Australian Government provides block funding to the states via various
national partnership agreements to support their training systems. In addition, theAustralian Government directly supports many VET activities, including support forapprenticeship initiatives, foundation skills and the VET Student Loans (VSL) Scheme.
Total Australian Government spending on education and training is projected toincrease in absolute terms, with real spending per person expected to increase from
$1,540 in 2021-22 to $1,620 in 2060-61. If HELP loans and VSL are taken into account,then real spending per person is expected to increase from $1,830 in 2021-22 to $2,040
in 2060-61.

1252021 Intergenerational Report

While increasing in absolute and real terms, spending on education and training is
projected to decrease from 1.9 per cent of GDP in 2021-22 to 1.2 per cent in 2060-61.
The decrease in spending as a per cent of GDP occurs because the growth in nominal
GDP is expected to be greater than the growth in spending which is largely dependent
on a combination of indexation rates (including CPI), wage cost indexes and population
growth. This decrease as a share of GDP largely reflects slowing population growth. The
trend is similar to the 2015 Intergenerational Report which projected spending on
education and training would decline to 1.0 per cent of GDP by 2054-55.

Chart 7.6.1

Australian Government spending on education and training

$
2,200

% of GDP
2.0
Total education spending including lending perperson (LHS)

2,000

1.8

1,800
Total education spending per person
(LHS)

1,600

1.6
1.4

1,400

1.2

1,200
1,000
2010-11

Total education spending (RHS)
2020-212030-312040-412050-511.0
2060-61

Note: Spending per person is expressed in 2020-21 dollars.
Source: Treasury.

Real spending (including lending) on tertiary education per person in the tertiary
education population is expected to increase from $1,600 in 2021-22 to $1,840 in
2060-61.82 Real spending on schools per person in the school-age population is
expected to increase from $5,040 per person in 2021-22 to $6,490 per person by
2060-61.83
For the VET sector, the Australian Government is currently negotiating a new National
Skills Agreement with states to ensure Australians can access high quality and relevant
training to attain the skills necessary for jobs that emerge through the next decade andbeyond. Through the Heads of Agreement for Skills Reform, all governments haveagreed priorities for a new National Skills Agreement which includes increasing real
investment in VET, and adopting a new funding model which is linked with efficientpricing. If agreed, the new National Skills Agreement is expected to increase total

82

83

126

Tertiary education spending per person is based on the population aged 17 to 59, reflecting both theage distribution of the student population in tertiary education, as well as the general benefit
provided to Australians from the Australian Government’s investment into university research.
School education spending per person is based on the population aged 4 to 18.

Part II: The budget over the next 40 years

education spending due to a change in indexation. As negotiations are ongoing withstates, any agreed changes resulting from the new National Skills Agreement are notincluded in this report’s projections of VET spending.
Support measures during the COVID-19 pandemic – such as the Boosting
Apprenticeship Commencements wage subsidy and the Supporting Apprentices andTrainees wage subsidy – saw a sharp increase in spending beginning in 2019-20. These
measures are time-limited.
Over the next 40 years, Australian Government spending on education and training is
expected to be influenced by population growth and the proportion of the population
participating in education.
A key driver of government education spending is the number of students participatingin education and training. The proportion of the population in the principal age groupfor education (5 to 24 years old) has decreased from 27.5 per cent in 2001-02 to an
estimated 24.6 per cent in 2021-22. It is expected that the proportion of the populationin this age group will fall to 22.1 per cent by 2060-61.
The proportion of students attending non-government schools is also an importantdriver of education spending. Funding to non-government schools has been increasing
steadily in line with the increasing proportion of students enrolled in non-government
schools: rising from 22.3 per cent in 1980 to 34.4 per cent in 2020. The higher numberof students increases total costs to the Australian Government.
The Australian Government has implemented a number of reforms to the educationand training sector in the past 5 years. These reforms have had – and will continue tohave – an impact on the Australian Government’s spending on the sector.
The Australian Government has, since 2018, focused on increasing support tounderfunded schools through the Quality Schools reforms. Funding has been targetedto underfunded schools and distributed on a needs basis to disadvantaged cohorts
ensuring all schools are able to meet the educational needs of their students.
The Australian Government has introduced reforms to higher education funding
designed to ensure the tertiary education system addresses the changing needs of thelabour market. From 2021, the Job-ready Graduates Package redesigned theCommonwealth Grant Scheme funding clusters and student contribution bands,
restored CPI indexation of Bachelor student places and provided additional funding
towards growth in outer metro and regional areas to ensure university places growover the long term. It also introduced a new National Priorities and Industry Linkage
Fund to incentivise universities towards more industry engagement. The reforms betteralign higher education funding with the costs of delivering a university education. Thechanges to government course contributions are intended to encourage students tostudy in areas of industry need.

1272021 Intergenerational Report

7.7

Other spending

Infrastructure
The Australian Government is continuing to invest in road and rail infrastructure
projects across Australia to support jobs and drive growth, meeting our national freightchallenge and getting Australians home sooner and safer. The Australian Government’s
rolling 10-year infrastructure pipeline has grown from $75 billion in 2018-19 to$110 billion at the 2020-21 and 2021-22 Budgets. This is largely delivered throughgrants to the states to deliver priority projects.
Future demand for infrastructure will be directly affected by population growth,
technological change, developments in the domestic and global economy,
environmental adaptation and sustainability, and consumer preferences.
Infrastructure funding is projected to grow in line with the economy over the long term.
Infrastructure is an enabler of economic development. It directly supports economic
activity and sustains employment. The Government’s investment in infrastructure will
support productivity growth and meet the future needs of Australians through reduced
congestion, expanded national freight links, better connected regions and improved
road safety. Financially viable, high-quality public infrastructure will also attract private
sector investment. Governments also assist private investment in infrastructure byproviding accurate information and addressing regulatory barriers.
Australia’s growing population underscores the importance of infrastructure planning,
investment and demand management. As the population grows, particularly in the
major cities, average travel times and congestion are increasing. For the potential
economic and fiscal benefits of population growth to be fully realised, existing road andrail infrastructure needs to be better maintained and utilised, and new investment
needs to be targeted to deliver the highest benefit. New infrastructure and better useof existing networks can reduce travel times and vehicle operating costs. It can delivera more reliable transport network for commuters, freight and other business.
While the long-term impact of the COVID-19 pandemic on consumer behaviour remains
uncertain, potential changes – such as increased remote working arrangements andpopulation growth in regional areas – may affect the requirements and distribution of
future infrastructure investment.
As a non-demand driven program, infrastructure spending is assumed to remain largely
stable as a share of the economy over time. Infrastructure spending by the AustralianGovernment is projected to be 0.4 per cent of GDP over the long run.

128

Part II: The budget over the next 40 years

Defence
The Australian Government provides funding for the delivery of Navy, Army, Air Forceand intelligence capabilities, support for Australian military operations overseas, andstrategic policy advice for the defence of Australia and its national interests. The
Government has decoupled the Defence budget from GDP forecasts to avoid the needto adjust spending plans in response to fluctuations in GDP. Defence funding certainty
is important, including to respond to new challenges as they emerge in a security
environment different from the relatively more benign one of the past. It also ensuresthat the planning and execution of long-term Defence programs are not subject to thevolatility of linking funding with GDP.
Total Defence funding increased to 2.1 per cent of GDP in 2020-21, meeting the
2 per cent of GDP commitment set out in the 2016 Defence White Paper. Defence
funding is projected to increase to around 2.3 per cent of GDP in 2031-32, broadly
consistent with the profile set out in the 2020 Force Structure Plan and 2020 Defence
Strategic Update. In the long term, Defence spending is then assumed to grow in linewith the economy.
This projected funding profile has been revised up since the 2015 Intergenerational
Report, in which Defence expenditure was projected to increase to 2 per cent of GDP
by 2023-24 and then remain at a constant share of the economy through to 2054-55.
This was consistent with Government commitments at the time.

129

Part II: The budget over the next 40 years

8.

Revenue

Overview
The COVID-19 pandemic has resulted in a significant fall in tax receipts as ashare of GDP. Tax receipts are now expected to reach the Government’s
tax-to-GDP cap in 2035-36, 4 years later than previously expected.
Personal income tax receipts are projected to grow faster than othersources of revenue over the period until the tax-to-GDP cap is reached.
Without raising additional revenue from existing taxes or imposing taxes
on new sources, personal income tax receipts will form a greater
proportion of total tax receipts in the long term as a result of bracket creep.
Company tax receipts will likely continue to be volatile, while indirect andconsumption-based tax receipts will form a smaller proportion of total tax
receipts than in the past. Shifts in technology, demographics andgeopolitical factors are also likely to affect the structure of the tax systemin the future.
Non-tax receipts are projected to decline as a share of the economy in thelong run, as the Future Fund is drawn down and growth in state
contributions to the National Disability Insurance Scheme (NDIS) is capped
at a fixed rate.

In 2021-22, 92.4 per cent of total receipts are expected to come from taxation. This is
projected to increase to 94.0 per cent in 2060-61.
The largest source of tax revenue is income tax, comprised of personal income andcorporate tax, with the vast majority of the remainder coming from taxes on goods andservices. Non-tax revenue includes interest received on government loans, interest anddividends from investments like the Future Fund and user charges for somegovernment services.

1312021 Intergenerational Report

The Government is committed to maintaining a sustainable tax burden
The Government’s medium-term fiscal strategy is underpinned by a policy to maintainthe tax-to-GDP ratio at or below 23.9 per cent.84 This tax-to-GDP cap of 23.9 per cent isbased on the average tax-to-GDP ratio in the years between the introduction of thegoods and services tax and the Global Financial Crisis, 2000-01 to 2007-08. This report
assumes that tax receipts do not exceed this proportion of GDP. Australia’s tax-to-GDP
ratio has ranged between 20 and 25 per cent of GDP over the past 30 years. Similar toother advanced economies, Australia’s tax-to-GDP ratio grew over the twentiethcentury in line with an expanding role of government.

Chart 8.1 Composition of Australian Government tax receipts% of GDP
25% of GDP
25
Other indirect taxes

Tax-to-GDP averages 23.9 per cent

20

GST

20

15

Company andother income
taxes

15

Sales taxes
excl. GST
10

10Personal
income tax

50
1900-01

Income tax
1920-21

1940-41

1960-61

1980-81

2000-01

2020-212040-41502060-61

Note: Reporting of tax receipts has changed across time. At present, personal income tax includes individuals
and other withholding taxes, and the Medicare levy. Company and other income taxes includes company tax,
superannuation fund taxes, fringe benefits tax, and petroleum resource rent tax.
Source: Treasury.

Tax receipts fell significantly as a share of GDP as automatic stabilisers took effect in
response to COVID-19 and the Government took additional steps to deliver temporary
and targeted stimulus and recovery measures. The tax-to-GDP ratio is projected toreach a low of 20.9 per cent in 2021-22, around 2.5 percentage points lower thanprojected at the 2019-20 Mid-Year Economic and Fiscal Outlook. Tax receipts are now
expected to reach the tax cap in 2035-36, 4 years later than previously expected.
Tax receipts are then projected to remain at the Government’s tax-to-GDP cap of
23.9 per cent until 2060-61, in line with the fiscal strategy. This long-term assumption
is unchanged and the tax revenue projection methodology is similar to that used inprevious reports.85

84
85

132

2021-22 Budget Paper No 1, Statement 3: Fiscal Strategy and Outlook.
For further information, see the Appendix.

Part II: The budget over the next 40 years

Tax receipts drive the profile for total receipts as a share of GDP until the tax-to-GDP
cap of 23.9 per cent is reached in 2035-36. From that time until the end of the
projection period, changes in total receipts as a share of GDP are driven by non-tax
receipts which are not constrained by the tax-to-GDP cap.

Chart 8.2 Composition of total Australian Government receipts% of GDP30% of GDP30
Total receipts
Non-tax receipts

25

20

Company and other tax receipts

20

15

GST receipts

15

25

Tax-to-GDP cap

10

10
Personal income tax receipts

502000-015

2010-112020-212030-312040-412050-5102060-61

Source: ATO Taxation Statistics; ABS Australian National Accounts; and Treasury.

1332021 Intergenerational ReportBox 8.1

Long-run tax assumptions across intergenerational reports

To project tax receipts over the next 40 years, every intergenerational report has
maintained a long-term limit on the ratio of tax-to-GDP. Once tax receipts reachthe tax-to-GDP limit, they are projected to remain constant for the remainder ofthe projection period. The tax-to-GDP limits chosen have varied between theequivalent of 23.5 per cent and 23.9 per cent, and have been based on historical
averages and fiscal strategies.86 The Government’s fiscal strategy applies a
tax-to-GDP cap of 23.9 per cent which is based on the average tax-to-GDP ratio
from 2000-01 to 2007-08, and is current government policy.

Chart 8.3 Path back to long-run tax assumption% of GDP
2002 IGR
0.5(23.9*)
0.0
-0.5
-1.0

2007 IGR(23.8*)% of GDP
0.5

2015 IGR
2010 IGR(23.5)

0.0

2021 IGR(23.9)

-0.5
-1.0

-1.5

-1.5

-2.0

-2.0

-2.5

-2.5

-3.0

-3.0

-3.5

-3.5
0

1

2

3

4

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years since intergenerational report release

Notes: Long-run tax assumptions for 2002 and 2007 Intergenerational Reports are re-stated toinclude GST and incorporate revisions to GDP.
Source: Treasury.

In this report, tax receipts are projected to reach the tax-to-GDP limit in 14 years(2035-36), reflecting the ongoing impact of the pandemic. In previous reports it
took between 3 years and 10 years to reach the tax-to-GDP limit, reflecting
different technical assumptions and outlooks for wages and prices.

86

134

The 2002 and 2007 Intergenerational Reports excluded GST from the calculation of AustralianGovernment tax receipts. The assumed limits have also been revised to incorporate historicalrevisions to GDP. See page 126 of the 2010 Intergenerational Report for more information.

Part II: The budget over the next 40 years

8.1

Personal income tax

Over time, inflation and increases in nominal wages increase an individual’s average
personal income tax rate. The effect of this is to increase the proportion of anindividual’s income that is taxed at their highest marginal tax rate.
Consistent with previous intergenerational reports, current projections assume thatongoing wages growth will cause personal income tax receipts to grow faster than GDP.
This increased personal income tax revenue will increase the tax-to-GDP ratio up to thepoint where the cap is reached.
Personal income tax receipts are projected to be 11.1 per cent of GDP in 2020-21.
By 2024-25, this is projected to decrease to approximately 10.9 per cent largely as aresult of the commencement of stage 3 of the Personal Income Tax Plan on 1 July 2024.
By 2031-32, personal income tax receipts are projected to increase to 11.9 per cent ofGDP, due to income and wages growth.
Personal income tax receipts are expected to grow to 12.7 per cent of GDP when the
tax cap is reached in 2035-36. When the cap is reached, personal income tax receipts
will comprise around 53.1 per cent of total taxation receipts, compared with49.6 per cent in 2020-21.

Chart 8.1.1

Personal income tax receipts% of GDP% of GDP

13.0

13.0

12.5

12.5

12.0

12.0

11.5

11.5

11.0

11.0

10.5

10.5

10.0

10.0

9.5

9.5

9.0
1990-91

2000-01

2010-112020-212030-312040-412050-51

9.0
2060-61

Source: ATO Taxation Statistics; ABS Australian National Accounts; and Treasury.

The share of total income tax filers who are net taxpayers has declined from around84 per cent in 1990-91 to 76 per cent in 2017-18. This is consistent with increases inthe effective tax-free threshold and the ageing population over this period. The
effective tax-free threshold has increased from $5,250 in 1990-91 to $23,226 for

135

2021 Intergenerational Reportresident taxpayers, $33,898 for singles over 66 and $30,592 each for couples over
66 years of age in 2020-21.87
The ageing population has contributed to a decline in net taxpayers as a share of thetotal population. The majority of Australians of retirement age pay little or no income
tax, and the proportion of older Australians who pay personal income tax has generally
declined over time, largely due to the introduction of age-related tax offsets andchanges to the taxation of superannuation income.

Chart 8.1.2

Proportion of Australians who pay income tax by age

%
90

%
90
2007-08

80

80

70

70

60

1997-98

60

2017-18

50

50

40

40

30

30

20

20

10

10

0

0
0

5

10

15

20

25

30

35

40

45 50
Age

55

60

65

70

75

80

85

90

Source: ATO Longitudinal Information Files; ABS National, state and territory population; and Treasury.

More than 80 per cent of taxpayers’ total income is derived from salary and wages. The
share of income from salary and wages has been broadly stable since the Global
Financial Crisis, but was around 3 percentage points lower than current levels in the
mid-2000s. This was due to elevated income from interest and dividends, as well as
historically high net capital gains. Salary and wage income is projected to make up thebulk of total income despite population ageing.
Income from capital gains has been highly volatile, reaching a peak of 4.8 per cent ofincome in 2006-07, before declining to under 2 per cent in 2008-09. Over the past
10 years, the share of income from capital gains has again increased, largely offset bya falling share from interest, dividends and net rent.

87

136

Effective tax-free thresholds are the level of income at which an individual will first start paying tax,
taking into account tax offsets that are available to all individuals (or all individuals above a certainage) such as the low and middle income tax offset and the seniors and pensioners tax offset.

Part II: The budget over the next 40 years

8.2

Goods and services tax

Australia relies less on GST revenues than other advanced economies that rely on
value-added taxes, largely because the GST is levied at a lower rate.88 The GST is
projected to continue to provide a stable base to help fund state government services,
remaining at around 3.5 per cent of GDP over the next 40 years.
As the GST is levied on a reasonably broad base of consumption, it is generally lesssubject to fluctuations from year-to-year due to changes in economic activity. Since theintroduction of the GST in 2000-01, GST receipts have ranged between 3.0 and
3.9 per cent of GDP, reaching a peak in 2003-04 before falling to 3.4 per cent of GDP
in 2020-21. This fall has largely been the result of changing household consumption
patterns, with a higher proportion of income being spent on services which are notsubject to GST, including healthcare, education and rent. This fall was partially offset
after 2012-13 by higher housing investment increasing GST receipts from theconstruction of new dwellings.
The COVID-19 pandemic has had a large impact on GST receipts, as the pandemic
initially caused a large decrease in household consumption before it recovered
strongly.89 Going forward, there are both upside and downside risks to the projections
for GST. Population ageing and real income growth may contribute to increased
GST-exempt private health spending as a share of consumption. Alternatively, ageing
may decrease GST-exempt education spending as a share of private consumption.

Chart 8.2.1

Goods and services tax receipts% of GDP
4.0% of GDP
4.0

3.5

3.5

3.0

3.0

2.5
2000-01

2010-112020-212030-312040-412050-512.5
2060-61

Source: ATO Taxation Statistics and Treasury.

88
89

OECD Revenue Statistics 2020 and OECD Consumption Tax Trends 2020.
In addition to COVID-19’s effects on household consumption, support to businesses provided by the
ATO contributed to the decline and recovery of GST receipts. For more information, see 2021-22
Budget Paper No 1, Statement 5: Revenue, Box 5.3.

137

2021 Intergenerational Report

8.3

Company and other taxes

Company tax
While company tax receipts are expected to remain around the current share of GDP,
they are expected to fluctuate considerably from year-to-year, continuing the volatility
seen historically.
The company tax base is highly concentrated in relatively few taxpayers. The
10 companies that pay the most tax accounted for more than one quarter of totalcompany tax paid in 2018-19, and the top 100 companies accounted for over48 per cent.90

Chart 8.3.1

Company and other tax receipts% of GDP8% of GDP
8

7

7
Other taxes

6

6

5

5

Company tax

4
3
2
1990-91

4
3

Other taxes
excl. sales taxes
2000-01

2010-112020-212030-312040-412050-512
2060-61

Source: ATO Taxation Statistics; ABS Australian National Accounts; and Treasury.

The concentration of revenue collected from the financial services industry and theresources industry presents risks for Australia’s revenue base. The main company
taxpayers are more exposed to industry and firm-specific trading conditions withcompany tax receipts sensitive to fluctuations in commodity prices. This means
company tax revenue is harder to predict and will continue to create challenges forlonger-term government budgeting and planning.91

90
91

138

ATO Taxation Statistics, ATO Corporate tax transparency: report of entity tax information.
For more information, see 2021-22 Budget Paper No 1, Statement 8, Box 8.1.

Part II: The budget over the next 40 years

Chart 8.3.2

Composition of company tax payable

%
100

%
100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0
2004-05
2006-07
Small companies

2008-092010-11
Mining2012-132014-15
Finance

2016-17Wholesale and Retail trade

Manufacturing

Construction and Utilities

Transport and Telecommunications

Education and Health

Other

0
2018-19

Note: ‘Small companies’ are companies across all industries with turnover less than $10 million.
Source: Treasury analysis of company tax return data.

Australia’s company tax revenue is dependent on, and responsive to, the evolving size
and role of multinational companies, as well as global trends in company investment
and profits, which have become increasingly mobile. It is likely to be shaped by changes
to the international tax framework. Statutory headline company tax rates have been
declining globally since the 1980s, with Australia following this trend. For example,
small and medium businesses wll face a tax rate of 25 per cent from 1 July 2021, thelowest rate in more than 50 years.
Australia’s headline rate of 30 per cent for companies with a turnover above $50 million
is high amongst OECD economies. However, there are some signs that the international
trend may be reversing with the UK and the US recently announcing their intention toincrease rates and the G7 committing to a global minimum tax of at least 15 per centon a country-by-country basis.

Other taxes
The remaining taxes outside personal income tax, company tax and GST are projected
to be 3.3 per cent of GDP in 2020-21, and remain at this level until 2060-61.
These taxes include a mix of direct and indirect taxes, notably: excise and customs
duties, superannuation fund taxes, fringe benefits tax, petroleum resource rent tax,
wine equalisation tax, luxury car tax and the major bank levy.
Excises are volumetric taxes levied on specific goods, so changes to consumption
patterns or technological change may alter the demand for excisable goods. Australia’s1392021 Intergenerational Reportmain excise bases are fuel, tobacco and alcohol. Each of these has a risk of narrowing
over time due to improvements in fuel efficiency, the long-term decline in smoking
rates, and lower per person alcohol consumption.
Policy decisions have also significantly diminished the contribution other indirect taxes
make to total tax receipts over the past 30 years, with the largest being the
replacement of wholesales sales tax with GST, the pausing of fuel excise rate indexationfrom 2000-01 to 2014-15, and signing free trade agreements with key trading partners.

8.4

Non-tax receipts

Despite some fluctuations over the next 40 years, non-tax receipts are projected todecrease as a share of the economy from 2.0 per cent of GDP in 2020-21 to 1.5 per centof GDP in 2060-61. With tax receipts capped at 23.9 per cent of GDP, the decrease in
non-tax receipts has the effect of reducing total receipts as a share of GDP over thelong term.
This decrease is mainly due to a reduction in NDIS state contributions and Future Fundearnings as a share of GDP.
In line with bilateral agreements, contributions from the states for the NDIS are capped
at 4 per cent growth per year. This means that contributions increase in nominal terms
but decrease as a share of GDP over time since nominal GDP is projected to grow fasterthan this rate.
Future Fund receipts in the form of interest receipts and dividends peak in 2033-34 andthen decrease as a share of GDP. This projected decline is mainly due to the assumptionthat drawdowns from the Future Fund will commence in 2031-32, when the target
asset level is reached. Other non-taxation receipts, such as interest earnings on smaller
investment funds, are assumed to grow in line with the economy over the long run.

Chart 8.4.1

Non-tax receipts% of GDP
2.0% of GDP
2.0
Future Fund earnings

1.5

1.5
NDIS state contributions

1.0

1.0

0.5

Other non-tax receipts

0.0
2020-212030-31

Source: Treasury.

140

2040-410.52050-510.0
2060-61

Part II: The budget over the next 40 years

9.

Major assets and liabilities

Overview
Major assets and liabilities are published in the government’s balance
sheet. Maintaining a strong balance sheet leaves countries better
positioned to respond to long-term challenges and economic downturns.
The government’s balance sheet comprises liabilities – including AustralianGovernment Securities (AGS) and the unfunded superannuation liability –and assets, of which the Future Fund is largest.
Over the next 40 years, total liabilities as a share of the economy are
projected to increase following the COVID-19 pandemic, before decreasing
and then broadly stabilising over time. Total assets are projected togradually decrease as a share of the economy.

The balance sheet measures changes in the value of government assets and liabilities
over time. This value is affected by changes in the economy, valuation changes, andnew additions to the balance sheet. Government decisions affecting spending or
taxation flow through to the balance sheet as, for instance, changes in cash reserves ordebt. The government may also directly use the balance sheet for policy purposes,
including through the creation of investment funds and loan programs.
Chapter 6 – Budget projections sets out the key balance sheet aggregates, including
gross debt, net debt and net financial worth.
This chapter contains detailed information on the Australian Government’s major
assets and liabilities and how they are likely to change in value over the next 40 years.

1412021 Intergenerational Report

Chart 9.1 Total assets and liabilities% of GDP80% of GDP
80

70

70

60

60

Total liabilities

50
40

50
40

Total assets

30

30

20

20

10

10

0
2020-212030-312040-412050-5102060-61

Source: Australian Office of Financial Management and Treasury.

Major liabilities
Liabilities on the government’s balance sheet are broadly categorised as interest
bearing liabilities (the majority of which is the market value of AGS) and provisions andpayables (the largest of which is the Australian Government’s superannuation liability).
Total liabilities as a share of the economy are projected to initially increase over theforward estimates, peaking in 2023-24 at 70.8 per cent of GDP. This reflects theincrease in government debt due to the COVID-19 pandemic. Total liabilities thendecrease and broadly stabilise at the end of the projection period, at around
51 per cent of GDP. This reflects the profile of AGS along with reductions in the
superannuation liability over the next 40 years.
AGS at market value are expected to represent around 70 per cent of total liabilities
in 2020-21, increasing to around 80 per cent by 2060-61, as the superannuation liability
reduces. Other borrowing, provisions and payables represent around 13 per cent of
total liabilities by 2060-61.

142Part II: The budget over the next 40 years

Chart 9.2 Components of total liabilities% of GDP80% of GDP
80
Other borrowing, provisions and payables
70
60

70
60

Superannuation liability

50

50

40

40

30

30

20

20

Australian Government Securities

1002020-21102030-312040-412050-5102060-61

Note: Other borrowing, provisions and payables include a range of categories such as other employee
liabilities, provisions (including subsidies), lease liabilities and loans.
Source: Australian Office of Financial Management and Treasury.

Australian Government Securities
The government finances its activities through receipts or borrowing. It borrows by
issuing AGS when receipts fall short of payments.
AGS are measured at market value in the government’s balance sheet. The market
value is the amount holders could sell AGS for in financial markets. AGS on issue haveincreased sharply as a consequence of the Government’s response to the
COVID-19 pandemic.
The market value of AGS is projected to peak at 53.2 per cent of GDP in 2024-25, before
falling to 36.8 per cent of GDP in 2047-48, supported by low borrowing costs relative
to economic growth, and a period of primary surpluses. The market value of AGS is thenprojected to increase to 40.8 per cent of GDP by 2060-61 as spending pressures growand receipts are constrained by the tax-to-GDP cap (Chart 9.3).

1432021 Intergenerational Report

Chart 9.3 Market value of Australian Government Securities% of GDP60% of GDP
60

50

50

40

40

30

30

20

20

10

10

0
2000-01

2010-112020-212030-312040-412050-5102060-61

Source: Final Budget Outcome; Australian Office of Financial Management; and Treasury.

Government employee superannuation
The largest liability on the government’s balance sheet after AGS is the unfunded public
sector superannuation liability.
An unfunded superannuation scheme involves the government paying public servantsa defined benefit largely as an annual pension on retirement, but not provisioning forthis. These schemes were once the predominant means of providing superannuation
to public servants but almost all are now closed to new members.92
It is projected that the unfunded superannuation liability will fall over the next 40 years,
from 11.8 per cent of GDP in 2020-21 to 3.6 per cent of GDP by 2060-61 (Chart 9.4).
This is primarily a function of the move away from unfunded superannuation schemes
to funded superannuation schemes that provision for superannuation based on theaccumulation of regular contributions and earnings.

92

144

The 4 major defined benefit superannuation schemes in 2020-21 are closed to new members (theCommonwealth Superannuation Scheme, the Public Sector Superannuation Scheme, the Defence
Force Retirement and Death Benefits Scheme, and the Military Superannuation and Benefits
Scheme). Australian Defence Force Cover remains open to new members and is projected to become
the major defined benefit superannuation scheme over the long run.

Part II: The budget over the next 40 years

Chart 9.4 Unfunded superannuation liability% of GDP14% of GDP
14

12

12

10

10

8

8

6

6

4

4

2

2

0
2020-212030-312040-412050-5102060-61

Source: Australian Government Actuary and Treasury.

Major assets
Assets on the government’s balance sheet are categorised as financial andnon-financial assets. Financial assets include investments, loans, equity, advances andcash. Non-financial assets include equipment, buildings, heritage and cultural assets,land, inventories and intangibles.
The government’s total assets are projected to decrease from 33.7 per cent of GDP in
2020-21 to 22.5 per cent of GDP in 2060-61 (Chart 9.5). This largely reflects a projected
reduction in the value of the Future Fund since drawdowns are assumed to commencefrom 2031-32.

145

2021 Intergenerational Report

Chart 9.5 Components of total assets% of GDP40% of GDP
40

30

30

Financial assets

20

20

10

10
Non-financial assets

02000-01

2010-112020-212030-312040-412050-5102060-61

Source: Final Budget Outcome and Treasury.

Financial assets
Financial assets have grown over recent history, with total financial assets expected toincrease from 14.8 per cent of GDP in 2011-12 to 24.8 per cent of GDP in 2020-21.
These arrangements are funding infrastructure (Western Sydney Airport, Inland Railand the Northern Australia Infrastructure Facility), communications (National
Broadband Network), the unfunded superannuation liability (the Future Fund) andenergy (Clean Energy Finance Corporation and Snowy 2.0).
Financial assets include investments on which the government aims to earn a financial
return in the form of interest, dividends, or capital gains. These investments may beheld for liquidity management reasons or for policy purposes. Instruments issued to
manage government liquidity may, for example, be in the form of term deposits thegovernment holds with the Reserve Bank of Australia. Investments that use the balance
sheet for policy purposes can be integral to the achievement of government objectives
that boost productivity, drive economic growth, deliver critical infrastructure andprovide important services for Australian citizens, businesses and communities.
Government investment funds
A large component of financial assets is government-owned investment funds, which
are generally classified as investments for policy purposes. There are currently
6 Australian Government investment funds – the Future Fund, the Medical Research
Future Fund, the DisabilityCare Australia Fund, the Aboriginal and Torres Strait IslanderLand and Sea Future Fund, the Future Drought Fund, and the Emergency Response
Fund.
The creation of an investment fund affects different measures of debt differently. It
generally has no impact on net worth and net financial worth as the financial assets of146

Part II: The budget over the next 40 years

the fund offset the additional borrowing. Creating an investment fund increases net
debt to the extent that the fund’s investments are in equity assets (shares), which are
not included in the calculation of net debt.
The Future Fund is the largest government investment fund. It was established in 2006
to help fund the cost of the unfunded public sector superannuation liability. The
government has provided the Future Fund with $60.5 billion of seed funding.
Following the challenging investment environment caused by the COVID-19 pandemic,
the Future Fund’s return in 2019-20 was -0.9 per cent, however returns haverebounded in 2020-21. At 31 March 2021, the Future Fund was valued at $178.6 billion
and delivered a 10-year return of 9.1 per cent per year, exceeding the investment targetof 6.1 per cent per year.
The projected value of the Future Fund is based on an assumption about whendrawdowns commence. The Future Fund Act 2006 states that the government canbegin drawing down from the Future Fund at the earlier date of 1 July 2020 or when
the opening balance of the Future Fund reaches the target asset level. The target asset
level is the projected Future Fund balance that would offset the projected unfundedsuperannuation liability accrued up to the same point in time. The Government hasannounced its intention to not draw down on the Future Fund until at least 2026-27. In
this report, drawdowns are assumed to begin from 2031-32, which is when the balanceof the Future Fund is projected to reach the target asset level.

Chart 9.6 Future Fund closing balance% of GDP12% of GDP
12

10

10

8

8

6

6

4

4

2

2

0
2020-212030-312040-412050-5102060-61

Source: Australian Government Actuary and Treasury.

Higher Education Loan Program (HELP)
HELP loans represent a financial asset on the government’s balance sheet as they are
expected to be repaid by students in the future. The value of HELP increases when newloans are issued and through indexation on existing loans, and declines as loans arerepaid and as debts are written off.
147

2021 Intergenerational Report

As at 30 June 2021, the fair value of HELP is estimated to be $48.5 billion.93 Over the
next 40 years, it is projected that HELP will reduce from 2.4 per cent of GDP in 2020-21
to 1.8 per cent of GDP in 2060-61. The fall in the fair value of HELP at the start of the
projections period is driven by an assumed increase in the discount rate applied toprojected HELP repayments. The fall in HELP as a share of the economy over the 40-year
projection period reflects that new issued loans are projected to grow in line with thegrowth in student numbers and prices, and assumed to grow slower than nominal GDP.
This is partially offset by growth in repayments, as repayment thresholds are grown inline with CPI, consistent with legislation. As wages are projected to grow faster than
CPI, this results in an increase in the number of debtors required to make a repayment
which increases the value of the HELP asset over time.

Chart 9.7

HELP fund closing balance% of GDP
2.5% of GDP
2.5

2.0

1.5
2020-212.02030-312040-412050-511.5
2060-61

Source: Australian Government Actuary; Department of Finance; and Treasury.

Non-financial assets
Non-financial assets are projected to increase from 26.4 per cent of total assets in
2020-21 to 44.2 per cent of total assets in 2060-61. This reflects that non-financial
assets are projected to increase from 9.0 to 9.9 per cent of GDP over the next 40 years
but financial assets decrease over time as a share of the economy. The largest
component of non-financial assets is defence acquisitions, which are included in theoverall funding for Defence (Section 7.7).

93

148

HELP debt is reported at the fair value which is conceptually close to the market value of the HELP
debt, or the estimated value for which the HELP debt could be sold. HELP comprises several
programs, including HECS-HELP, FEE-HELP, OS-HELP, SA-HELP and VET FEE-HELP.

Appendix
Overview
This appendix outlines the modelling methodologies and assumptions
underpinning the projections in this report and provides a summary of key
results. In general, the methodologies used throughout this report are
similar to those used in previous intergenerational reports.
The economic and fiscal projections incorporate a range of assumptions
and judgements. These reflect the best information, as well as detailed
analysis of historical trends and current policy, available at the time of
preparing the report.
There is considerable uncertainty in quantifying and modelling economic
and fiscal outcomes over the next 40 years. The projections contained inthis report are intended to capture the main trends and trajectories thatwill influence outcomes in our future. Uncertainties have been increasedby the COVID-19 pandemic, the impacts of which continue to unfold.

149

2021 Intergenerational Report

1.

Projections Summary

Table A1.1

Demographic projections

Population (millions)2020-212030-312040-412050-51

2060-61

25.7

28.8

32.2

35.6

38.8

0-14

4.8

4.8

5.2

5.8

6.1

15-64

16.6

18.3

20.2

22.1

23.8

65-84

3.8

4.8

5.5

6.0

6.9

85 and over

0.5

0.8

1.3

1.7

1.9

Male

81.4

83.1

84.5

85.8

86.8

FemaleLife expectancy at birth (years)

85.4

86.6

87.6

88.5

89.3

Total fertility rate

1.61

1.62

1.62

1.62

1.62

Old-age dependency ratio

3.9

3.2

3.0

2.9

2.7

Net overseas migration(per cent of total population)

-0.4

0.8

0.7

0.7

0.6

Note: Life expectancy figures are calculated using the period method. The old-age dependency ratio refers to
the number of people of traditional working age (15-64) for every person 65 and older.
Source: McDonald (2020) for fertility projections only and Treasury.

150Appendix

Table A1.2

Economic and fiscal projections
2020-212030-312040-412050-51

2060-61

1.2

2.9

2.7

2.4

2.3

76,70089,600105,700

122,400

140,900

Economic projections
Real GDP growth (%)
Real GDP per person ($)
Real GDP per person growth (%)

1.1

1.7

1.6

1.4

1.4

77,90085,40099,100113,100

128,900

Real GNI per person growth (%)

4.7

1.6

1.4

1.3

1.4

Total participation rate 15-64 (%)

78.9

79.9

81.3

81.5

81.5

Total participation rate 15+ (%)

65.8

64.9

64.9

64.5

63.6

Male 15+

70.8

69.0

68.9

68.6

67.6

Female 15+

61.0

61.0

61.1

60.7

59.9

-7.8

-1.5

-1.1

-1.8

-2.3

Real GNI per person ($)

Fiscal projections (% of GDP)
Underlying cash balancePrimary balance

-7.1

-0.7

0.3

-0.1

-0.6

Gross debt

40.2

51.2

39.2

37.1

40.8

Net debt

30.0

38.2

29.0

29.3

34.4

Net financial worth

-37.4

-41.8

-32.5

-32.9

-38.5

Source: Treasury.

1512021 Intergenerational Report

Table A1.3

Projections of major components of Australian Government
spending (per cent of GDP)
2020-212030-312040-412050-51

2060-61Disability Support Pension

0.9

0.7

0.7

0.8

0.8

Family Tax Benefit

0.9

0.7

0.5

0.5

0.4

Child Care Subsidy

0.4

0.5

0.4

0.4

0.3

Parenting Payment Single

0.3

0.2

0.2

0.2

0.2

Parenting Payment Partnered

0.1

0.0

0.0

0.0

0.0

Paid Parental Leave

0.1

0.1

0.1

0.1

0.1

JobSeeker Payment

1.4

0.6

0.5

0.5

0.4

Youth Allowance and Austudy

0.3

0.2

0.1

0.1

0.1

Carer Payment

0.3

0.4

0.4

0.4

0.4

Total payments to individuals

4.8

3.3

3.0

2.9

2.7

Health

4.6

4.4

4.9

5.5

6.2

Age and Service Pension

2.7

2.5

2.4

2.2

2.1

Defence

2.1

2.3

2.3

2.3

2.3

Education

1.9

1.6

1.4

1.3

1.2

Aged care

1.2

1.4

1.5

1.8

2.1

National Disability Insurance Scheme(Australian Government)

0.7

1.0

1.0

1.0

1.0

Public Sector Superannuation

0.4

0.4

0.4

0.3

0.2

Total payments

32.1

26.2

26.8

27.3

27.7

Total payments (excl. interest)

31.3

25.2

25.1

25.4

25.8

Payments to individuals

Source: Treasury.

152

Appendix

Table A1.4

Projections of major components of Australian Government
spending (real spending per person, 2020-21 dollars)
2020-212030-312040-412050-51

2060-61Disability Support Pension

710

660

770

950

1110

Family Tax Benefit

730

580

560

550

530

Child Care Subsidy

350

440

450

440

420

Parenting Payment Single

240

180

210

230

250

Parenting Payment Partnered

60

30

30

30

30

Paid Parental Leave

90

80

80

80

70

JobSeeker Payment

1140

540

550

550

550

Youth Allowance and Austudy

260

140

130

130

130

Payments to individuals

250

310

420

530

620

Total payments to individuals

Carer Payment

3840

2980

3200

3480

3710

Health

3670

3970

5120

6670

8700

Age and Service Pension

2190

2210

2540

2730

2990

Defence

1640

2030

2390

2760

3170

Education

1490

1410

1490

1580

1620

Aged care

950

1280

1620

2230

2900

National Disability Insurance Scheme(Australian Government)

540

890

1060

1250

1440

Public Sector Superannuation

330

360

400

380

320

Total payments

25680

23360

28100

33120

38680

Total payments (excl. interest)

25020

22410

26380

30830

35980

Source: Treasury.

1532021 Intergenerational Report

Key concepts
Gross Domestic Product (GDP) measures the output (goods and services) produced in
the Australian economy in a given period.
Nominal GDP measures the value of the output produced in Australia at current prices.
For example, nominal GDP in 2020 is calculated using prices for goods and services in
2020. Nominal GDP has a significant implication for tax revenue and the fiscal position.
Real GDP measures the total value of output produced in Australia using the prices ofa chosen base year. It removes the effect of price changes, allowing a focus on changes
in quantities of output.
Real GDP per person measures the average level of output produced per person, whichis the most widely used comparative indicator of economic performance and an
indication of average living standards.
Potential GDP estimates the highest sustainable level of economic output, or the
economy’s productive capacity. Potential GDP grows through the accumulation offactors that expand the economy’s productive capacity. Potential GDP is estimatedbased on an analysis of trends in population, productivity and participation. As sparecapacity in the economy is absorbed over time, real GDP converges towards its
potential level.
The economy is at full capacity when actual output equals potential output.
Spare capacity occurs when actual economic output is below potential. This means
there are economic resources (such as labour) that are being underutilised.
Gross National Income (GNI) measures how much Australia earns, rather than what
output is produced in the economy. It is used as an indicator of Australia’s standard ofliving. GNI measures total income received in Australia from its residents andbusinesses in Australia and abroad. It can be measured in real or in nominal terms
similar to GDP.
Real GNI per person is often used as a measure of a country’s economic prosperity,
because it captures a country’s average real income per person from the economic
activity of its residents and businesses, regardless of whether they are located in the
country or abroad. Higher commodity prices (and hence terms of trade) have a direct
impact on real incomes and hence GNI.
The terms of trade measure export prices relative to import prices. They have asignificant influence on Australia’s GNI and nominal GDP. Favourable terms of trade, or
periods when export prices are high relative to import prices, imply that Australia isable to buy more imports for a given amount of exports.
Labour productivity is a measure of output per hour worked. It depends on growth inunderlying productivity and the productive capital stock. Underlying productivity, also
known as labour augmenting technical change, reflects changes in productivity that are
specific to labour that are unrelated to growth in the productive capital stock. Increases
154Appendix

in underlying productivity lead to complementary increases in the productive capitalstock, but this takes time due to costs of adjustment.
The consumer price index (CPI) measures the prices of a representative basket of goods
and services consumed in Australia.
The GDP deflator measures the level of prices across the goods and services containedin GDP.
The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the rate ofunemployment that can be sustained without generating inflationary pressures.
The level of a variable indicates its absolute size. For example, in real GDP it indicates‘how big’ the economy is.
The growth rate of a variable indicates its rate of change. For example, in real GDP it
indicates ‘how fast’ the size of the economy is changing over time.

155

2021 Intergenerational Report2.

Methodology and assumptions

2.1

Economic projections framework

The long-run economic projections in this report build on those in the 2021-22 Budget.
This report generates a projection for real GDP using information and assumptions
about the trajectories of the population, participation and productivity.
On the nominal side, key non-rural commodity export prices are projected based on
cost curve analysis. Domestic prices return over time to the mid-point of the Reserve
Bank of Australia’s inflation target band.
A macroeconometric model of the Australian economy is used to combine theseassumptions and trend inputs to generate a projection for real and nominal GDP.

Population projections
The population projections in this report use the cohort-component method outlinedin the 2020 Population Statement and the 2021-22 Budget.94 The assumptions for thecomponents of population growth are the same as for the 2021-22 Budget but extend
to 2060-61.
Assumptions about fertility, mortality and net overseas migration are made over:• the near term – the forecast period, between 2020-21 and 2024-25, and• the longer term – the projections period, between 2025-26 and 2060-61.
Population projections are estimated for each single year of age (0 to 120) and sex from2020-21 to 2060-61.
Fertility
Future births are estimated by applying age-specific fertility rate assumptions to thefemale population aged 15 to 49 in each year, based on projections by Peter McDonald,
Professor of Demography at the University of Melbourne’s Melbourne School of
Population and Global Health.95
Mortality
Future deaths are estimated by applying age and sex-specific mortality rate
assumptions to the population.

94
95

156

Centre for Population, Population Statement 2020 (Canberra: Centre for Population, 2020).
P. McDonald, A Projection of Australia’s Future Fertility Rates (Canberra: Centre for Population 2020).

Appendix

Assumptions about future mortality rates are based on life tables produced by the ABS,
to which the Australian Government Actuary’s mortality improvement factors areapplied.96

Net overseas migration
Forecasts for net overseas migration (NOM) use detailed historical data on
international arrivals and departures and offshore visa grants data from the
Department of Home Affairs. Initial NOM forecasts are estimated based on arrivals anddepartures of broad migrant categories prior to the COVID-19 pandemic. These initial
forecasts are then adjusted to capture the likely impact of the pandemic. The adjusted
NOM forecasts for the period 2020-21 to 2024-25 are included in the population
projection baseline.
From 2025-26 onwards, NOM is assumed to remain at a fixed level of 235,000. The age
and sex distribution of both arrivals and departures are assumed to reflect the 5-year
historical average distribution observed from 2012-13 to 2017-18.
The NOM assumption of 235,000 people per year over the long run reflects:• the Government’s migration planning levels (reviewed and set by the Government
on a yearly basis) of:- the permanent Migration Program (190,000 people per year from 2023-24)- the Humanitarian Program (13,750 people per year)• the flows of temporary migrants who reside in Australia for several years but do nottransition to permanent residency (assumed to be a net inflow of 66,250 people per
year, based on a historical average of the net inward flow of such migrants prior tothe onset of the COVID-19 pandemic)• the flows of Australian citizens (assumed to be a net outflow of around
15,000 people per year, based on a historical average), as well as the number ofpermanent residents who subsequently emigrate (assumed to be a net outflow ofaround 20,000 people per year, based on a historical average).

96

ABS, Life Tables, 2017-19, (2020).

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Table A2.1.1 Population projection assumptions
Net
Total
overseas
fertility rate migration
Intergenerational
ReportPeriod life expectancy at birth inyear 2050 (years)

Population
June 2050

Babies per
woman

PeopleMales

Females

People, millions

2021

1.6

235,000

85.7

88.4

35.3

2015

1.9

215,000

87.5

90.1

37.8

2010

1.9

180,000

87.7

90.5

35.9

2007

1.7

110,000

87.6

90.2

28.5

2002

1.6

90,000

83.2

88.2

25.7

Note: The 2050 year was chosen for comparability as historical intergenerational reports do not project life
expectancies and populations beyond this year. The projections data for 2002, 2007 and 2010 reports were
published in the 2015 Intergenerational Report.
Source: Treasury.

Modelling the economic and fiscal impacts of different migrant streams
The lifetime economic and fiscal impacts of different groups of permanent migrants
shown in Charts 2.9 and 2.10 have been estimated using Treasury’s OverLapping
Generations model of the Australian economy (OLGA) and Fiscal Impact of New
Australians (FIONA) model, respectively. OLGA is a lifecycle dynamic generalequilibrium model that has been calibrated to Australian data. FIONA is a demographic
cohort model designed to estimate the fiscal impact of permanent migrants to Australia
over their remaining lifetimes.
Both the OLGA and FIONA sets of results presented in this report show a longitudinal
perspective on migration, capturing the economic (as measured by real GDP) and fiscal
impact of a single cohort of permanent migrants – the 2018-19 cohort – over theirremaining lifetimes in Australia.
Both models present the results in net present values in 2018-19 dollars. OLGA is a realmodel with all prices assumed to grow at a common notional rate, so net present values
are calculated using a real discount rate.
The FIONA model calculates the net present value using a nominal discount rate,
broadly reflecting the government’s cost of borrowing over the long term.
Both sets of results are best interpreted by comparing estimates of different migrantgroups (or between migrant groups and the general Australian population), rather thanfocusing on absolute dollar values. This is because the relativities between groups arerobust to different modelling choices and assumptions over the long run, whereas theabsolute level estimates vary much more widely.
The OLGA and FIONA results presented in this report do not capture the broader
economic, social or environmental effects of migration such as technology spillovers or

158

Appendix

congestion. The FIONA results presented here do not capture the fiscal impacts of
migration on state or local governments.
Lifetime contributions to GDP, as estimated using the OLGA model
The skill distribution of the permanent migrant cohort is calibrated to tax and Census
data collected from earlier permanent migrant cohorts. Labour market outcomes arethen determined endogenously in the model.
The age distribution of the permanent migrant cohort in OLGA is calibrated to the age
distribution of the 2018-19 permanent migrant cohort. OLGA only directly captures
those migrants who arrive aged 21 to 95.
Aside from age and income earning ability, all other economic characteristics of
migrants are assumed to be the same as for an equivalent Australian resident. These
include, among other things, wealth, entrepreneurship, propensities to save andconsume, and English-speaking ability. Variations in these factors from the resident
population will likely affect the analysis of more disaggregated visa classes but are notexpected to have a significant effect on the estimates of broader categories reported
in this report.
In OLGA a permanent migrant is assumed to pay the same taxes and receive the sameamount of government transfers as a resident of the same age and income-earning
ability. For simplicity the debt-to-GDP ratio has been held constant with the net fiscal
impact of migrants offset through changes to personal income tax.
The OLGA results reflect changes in aggregate outcomes, some of which will be
distributed to the resident population.
Lifetime fiscal impact, as estimated using the FIONA model
The FIONA model has been developed to estimate the fiscal impact of permanent
migrants over their remaining lifetimes in Australia. The model also estimates the valueof taxes paid and the costs of services received by the general Australian population to
enable comparison to the permanent migrant cohort.
The results in Chart 2.10 relate only to tax revenues retained and government expenses
incurred by the Australian Government (a subset of FIONA estimates, which extend to
the state government level). The model captures personal income tax and indirect taxes
as well as the visa application charges paid by migrants prior to securing permanent
residency. Taxes not directly attributable to individuals such as company income tax
are not included. On the spending side, FIONA incorporates estimates for AustralianGovernment expenditure on aged care, education, health, infrastructure, payments toindividuals, and settlement services. Defence spending is not included.

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Participation rate projections
The increase in the total participation rate since the first Intergenerational Report in2002 has been larger than projected and future projections for participation rates havebeen successively revised upwards.
The participation rate projections in this report are based on a new methodology, as
explained in detail in Treasury Working Paper 2021-02 Australian Labour Force
Participation: Historical Trends and Future Prospects.97 This methodology considers
how participation rates have historically varied over the lifecycle and how theselifecycle participation profiles have shifted between different generations. Importantly,
this means that participation rates at later stages of life for a given generation partly
depend on the observed participation for that generation at younger ages.

Productivity projections
Labour productivity is typically defined as output per hour worked. Factors that canaffect labour productivity include workers’ skills, technological change, management
practices and the productive capital stock.
The 2015 Intergenerational Report used an aggregate approach to model labour
productivity. The macroeconomic projections in this report adopt a more sophisticatedapproach to projecting labour productivity, consistent with the 2021-22 Budget.
The approach now incorporates a direct role for changes in the productive capital stock
to lead to changes in labour productivity. Labour productivity growth depends on bothunderlying productivity and the productive capital stock.98
Underlying productivity reflects changes in productivity that are specific to labour, andunrelated to growth in labour and capital inputs. Underlying productivity is unobserved
and so is typically modelled to reflect the remaining component of output growth thatis unexplained by increases in labour and capital inputs.
Underlying productivity growth is assumed to converge over a 10-year period to
1.5 per cent per year, consistent with the average growth rate in labour productivity
over the 30 years to 2018-19. The COVID-19 pandemic has had significant impacts on
the drivers of labour productivity growth, which may impact the accuracy of the labour
productivity measure in 2019-20.99
The productive capital stock refers to the productive assets available to assist in
producing output. It increases with business investment and decreases due to thedepreciation of existing assets.

97
98
99

160

L. Gustafsson, ‘Australian Labour Force Participation: Historical Trends and Future Prospects’,Treasury Working Paper 2021-02 (2021).
Underlying productivity is also known as labour augmenting technical change.
ABS, ‘Productivity measurement in the time of a pandemic’, Estimates of Industry Multifactor
Productivity, 2019-20 financial year.

Appendix

Long-run growth in the stock of productive capital is linked to growth in underlying
productivity. This reflects an assumption that, in the long run, labour (adjusted forunderlying productivity) and capital shares of output are constant.

Nominal GDP, prices and wages
Output prices are a volume-weighted average of the price received for goods andservices sold domestically and internationally.
High export prices often occur in periods of strong demand for Australia’s bulk
commodities. For example, from the mid-2000s to 2011, strong demand for Australia’s
major commodity exports, particularly from China, drove a significant increase in theprices of iron ore and thermal and metallurgical coal. From 2011-12 to 2015-16, key
commodity prices retreated from these record highs, resulting in large falls in the termsof trade. Consistent with the approach to commodity prices in the 2021-22 Budget, thereal prices of Australia’s commodity exports are expected to fall until 2025-26, before
stabilising at their long-run levels thereafter. This report uses the same export priceprojections from the 2021-22 Budget. The terms of trade are projected to return to andremain around the 2006-07 level from 2025-26 to 2060-61.
Domestic prices are projected to return over time to the mid-point of the RBA’s
inflation target band of 2 to 3 per cent. Over the long run, output prices are projected
to grow by 2.5 per cent per year, consistent with Australia’s medium-term inflation
target. Wages are projected to grow by around 4.0 per cent per year, consistent withdomestic inflation and long-run labour productivity growth converging to 1.5 per centper year.

2.2

Aggregate fiscal projections

The Model of Fiscal Aggregates and Scenario Analysis (MFASA) used to prepare theaggregate fiscal projections in this report draws together the outputs of a wide rangeof separate but consistent models that project economic parameters, tax receipts,
payments (for example, health, aged care, and higher education), and the balance
sheet (for example, investment funds).
MFASA is designed to replicate an internally consistent cash and accrual accounting
system so that all fiscal aggregates can be produced. This means the operatingstatement, the cash flow statement, and the balance sheet are interconnected, withchanges in one statement affecting the other statements.

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Figure A2.2.1 Preparing fiscal aggregates

Source: Treasury.

The forward estimates and medium-term projections published in this report areconsistent with those published in the 2021-22 Budget. The forward estimates form
the basis for the projections and are grown by relevant economic and demographic
parameters to create the medium- and long-term projections. Projections of revenue,
spending and the Government’s balance sheet are compiled in MFASA. Any
components that are not explicitly modelled are grouped and grown by an aggregate
growth factor, such as nominal GDP.
The modelled and non-modelled components are combined to calculate the financing
task in each year. This is comprised of the underlying cash balance excluding interest
payments on Australian Government Securities (AGS) plus balance sheet flows.
The financing task is inputted into PDI Sim, along with the level of AGS at the end of theforward estimates, and the assumed AGS yield curve in each year (Section 3 of thisAppendix includes more information on the bond yield assumptions). PDI Sim thencalculates interest payments and the level of AGS, which are inputted back into MFASA
to generate the aggregate fiscal projections.

2.3

Revenue projections

This report projects that tax receipts will increase from current levels to reach along-run constant tax-to-GDP ratio of 23.9 per cent. This ratio is consistent with theGovernment’s Fiscal Strategy and is based on the average tax-to-GDP ratio of the years

162Appendix

following the introduction of the GST and prior to the Global Financial Crisis (2000-01
to 2007-08 inclusive).
The projections methodology is similar to previous reports, relying on the broadcorrelation between major elements of nominal GDP (such as compensation of
employees, gross operating surplus and nominal consumption) and their respective tax
bases (personal income tax, company tax, GST and other excise and customs duty).

Medium- and long-term revenue projections
The assumption that the tax-to-GDP cap would constrain tax receipts is largely basedon:• an observation that the tax-to-GDP ratio had remained relatively stable over the
past 30 years, and that such stability was observed widely in advanced economies• that a strict no-policy-change scenario was unrealistic as it would imply increases inaverage tax rates on personal income each year
• the emphasis of the reports rested on pressures that demographic change was likely
to impose on future government spending.
Similarly, this report also assumes a period of adjustment before tax receipts reach
their long-term level, building off the projections and methodology in the2021-22 Budget. The tax-to-GDP ratio is projected to rise from 20.9 per cent of GDP in
2021-22 to 23.9 per cent of GDP in 2035-36. Tax receipts are then projected to remain
at 23.9 per cent until 2060-61.
Non-tax receipts are a relatively small component of total receipts and are projected
as part of MFASA.

Policy assumptions
With no policy change, tax collections historically would have risen much faster thanGDP over time, resulting in a tax-to-GDP ratio considerably higher than actuallyoccurred. This reflects increasing tax rates on personal income over time due to theprogressivity of the personal income tax scale and the fact that the personal income
tax thresholds are set in nominal terms.
The broad stability of the historical tax-to-GDP ratio is largely the result of policy
adjustments, particularly periodic adjustments to the personal income tax scale.
The projections from 2020-21 out to 2035-36 are based on a ‘no policy change’
scenario, and include the effects of existing policy such as the Government’s Personal
Income Tax Plan. Beyond 2035-36, the estimates are prepared using a ‘top-down’approach, assuming a constant tax-to-GDP ratio of 23.9 per cent of GDP. Within theoverall long-run assumption, GST receipts (and the associated Commonwealthpayments to the states) are assumed to comprise around 3.5 per cent of GDP.

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The assumption that the aggregate tax-to-GDP ratio remains constant is not intended
to imply that receipts from all heads of revenue will remain constant as a share of GDP.
In the absence of policy adjustments, the current structure of the tax system will leadto some types of tax receipts varying over the long term as a share of GDP. For example,
there has been a long-run decline in excise and excise-equivalent customs duty as ashare of nominal GDP. Should this trend continue over the long run, a constanttax-to-GDP ratio would imply that other taxes would increase as a share of total tax.

2.4

Spending projections

HealthGeneral methodology
This report uses a similar modelling methodology to previous intergenerational reports.
Health expenditure beyond the forward estimates is projected initially on the basis ofindividual component models for public hospitals, pharmaceutical benefits, medical
benefits and private health insurance rebates. The share of health spending made up
by each component has changed significantly over time. Expenditure not captured in
the component models, such as veterans’ health, public health programs and medical
research, is held constant as a percentage of nominal GDP.
Component models are used to project the cost of health services per person from theend of the forward estimates to 2031-32. The uncertainty around the distribution ofhealth expenditure between the components of health spending increases with thelength of the projection period. Because of this, from 2032-33 onwards, an aggregate
model is used to project total Australian Government health spending.
This long-run model assumes growth in the non-demographic factor trends towards a
historical non-demographic growth rate for health spending by all levels ofgovernment. This is broadly consistent with the approach used in the 2010 and 2015
Intergenerational Reports.
The use of component models for the short term and an aggregate model for long term
projections seeks to balance the desire for more detailed projections against theuncertainty as to whether recent trends in individual components of government
health spending will be representative of longer-term trends. Long-term modelling on
a component basis could risk underestimating future spending pressures, which are
driven by a variety of factors including technological change, demographic change andincome growth.
Medical benefits
The medical benefits component model includes spending under the Medicare Benefits
Schedule.

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Appendix

Projections are derived by combining non-demographic growth in current spending on
medical benefits per person for age and gender cohorts with estimates of population(excluding the veterans’ population) and CPI growth.
The non-demographic growth rate is derived from trends in historical Medicare
Benefits Schedule expenditure data. Real age-adjusted spending per person is
calculated by adjusting historical spending for CPI growth and changes in the size andage structure of the population. An exponential trend is applied to this historical series,
generating a non-demographic growth rate which is then applied as a constantpercentage increase in spending across all age and gender cohorts.
Because veterans receive medical services under separate arrangements from theMedicare Benefits Schedule, they are not included in the MBS projections. Spending on
medical benefits for veterans is included as other health spending consistent withgovernment budget presentation.
The age profile of medical benefits spending shows that spending per person is higher
for older age groups than for younger age groups (Table A2.4.1). Spending per person
on medical benefits peaks for those aged above 85.

Table A2.4.1 Index of the age profile of medical benefits spending perperson, 2019-20
Age Group

Male

Female

0-4

0.50

0.45

5-9

0.36

0.31

10-14

0.33

0.34

15-19

0.36

0.57

20-24

0.34

0.71

25-29

0.36

0.81

30-34

0.44

1.04

35-39

0.54

1.12

40-44

0.62

1.08

45-49

0.73

1.09

50-54

0.87

1.18

55-59

1.07

1.28

60-64

1.34

1.46

65-69

1.77

1.79

70-74

2.28

2.19

75-79

2.83

2.60

80-84

3.21

2.84

85+

3.39

2.96

Weighted average

0.86

1.13

Note: Index of average cost per person = 1.
Source: Department of Health, and Treasury.

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Pharmaceutical benefits
The pharmaceutical benefits model covers spending under the Pharmaceutical Benefits
Scheme and the Repatriation Pharmaceutical Benefits Scheme.
Projections are derived by applying non-demographic growth to current spending onpharmaceutical benefits per person for each age group in each gender. Population and
CPI projections are then applied to derive nominal projections of spending. Expenditureon the Repatriation Pharmaceutical Benefits Scheme is included in the projections.
A non-demographic growth rate for each age and gender cohort is derived from trends
in historical data on pharmaceutical benefits expenditure. Real per person expenditure
for cohorts is calculated by adjusting historical expenditure for growth in CPI, with alinear trend applied to the series to calculate the non-demographic growth factors.
Non-demographic growth is projected forward as a constant real dollar increase in
spending each year for each age group and gender.
The age profile of pharmaceutical benefits spending shows that spending per person ishigher for older age groups than for younger age groups (Table A2.4.2). Spending
per person on pharmaceutical benefits peaks for those aged 80 to 84.

Table A2.4.2 Index of the age profile of pharmaceutical benefits spending
per person, 2019-20
Age Group

Male

Female

0-4

0.09

0.08

5-9

0.16

0.12

10-14

0.26

0.20

15-19

0.23

0.23

20-24

0.26

0.28

25-29

0.34

0.35

30-34

0.43

0.47

35-39

0.55

0.65

40-44

0.69

0.82

45-49

0.85

0.93

50-54

1.05

1.04

55-59

1.33

1.27

60-64

1.67

1.55

65-69

2.36

2.09

70-74

3.13

2.73

75-79

4.01

3.28

80-84

4.57

3.59

85+

4.27

3.17

Weighted average

1.01

0.99

Note: Index of average cost per person = 1.
Source: Department of Health, and Treasury.

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Appendix

Hospitals
Government spending on public hospitals is projected based on the parameters of the2020-25 National Health Reform Agreement (NHRA) over the medium-term period.
Under the NHRA the Commonwealth is expected to invest more than $130 billion indemand driven public hospital funding over 5 years from 2020-21. Between 2020-21
and 2031-32, Australian Government spending on public hospitals grows by an averageof 6.4 per cent per year.
Spending on hospital services for veterans has been included in the other healthspending category consistent with government budget presentation.
Private health insurance rebate
The Government’s contribution to an individual’s private health insurance rebate isindexed annually by the lesser of the change in CPI or the actual average increase in thepremium charged by insurers. Accordingly, the private health insurance rebate model
projects spending based on growth in the CPI and population.
The current proportion of private health insurance holders in each 5-year age cohort isassumed to remain constant beyond the forward estimates. The projection model
assumes zero non-demographic real growth, as increases in private health insurance
prices are capped at the CPI and increases in demand are assumed to be primarily
driven by demographic factors.
The proportion of individuals holding private hospital cover is higher for older
Australians, with 53 per cent of men aged 65 to 79 holding coverage. For women, those
aged 70 to 74 are most likely to hold coverage.

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Table A2.4.3 Proportion of the population holding private healthinsurance cover, 2019-20
Age Group

Male

Female

0-4

0.36

0.35

5-9

0.43

0.42

10-14

0.45

0.45

15-19

0.44

0.44

20-24

0.29

0.31

25-29

0.20

0.24

30-34

0.35

0.40

35-39

0.44

0.48

40-44

0.47

0.50

45-49

0.47

0.50

50-54

0.48

0.50

55-59

0.49

0.51

60-64

0.51

0.53

65-69

0.53

0.55

70-74

0.53

0.56

75-79

0.53

0.54

80-84

0.51

0.50

85+

0.47

0.43

Total

0.42

0.45

Source: Treasury estimates based on data from the Department of Health.

Other spending
Other health spending includes all other Australian Government health spending.
Major components of this expenditure include:• spending on veterans’ health care
• population health and safety programs, health and research• health workforce programs including payments to general practitioners forinfrastructure, training and support, and the Practice Incentives Program.
For the purposes of this report, other health spending also includes expenditure on
measures to address the COVID-19 pandemic, including purchases of personal
protective equipment and COVID-19 vaccines, as well as funding provided to the states
and territories through the National Partnership Agreement on COVID-19 Response. As
this spending is expected to cease before the end of the forward estimates it does notflow through to the long-run projections.
Other health spending excluding veterans’ health care is assumed to remain constantas a proportion of GDP. This approach is consistent with how other non-demographic
payments, other than interest payments, are modelled.

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Appendix

Veterans’ health care includes all spending on veterans’ health care administered by
the Department of Veterans’ Affairs except spending on the Repatriation
Pharmaceutical Benefits Scheme, which is included in the pharmaceutical benefits
projections.
Veterans’ spending per person on medical benefits is assumed to be equivalent to thegeneral population, while spending per person on hospitals is assumed to grow at thesame rate it does over the forward estimates. Residual veterans’ health spending perperson is projected as a constant proportion of GDP per person.
Aggregate modelOver time, spending on different components of Australia’s health system will grow at
different rates, both in the short and medium term. These differences reflect a range
of factors including advances in medical technology and policy choices (for example,
periods when there is a greater focus on preventative health). History also suggests
these differences are unlikely to remain consistent over the long term. For this reason,
the projection transitions to an aggregate model of health expenditure from 2031-32.
Real spending per person in each age and gender group is grown by an aggregate
non-demographic growth rate. This expenditure is combined with changes inAustralia’s demographics and forecasts of CPI growth to produce nominal expenditure
projections for the years from 2032-33 to 2060-61.
The non-demographic growth rate is calculated from the growth in real, age-adjusted
spending per person from all governments. The growth rate is derived from the seriesof all government health spending adjusted for CPI growth and changes in the size andage structure of the population. The non-demographic growth rate is determined byfitting an exponential trend to the series and is estimated using the past 20 years ofhistorical data. This reflects the most recent period of growth in age adjusted healthspending per person but is still long enough to abstract from cyclical changes.

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Table A2.4.4 Health spending data sources
Pharmaceutical benefits
Age-cost profiles
Five year age-cost profiles by gender from 2002-03 to 2019-20. Data includes all Pharmaceutical
Benefits Scheme and Repatriation Pharmaceutical Benefits Scheme spending administered by the
Department of Human Services and sourced from the Department of Health. Where expenditure was not
attributed it was imputed to have been distributed according to the profile of expenditure which was
attributed.
Historical program spending
Pharmaceutical Benefits Scheme and Repatriation Pharmaceutical Benefits Scheme data from the
Department of Health.
Medical benefits
Age-cost profiles
Five year age-cost profiles by gender from 1984-85 to 2019-20. Data includes Medicare Benefits
Schedule paid by the Department of Human Services and sourced from the Department of Health. Where
expenditure was not attributed it was imputed to have been distributed according to the profile ofexpenditure which was attributed.
Historical program spending
Medicare Benefits Schedule data from the Department of Health.
Hospitals
Age-cost profiles
Five year age-cost profiles by gender provided by the Department of Health.
Historical program spending
Australian Government funding for public hospitals from the Australian Institute of Health and Welfare
and Department of Health.
Private Health Insurance
Proportion of individuals holding hospital coverCalculated using data from the Australian Prudential Regulation Authority provided by the Department of
Health.
Historical program spending
Private Health Insurance Rebate spending from the Department of Health and the Australian Taxation
Office.
Other HealthHistorical program spending
Healthcare spending on veterans from Commonwealth budget papers and Department of Veterans’Affairs Annual Reports.
Veterans’ population
Veterans’ population historical data and projections supplied by the Department of Veterans’ Affairs.

Source: Treasury.

170Appendix

Aged careLong-term projections involve judgements around how long trends in spending fordifferent components are likely to continue. The changes to aged care modellingbalance the desire for policy insight with the need for internal consistency andtransparency in the long-term projections. These changes also align the modelling foraged care spending with the modelling approach taken for other health expenditure.
Recent literature on health and aged care spending in Australia has shown that simple
demographic models do not adequately explain changes in these expenditures (forexample, models that derive predicted healthcare expenditure as a product of age andgender specific per person health care costs and population projections corresponding
to those age and gender characteristics). These studies have also highlighted that
non-demographic factors are important in driving costs, primarily as a result oftechnological improvements leading to more expensive medical interventions andincreased consumer expectations.100
Projections of aged care spending over the next 40 years are based on historical trends
in the cost of aged care services per head of population by age and gender, combinedwith projected population changes, CPI growth, and estimated non-demographic
factors.
In general, projections are derived by first applying an estimated non-demographic
growth rate to the current aggregate spending per person. These estimates are thenincreased by projected population growth and CPI growth to derive a nominal
projection of spending.
For simplicity, the modelling approach estimates one non-demographic growth rate fortotal aged care spending, rather than for individual age cohorts. The non-demographic
growth rate is derived from trends in the historical data. This is done by first adjusting
historical aged care spending data for CPI growth and changes in the size and age
structure of the population to derive a series of real, age-adjusted aged care spending
per person. The non-demographic growth rate is then determined by fitting a trend to
this series. For spending on aged care, an exponential trend fits the data more closelythan a linear trend, so non-demographic growth is projected as a percentage increasein spending each year.
Modelling approaches for aged care expenditure have varied across intergenerational
reports. But ultimately, they capture and project similar effects, leading to similar
estimates of growth in aged care spending as a proportion of GDP over the long term.
Aged care spending for the 6 years beyond the end of the forward estimates (over the
medium-term period to 2030-31) is based on growth in aged care spending at acomponent level. From 2031-32 onwards (that is, the long term), this report uses amodel of total Australian Government aged care spending that assumes that

100 A. Harris and A. Sharma, ‘Estimating the future health and aged care expenditure in Australia withchanges in morbidity’, PLOS ONE, 13(8), 2018.

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2021 Intergenerational Reportnon-demographic growth increases to the historical growth rate for aged carespending.
The growth in aged care spending is driven by both non-demographic factors andgrowth in the number of people aged 85 and over (the age cohort who make up thevast majority of aged care usage). The relative impact of recipient growth falls over the
projection period and the growth in costs becomes the dominant factor in aged carespending growth. This is a result of the decreased growth in the number of people aged
85 and over as the smaller cohort which follows the baby boomers moves into agedcare eligibility ages.
Non-demographic factors could include government policy decisions, changing
consumer preferences and real wage developments. Population growth and pricegrowth are relatively stable contributors to aged care spending growth. Growth in theestimated non-demographic factor has been volatile over history, largely reflecting
policy adjustments over the past 2 decades as consumer preferences have changed andpeople’s desire and ability to age at home has grown. As a result, there can be large
variability in the historical average non-demographic growth rate depending on thetime period over which it is calculated. The approach used in this report assumes thatgrowth in the non-demographic factor converges to its 20-year historical average overa 10-year period to smooth the transition and avoid sharp adjustments between theend of the medium term and the beginning of the long-term period.

National Disability Insurance Scheme
The National Disability Insurance Scheme (NDIS) is a mechanism for funding long-termcare and support for people with disability. This is the first Intergenerational Report inwhich the NDIS has been geographically available across all of Australia. The total costof the scheme is a function of both the growth in average package costs and the numberof scheme participants.
Prior to 2013-14 and the establishment of the NDIS, the Australian Government
provided funding to states and territories for specialist disability services, including
under the National Disability Agreement and the Commonwealth, State and Territory
Disability Agreement, contributing $1.2 billion in 2013. The Commonwealth also
provided funding directly to national programs (for example, the Home and Community
Care Program). The Australian Government still provides additional support for people
with disabilities outside the NDIS through specialist programs, income support andemployment support.
The 2015 Intergenerational Report projected NDIS expenditure based on the
Productivity Commission’s 2011 inquiry report into Disability Care and Support. Since
then the model used for projections of NDIS spending has been updated to incorporate
additional data that has become available as the scheme has been rolled out nationally,
and as more participants have joined the scheme. This report takes a different
approach and combines projections provided by the Department of Social Services forthe 10 years to 2031-32 with a long-run aggregate model.
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As at 31 March 2021 there were 450,000 participants in the NDIS. This number is
expected to increase at around 5 per cent per year over the next 10 years as eligible
Australians are brought onto the Scheme. From 2031-32 the number of NDIS
participants is expected to grow in line with population growth. The projections assume
no change in age-specific disability rates and distinguish between NDIS participants
aged between 0 to 64 and 65+.
Projections of package costs are based on an average across all NDIS participants.
Growth in average annualised payments per participant has averaged 12 per centper year since April 2017. From 2024-25 onwards average package costs are projected
to grow by a combination of wages (Average Weekly Earnings) and price inflation (CPI).
This assumption reflects the fact that the main driver of NDIS costs is provider wages,
along with a small capital component.
The Australian and state governments jointly fund the NDIS, with state funding
contributions determined by bilateral agreements between the Australian and state
governments. State funding contributions to the NDIS are expected to grow in line with
their bilateral agreements, with the Australian Government responsible for theremaining cost.
The model also includes funding for the National Disability Insurance Agency (NDIA),
which the Australian Government provides. Over the projection period these costs are
expected to increase in line with CPI.

Income support payments
Comprehensive policy models
Age and Service Pension
Age and Service Pension expenditure, as well as other projections related to theretirement income system, are produced using Treasury’s Model of AustralianRetirement Incomes and Assets (MARIA). MARIA is a long-term, population-level,
dynamic microsimulation model of Australia’s retirement income system. MARIA
begins with 2015-16 administrative base data supplemented with survey data from the
HILDA Survey and the ABS Survey of Income and Housing. The model is run on arepresentative sample of this complete dataset.
MARIA uses Treasury analysis to develop input parameters that simulate thecharacteristics of each individual for every year of the model run, based on theircharacteristics in the previous year. These characteristics include householdcomposition, labour force participation, income, and compulsory and voluntarysuperannuation contributions. Some characteristics are not modelled dynamically
year-on-year, but rather imputed at the point of retirement. These characteristics
include home-ownership status and non-superannuation savings. The imputation isbased on factors such as age, education level, work experience and superannuation
balance.

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MARIA’s key output is defined contribution superannuation amounts held byindividuals, both accumulation throughout working life and drawdown in retirement.
MARIA can therefore also project the aggregate defined contribution funds undermanagement in the superannuation system.
MARIA projects Age Pension spending and coverage based on the simulated
superannuation assets, imputed non-superannuation assets and deemed income ofindividuals and their partners.
Long-run estimates of superannuation tax concessions
The long-run value of superannuation tax concessions (benchmark variations) is
estimated using MARIA on a revenue forgone basis. The cost of tax concessions isestimated independently each year (that is, there is no dynamic impact of the removalof concessions over time). These estimates broadly replicate the methodology andbenchmark used in the Tax Benchmarks and Variations Statement, and include:
combined estimates of capital gains and earnings tax concessions provided tosuperannuation funds (reflecting a combined C1 and C4 estimate from the Tax
Benchmarks and Variations Statement); and contributions tax concession estimates(reflecting a combined C2 and C3 estimate from the Tax Benchmarks and Variations
Statement).
Unlike the Tax Benchmarks and Variations Statement, the long-run estimates in MARIA
have been constructed on an additive basis to facilitate analysis of trends. The value ofsuperannuation tax concessions is estimated by adding contributions and earnings totaxable income in 2 stages and applying the progressive income tax rates at each stage.
The value of the earnings tax concession is the difference between the total value ofconcessions and value of contributions tax concessions.
From 2035-36, several personal income tax thresholds and offsets that comprise thebenchmark are assumed to be indexed to wage growth.
Coverage trend models
Coverage trend models are used where spending is strongly related to participation
rates for a payment and the unit cost growth is linked to a price index. These models
are used to project spending on Disability Support Pension, Parenting Payment Single,
Parenting Payment Partnered, JobSeeker Payment, Youth Allowance (Student andOther) and Austudy, Carer Payment, Family Tax Benefit, Paid Parental Leave, and Child
Care Subsidy.
The approach takes historical data on coverage or participation (in a payment orservice) and extracts the trend to give a coverage or participation projection for the
future, usually by age and gender. This projection is used with the population or
unemployment projections and a standard unit cost to project the future level of
spending. The standard unit cost is usually independent of age or gender and assumed
to grow in line with either wages or CPI growth (or a combination) in the future. The
projection of coverage may involve non-linear techniques such as logistic functions.
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Table A2.4.5 Income support payment projection methodologies

Coverage rates
Disability Support Pension
Parenting Payment Single
JobSeeker Payment
Youth Allowance (Other)
Parenting Payment PartneredCarer Payment
Youth Allowance (Student)
Austudy
Family Tax Benefit
Child Care Subsidy

Future trends
Logistic curves used to taper
Based on age and gender
growthBased on age and gender
Based on age and gender
Based on age and gender
Based on age and gender

Based on current take-up ratios
Based on current take-up ratios
Based on current take-up ratios
Based on current take-up ratios
Logistic curves used to taper
Based on age and gender
growthBased on age and gender
Based on age and gender
Based on age
Based on age

Based on current take-up ratios
Based on current take-up ratios
Based on current take-up ratios
Based on current take-up ratios

Unit cost
growthoutsideforwards
estimates
AWE
AWE
CPI
CPI
CPI
AWE
CPI
CPI
CPI
CPI

Source: Treasury.

Education
The Australian Government’s Job-ready Graduates Package is included in the
projections for higher education spending from 2021. The indexation of the cap on
Commonwealth Grant Scheme (CGS) funding for universities has been revised to reflect
the CPI. Location specific university funding under the CGS is included in the
projections.
Since 2018 the Australian Government has increased support to underfunded schools
though the Quality Schools reforms. As part of these reforms, the AustralianGovernment implemented the Schooling Resource Standard (SRS), which is an estimateof how much total public funding a school needs to meet its students’ education needs,
which is an important factor influencing schools spending. Average funding amounts
per student are indexed to the SRS, and student growth is based on population
projections by age. Vocational education and training (VET) participation rates forapprentices and students are projected to grow in line with the general population. The
average funding amount per student is indexed to wages.

Defence
Defence spending projections are based on nominal projections over the period to2031-32, consistent with current Government spending commitments at the 2021-22
Budget. From 2032-33, defence funding is assumed to grow at the same rate as nominal
GDP growth.

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GST payments
As the GST is passed on to the states, GST payments are assumed to equal GST receipts
plus the GST pool boost in the long run.

Other spending
A range of government spending is not explicitly modelled, including spending on theAustralian Public Service, law and order, the arts, community development andtourism. This ‘other spending’ component is calculated as the residual of total
payments over the forward estimates (sourced from the Australian Government
financial statements) and total modelled payments. Over the medium and long run,this component is indexed to nominal GDP growth.

2.5

Balance sheet items

Investment Funds
Investment funds are modelled over the projection period based on indexation
assumptions, such as CPI, and investment mandates.
The Future Fund is modelled based on the Government’s current investment mandate,
which states that the benchmark annual average return is equal to at least CPI plus 4 to
5 per cent per year. For modelling purposes, drawdowns from the Future Fund areassumed to commence the year after the size of the fund equals the target asset level,
which is projected to occur in 2031-32. Drawdowns are assumed to be equal to theGovernment’s annual unfunded superannuation payments, consistent with the intent
of the Fund’s establishment.
Modelling assumes that the holdings of the Future Fund are broadly allocated between
2 financial asset classes: investment (cash and other liquid assets such as
interest-bearing liabilities) and equity holdings, with the asset portfolio weighted
towards investment products. This is consistent with the current asset allocation of theFund.

Higher Education Loan Program (HELP)
Projections of the HELP receivable rely on a microsimulation model of incomes andrepayment parameters using data on the income and transactions of HELP debtors
provided by the Australian Taxation Office. The model simulates future incomes foreach individual with an outstanding HELP debt based on the incomes reported to date
and a limited number of demographic variables. The simulated income profiles allow
future repayments against the outstanding debt to be estimated as well as estimatingdebt that is not expected to be repaid. The discount rate applied to projected
repayments is assumed to increase over the forward estimates from a current rate of
1.3 per cent per year and is then held constant at 5 per cent from 2025-26 onwards.

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The repayment pattern generated by the model for debt incurred in the most recent
financial year is applied to debt that is expected to be incurred in future years. Thisapproach implicitly assumes that any growth in the aggregate debts being incurred,over and above normal indexation rates, is the result of increased numbers of students
rather than higher average debts in real terms.
Repayment prospects of VET debtors are modelled separately to non-VET debtors,
relying on their income profiles available to date and a broadly similar methodology tothat used to project non-VET debtors.

Government employee superannuation
Projections of the unfunded defined benefit superannuation liability, and theassociated Commonwealth cash outlays, are based on actuarial valuations anddemographic and economic assumptions.
The 4 major defined benefit superannuation schemes in 2020-21 are closed to newmembers (the Commonwealth Superannuation Scheme, the Public Sector
Superannuation Scheme, the Defence Force Retirement and Death Benefits Scheme,
and the Military Superannuation and Benefits Scheme). Australian Defence Force Coverremains open to new members and is projected to become the major defined benefit
superannuation scheme over the long run.

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3.

Sensitivity analysis

Different variables will produce different outcomes from those assumed in modellingand projections. Sensitivity analysis assesses the significance of uncertainty byconsidering alternative assumptions for the main variables. This analysis can illustrate
the impact of small changes in assumptions on economic and fiscal aggregates.
Sensitivity analyses have been performed for the purpose of this report:• Sensitivity of economic and fiscal aggregates to proportional migration projections(Box 2.1, Chapter 2 – Population).
• Sensitivity of economic and fiscal aggregates to lower trend productivity growth(Box 4.2, Chapter 4 – Productivity).
• Sensitivity of the fiscal aggregates to lower and higher bond yield assumptions(Box 6.3, Chapter 6 – Budget Projections).
Tables A3.1 and A3.2 contain additional information and results of the population andproductivity sensitivity analyses. The sensitivity analyses are prepared with alternative
economic parameters, payment, receipt and balance sheet inputs into MFASA.

Table A3.1

Assumptions underlying sensitivity analysis
Proportional

Lower productivity

Baselinemigration

growth

1.5

1.5

1.2

235,000 people

0.82 per cent of population

235,000 people

Economic
Labour productivity growth(per cent)

Demographic
Long-term annual net
overseas migration from2031-31 to 2060-61(a)Under the proportional migration sensitivity analysis, net overseas migration reaches 327,000 people
per year in 2060-61, compared with 235,000 per year in the baseline population projections.
(b) Under the productivity sensitivity analysis, growth in underlying productivity is assumed to converge tothe average of the most recent productivity cycle of 1.2 per cent by 2024-25 and remain at that rate of
growth for the remaining period.

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Table A3.2

Sensitivity analysis results
Baseline
2020-212060-61

Migration

Productivity

2060-61

2060-61

Economic
Real GDP growth (%)

1.2

2.3

2.6

2.0

Real GDP per person growth (%)

1.1

1.4

1.5

1.1

Real GDP per person ($)

76,700140,900

141,500

127,600

Labour force participation

65.8

63.6

64.3

63.6

Labour force size (millions)

13.7

20.7

21.7

20.7

Old-age dependency ratio

3.9

2.7

2.8

2.7

Health

4.6

6.2

6.1

6.9

Aged care

1.2

2.1

2.0

2.3

Age and Service Pension

2.7

2.1

2.1

2.1

Payments to individuals

4.8

2.7

2.7

2.8

Education

1.9

1.2

1.2

1.3

Underlying cash balance

-7.8

-2.3

-1.8

-4.5

Primary balance

-7.1

-0.6

-0.3

-1.9

Gross debt

40.2

40.8

35.8

63.9

Net debt

30.0

34.4

29.6

57.1

Net financial worth

-37.4

-38.5

-33.4

-55.7

Spending (per cent of GDP)

Fiscal projections (% of GDP)

Note: Results in this table may differ from those presented in this report due to rounding.
Source: Treasury.

Bond yield sensitivity analyses
This report employs a technical assumption for baseline bond yields. Following a periodof fixed nominal yields, the 10-year bond yield converges linearly from 2024-25 over
15 years to a long-run 10-year bond yield of around 5 per cent, consistent with long-run
nominal GDP growth. Bonds with other tenors have differing yields but are constructedaround the 10-year bond rate profile.
The lower and higher bond yield sensitivity analyses included in this report illustrate
the impact of changes in the yield assumption in isolation. There are 2 main fiscal
components that are calculated separately and then combined to estimate the impactof the alternative yield assumption on fiscal aggregates.

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Firstly, the effect of the alternative yield assumption on government investment fundinterest and dividend receipts and term deposit drawdowns is calculated. These impact
the financing task and flow through to interest payments on government debt.
Secondly, the effect of the alternative yield assumption on bond yields is calculated,which flows through to interest payments.

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