Australia’s growth rate will slow from a long-run average of 3.1% to 2.2%, with lower workforce participation, slower productivity and population growth weighing down economic wellbeing.
That is the conclusion of the intergenerational report (IGR), released on Thursday by the treasurer, Jim Chalmers, who will argue that the government is still “optimistic” that Australia can “own the future” through investments to lift productivity, including in renewable energy.
As the report notes “significant real, tangible and direct impacts” if global heating exceeds 2C above pre-industrial times, Chalmers will tell the National Press Club that Australia must “take the big shifts seriously” and that “dealing with climate change is a global environmental and economic imperative”.
Australia will need an additional $225bn of investment to decarbonise heavy industries and transition our energy system, he says, which will help unlock opportunities “with more clean, cheap, renewable power creating cumulative comparative advantages in the new industries of the net zero economy”.
In an advance copy of the speech, seen by Guardian Australia, Chalmers argues the IGR presents a positive vision of “Australians living longer and healthier lives, in a country powered by renewables and transformed by technology, with care and compassion at its core”.
The IGR projects that by 2062-63 the economy will be two and a half times larger, with incomes 50% higher in real terms.
But after increases in population are accounted for, the average annual growth rate of income per person is projected to be 1%, compared with 2.1% over the past 40 years.
“Like other advanced economies, Australia’s economic growth is projected to be slower than in the past 40 years,” it said.
“This is driven by lower projected population growth and reduced participation due to ageing, along with an assumption of slower long-run productivity growth.”
The IGR assumed that productivity will increase at a rate of 1.2%, consistent with the 20-year average, but noted this could be improved upon through policy changes or other economic shifts “such as the expanded use of digital technology … net zero transformation or changes in industry composition”.
While the Australian economy currently enjoys “near record high” participation in the labour force, driven by more women entering the workforce, overall participation will decline from 66.6% in 2022-23 to 63.8% in 2062-63.
The gender gap in participation is expected to continue to narrow, with men’s participation just seven percentage points higher than women in 2062-63.
Population growth is projected to slow to 1.1%, down from 1.4% over the last 40 years, with the total population tipped to reach 40.5 million in 2062–63.
“Australians are expected to continue living longer and remain healthier to an older age, while having fewer children,” it said. “This is leading to an ageing and a slower-growing population.”
In four decades, the number of Australians aged 65 and over will more than double and the number aged 85 and over will more than triple.
Chalmers acknowledges that an ageing population “will create some challenges” for the budget and growth, due to a “smaller share of working-age people” which will put “pressure on our tax base”.
In response to questions about the decline in petrol excise due to the uptake of electric vehicles, Chalmers left open the option of road user charging, describing the revenue challenge as an “increasing focus” of Labor and future governments.
Chalmers also said that retirees are “more frugal than they need to be” with their superannuation, describing it as a “big problem” that would be solved by a policy to address the “absence of literacy and options” about drawing down more on super and leaving less in inheritance.
Total government spending is projected to rise by 3.8 % of GDP over the next 40 years, with ageing the cause of two-fifths of the increase.
Earlier excerpts of the IGR have shown that the five fastest growing areas of federal spending – health, aged care, NDIS, defence and interest payments – will grow to half of the budget by 2062-63, which Chalmers said “could keep us in deficit and put debt back on the rise”.
According to the IGR, gross government debt is projected to decline to 22.5% of GDP in 2048–49, before rising to 32.1% of GDP by 2062–63.
The IGR found that in 2060-61 “gross debt-to-GDP is projected to be 11.3%” better than was projected in the 2021 report.
It credited this to “faster-than-expected recovery from the Covid-19 pandemic, and disciplined fiscal policy including decisions in recent budgets to direct tax upgrades to budget repair”.
Earlier on Thursday the shadow treasurer, Angus Taylor, said that households and small businesses are “struggling with the cost of living” due to higher power prices, 11 interest rate rises in a row, and a 4.6% fall in labour productivity in the year to March 2023.
“They’re not thinking about 40 years from now,” he told ABC TV. “They’re thinking about 40 days from now, [they’re thinking about] how to get through the next 40 hours.”
Chalmers addresses the criticism by acknowledging “this IGR comes at a difficult moment for Australians right around the country”.
The government’s “immediate obligation is to do what we can to ease cost-of-living pressures without adding to inflation”, he says.
But Chalmers argues “there will never be a quiet time to think about the future … there will always be competing pressures and urgent calls on our attention”.
“The best leaders can focus on more than one thing, more than one horizon, more than one set of opportunities.”
Chalmers notes the assumption of 1.2% productivity growth is “more realistic” than the Coalition’s last IGR in 2021, which assumed 1.5%. He acknowledges that this “means that overall real GDP projections are down from the report released a couple of years ago”.
