Ageing population to put brakes on economic growth

One quarter of Australians will be aged 65 years or more by the year 2045, roughly double the present proportion, according to the latest population projections.

As a result of the ageing trend, labour force participation is expected to drop from around 63.5 per cent in 2004 to 56.3 per cent by 2045.

A Productivity Commission report on the Economic Implications of an Ageing Australia, released earlier this year, found that the ageing trend will affect economic growth rates.

Assuming the average labour productivity performance of the past 30 years, per capita GDP growth will slump to 1.25 per cent per year by the mid 2020s, half its rate in 2004.

While taxation revenue will largely track GDP growth, government expenditure is likely to rise more rapidly, placing budgets under considerable pressure.

Although education and some welfare payments are projected to increase more slowly than GDP, government spending on health, aged care and pensions will grow at a faster rate.

The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2045, with ageing accounting for nearly one-half of this.

The Productivity Commission calculated that, in the absence of other policy actions to reduce fiscal pressure, taxation levels would need to rise by 21 per cent by 2045, or the debt burden of ageing would become twice as large as Australia’s GDP.

It suggested that more cost-effective service provision, especially in health care, would alleviate a major source of fiscal pressure at its source.

The commission said “plausible” increases in fertility and net migration would have little impact on ageing trends.