Economic Impact

Looking to the Future

Australia’s population is ageing, look at this chart.  The first shows Population growth and combined dependency ratio crossing over. The next shows how significant is the Proportion of the Australian population aged 65+.

chart 1

The proportion of working age people is projected to fall, with only 2.7 people of working age to support each Australian aged 65 years and over by 2050 (compared to 5 working aged people per aged person today and 7.5 in 1970). Population growth is projected to slow to an average annual rate of 1.2 per cent over the next 40 years, slightly lower than the 1.4 per cent average annual rate of growth in the previous 40 years.

Even with slower population growth the total population is projected to be 35.9 million people by 2050. All developed countries have experienced population ageing and will continue to do so. Those countries with low population growth face greater challenges from population ageing. For instance, Japan’s already high old-age dependency ratio is projected to more than double in the next 40 years, resulting in only 1.4 people of working age for every person aged 65 years or older.

Economic and fiscal implications of an ageing population 

An ageing population will have consequences for economic growth and government finances. The challenge is to develop responses that will mitigate these consequences in the most effective way and minimise the size of the adjustment costs in the future.

Economic growth

While the past 40 years have seen annual average growth in real GDP of 3.3 per cent, the next 40 years are projected to see growth slow to 2.7 per cent annually. Associated with this slower economic growth, real GDP per capita growth will slow to 1.5 per cent per annum from 1.9 per cent per annum over the previous 40 years.

chart 2

The ageing of the population is the major factor driving the slowing in economic growth. As the proportion of the population of traditional working age falls, the rate of labour force participation across the whole population is also projected to fall.

The labour force participation rate for people aged 15 years and over is projected to fall to less than 61 per cent by 2049–50, compared with 65 per cent today.

 Ageing and fiscal pressures

Population ageing will create substantial fiscal pressures. Slower economic growth associated with ageing, increased demand for age-related payments and services, expected technological advancements in health and demand for higher quality health services will add to these pressures.

Ageing and health pressures are projected to result in an increase in total government spending from 22.4 per cent of GDP in 2015–16 to 27.1 per cent of GDP by 2049–50. As a consequence, spending is projected to exceed revenue by 2¾ per cent of GDP in 40 years time .

chart 3

 

Responding to the implications of an ageing population

Growing the economy

The central plank of responding to the economic and fiscal consequences of an ageing population is to support stronger economic growth in sustainable ways. Economic growth is a function of productivity, participation and population — the ‘3Ps’.

chart 4

Higher productivity is the key With an ageing population, it is critical the Government pursue productivity enhancing and nation building reforms through prudent investment in social and economic infrastructure, and policies to support skills and human capital development.

Enhanced productivity growth is the key to increasing economic growth. Australia’s productivity performance has slowed in the recent past, averaging only 1.4 per cent in the past decade compared with 2.1 per cent in the 1990s.  With the ageing of the population reducing participation, productivity growth will be the major contributor to real GDP per person growth in Australia over the next 40 years.

With the ageing of the population, and a continuation of the productivity trends of the past 30 years, growth in real GDP per person is projected to slow to 1.5 per cent per annum. If productivity growth were increased to 2 per cent per annum, the economy would be over 15 per cent larger in 2049–50, GDP per person would be around $16,000 higher and fiscal pressures would be reduced as a result of an enhanced capacity to fund government services.

 Supporting participation

While an ageing population will result in lower aggregate participation rates, steps to improve participation would minimise the impact. In 2008, Australia’s labour force participation rate was the tenth highest in the OECD; higher than the United States, but lower than the United Kingdom, New Zealand and Canada.

chart 5

Within this total, Australia’s participation rate for prime aged men has been relatively constant at around 91 per cent, below the OECD average of 92.2 per cent. In contrast, female participation of 75 per cent in Australia is higher than the OECD average of 71 per cent.

Despite recent increases, Australia’s mature age participation rate is below that of comparable countries — including the United States, United Kingdom, Canada and New Zealand. There is scope for Australia to improve its labour force participation rates, especially through policies that target improvements in education, health and attachment to the labour market. This includes removing the barriers to workforce participation for mature aged people who want to work. Policy responses need to reflect a sound understanding of the complex nature of mature age participation.

Sustainable population growth

Population growth puts pressure on infrastructure and services, but will continue to contribute to economic growth. It can be socially and environmentally sustainable provided governments plan and invest, well ahead of time, for a larger population. By way of comparison, if Australia was to face lower net overseas migration and fertility that led to a lower annual rate of population growth of 0.8 per cent (compared to the 1.2 per cent per annum growth rate that is projected), real GDP per person would be around 2 per cent lower in 2049–50.

Countries with low or declining population growth face more extreme ageing challenges, with greater demands for publicly funded social services and a reduced ability to meet these challenges. There are growing concerns about the fiscal sustainability of some of these countries.

Spending pressures of an ageing population

An ageing population will significantly increase spending pressure in the areas of health, age-related pensions and aged care. Currently, more than a quarter of Australian government spending is directed to health, age-related pensions and aged care. Australian government spending on these areas is projected to increase significantly, pushing their share of total spending to almost half by 2049–50. As a result, total Australian government spending is projected to rise to around 27 per cent of GDP by 2049–50, rising by around 4¾ per cent of GDP from the projected low-point in spending in 2015–16. Rising health costs are by far the largest contributor to increased spending, accounting for around two-thirds of the overall increase.

chart 6

With some categories of spending declining as a proportion of GDP, the increase in health, age-related pensions and aged care more than explains the increase in total spending in dollar terms.