KEY POINTS:
- The Intergenerational Report has been released, giving a picture of Australia in 40 years.
- Australia's population will be much older and more heavily dependent on aged care.
- The IGR has also laid bare the impact climate change could have on future generations.
Australians have been given the clearest snapshot of what their country will look like four decades from now.
The sixth Intergenerational Report (IGR), released two years after the last one, warns of how an ageing population and sliding birth rate will hit the economy in 2063.
It also gives insight into climate change's devastating impact on the economy, why your taxes may need to change, and how our increasingly volatile region could alter the way we trade.
"These forces will influence the future path and structure of our economy and change how Australians live, work, and engage with the world," it says.
Here are the key takeaways.
Climate change to rock the economy
The impact of climate change is a key feature of this year's IGR, and it's grim reading.
"Floods, bushfires and other extreme weather events are expected to increase in frequency and severity, causing major disruptions to local economic activity and ultimately hindering overall economic output," it says.
The report outlines four key areas that will be particularly impacted by 2063 if temperatures rise above two degrees:
- Productivity
- Agriculture
- Tourism
- Natural disaster spending
The impact of higher temperatures could wipe away between $135 billion and $423 billion in productivity over the next four decades, it says.
Higher temperatures will force international tourists to adjust where they travel, and the report predicts the impact will be twice as bad if temperatures rise by three degrees instead of two.
The government could be spending three times as much responding to natural disasters, the report says. Source: AAP / Sean Davey
Farmers are also set for punishment. The IGR expects crop yields to fall by up to 4 per cent, and that's before changes to rainfall patterns are taken into account.
Worse still, the report warns climate change's "indirect and cumulative" consequences are likely to exacerbate these challenges.
Global efforts to move away from fossil fuels will upend Australia's resources sector.
If temperature rises are capped at 1.5 per cent, the IGR expects international demand for Australian coal in 2063 to be just 1 per cent of current levels. But it tips other critical minerals to become increasingly profitable, with global demand for lithium to increase eight-fold.
A bigger, older population
Australia is going to get much bigger, and much older.
That will mean big economic challenges.
There'll be an extra 14 million people in the country by 2063, with the population to grow past 40 million. But it's worth noting previous IGRs have underestimated population growth.
Treasurer Jim Chalmers speaks to the media during a press conference. Source: AAP / Bianca De Marchi
That will pose challenges for older Australians, and potentially impact their standard of living.
"Longevity risk - the risk of outliving savings – is a key concern for retirees in deciding how to draw down their superannuation," the report says.
And younger Australians are having fewer children, which will also skew age demographics.
The number of people over 65 is going to more than double by 2063, and the number of people over 85 is going to more than triple.
That means the economy will need to change drastically.
We'll become much more reliant on a rapidly expanded care sector, which includes things such as health and aged care. While the sector currently accounts for around 8 per cent of GDP, the report predicts it'll be around 15 per cent by 2063.
"Part of this demand may be met by data and digital technologies increasing productivity and enabling more Australians to participate in work," the report says.
Australia's older population will make it increasingly reliant on aged care. Source: Getty / Maskot
Economy to slow, some costs to blow out
Like other countries in the OECD (a group of 38 countries with advanced economies), economic growth is also expected to slow, largely as a result of the above.
And spending in certain key areas - aged care, the NDIS, health, defence, and interest on the nation's debt - is set to balloon.
Those five currently account for around a third of government spending, but that's set to rise to roughly half.
Workers carrying more of tax burden
Regular workers are set to pick up a greater chunk of the tax burden over the next decade.
That's because the budget will come to more heavily rely on personal income tax, with GST and company tax set to remain stable.
A proportionately smaller pool of working-age Australians, supporting a higher proportion of retirees needing health and aged care, will put extra pressure on the budget.
There'll also be a longer-term shift in where government can source its money.
Labor has long encouraged Australians to buy electric vehicles, and the shift away from regular cars is expected to accelerate this decade partly due to tax incentives. But fewer petrol cars means the government recouping less from taxes on petrol.
There's also been a consistent decline in the number of young Australians taking up smoking. If that trend continues, that again means less revenue from taxing cigarettes. That was worth about $14 billion in 2020-21.
Geopolitical risks to increase
Increasing tensions in our region will pose challenges for decades.
While the COVID-19 pandemic laid bare weaknesses in the global supply chains, the IGR also notes that trade and investment have increasingly been used as "tools of statecraft".
Australia has certainly borne the brunt of that, after a series of trade sanctions imposed on its exports by China.
The report says that dynamic is likely to deepen, something that will require "unprecedented" coordination between Australia's domestic policy, foreign policy, and national security arms.
And a hot war in the Indo-Pacific would have "far-reaching consequences" for our economy, it warns.
That will require moving away from relying on single sources for trade, and pivoting towards trade partners "interested in maintaining a secure, peaceful and prosperous region".
