Australia’s Intergenerational Report

Considering future liabilities of Government in a fiscal context

22 April 2013

History• 1992 - Senate Select Committee on Superannuation

report.• 1992 - Retirement Income Modelling (RIM) Task

Force commenced operations. • 1996 - Commission of Audit report draws attention

to the demographic issue using RIM projections and proposed the Charter of Budget Honesty.

• 1998 - Charter of Budget Honesty Act 1998 passed.

The Charter

• The Charter of Budget Honesty Act 1998 requires the Treasurer to produce an intergenerational report (IGR) every 5 years.

• The report is intended to assess the sustainability of current Government policies over the next 40 years.

• The Government has released 3 IGRs: 2002, 2007, 2010.

2010 IGR: Themes/Conclusions• Ageing population, health and climate change

challenges for living standards and budget• Early action minimises adjustment costs and

economic and fiscal consequences in long run• Responding to these challenges

– Responsible economic management: productivity, participation

– Fiscal strategy: restraining expenditure growth – Health reform

4

How the IGR is put together

• IGR is a snapshot based on current policy• IGR model

– GDP projections based on 3Ps methodology– Constant tax-to-GDP ratio assumption (23.5%)– Model major demographic spending areas– Non-modelled held as constant share of GDP

The 3Ps framework for real GDPReal GDP

Population Participation Productivity

Demographics

Fertility

Mortality

Net migration

Population (15+)

Participation

Participation rate by age and gender

Unemployment rate

Average hours worked by age and

gender

Average hours worked per

working person (15+)

Productivity

Labour productivity

Average output per hour worked

Employment

Source: Australian Government, 2010, Intergenerational Report 2010, Canberra.

Population growth and combined dependency ratio

Source: ABS cat. no. 3105.0.65.001 (2008) and Treasury projections from 2010 Intergenerational Report.

Participation rates

Source: 2010 Intergenerational Report and ABS cat. no. 6291.0.55.001.Note: ◊ denotes recent participation figures published by the ABS for 2010-11.

Growth in real GDP per person based on the 3Ps

0.3 0.3

-0.1-0.4

1.8 1.9

0.1

-0.2

0.0 0.0

1.6 1.5

-1

0

1

2

3

4

Share ofpopulation 15+

Participationrate

Unemploymentrate

Averagehours w orked

Labourproductivity

Real GDP perperson

-1

0

1

2

3

4

Past 40 years Next 40 years

ProductivityParticipationPopulation

Percentage contribution Percentage contribution

Source: 2010 Intergenerational Report.

Fiscal Gap

Source: 2010 Intergenerational Report and 2012-13 Budget .

Note: Primary balance measure. For the 2012-13 Budget numbers, 2009-10 and 2010-11 are actuals, 2011-12 to 2013-14 are estimates and 2014-15 and 2015-16 are projections.

Projected path of net debt

Pension and superannuation expenditure

13

Influence and the IGR• Provides an authoritative long term perspective on major

pressures affecting Australia’s future• Useful tool for influencing community opinion• Recognition of long-run fiscal pressures and steps taken to

manage spending pressures and liabilities• Productivity and Participation are now key considerations when

assessing policy• Significant policy change since IGR1

– Health– Pension age

• Modelling capability a key policy tool