Second Intergenerational Report

The second intergeneration report was published on 2 April 2007. It follows the first report in the series, which was released on 14 May 2002 as Budget Paper No. 5.

The demographic challenge

The main issues that the intergenerational reports address are the financial consequences of the structural ageing of the population. This trend refers to the rising proportion of the population over working age (that is, aged over 65), and the consequent decline in the proportion of the population able to participate in the workforce. This will lead to:

• a decline in the rate of economic growth
• a slowdown in the rate at which government revenue grows, and
• increasing government costs in meeting the needs of the growing number of those outside the workforce.

What is an intergenerational report?

Section 20 of the Charter of Budget Honesty Act 1998 requires that the Treasurer publicly release an intergenerational report every five years to assess the long-term sustainability of current government policies over the following 40 years.

What are the main conclusions of the second report?

The overall conclusion of the intergenerational reports is expressed in terms of the ‘fiscal gap’. This is the difference between expected government revenue and projected expenses at a certain point in time, measured in percentage of gross domestic product (GDP).

By 2046–47 the projected fiscal gap is 3.5 per cent of GDP, in the absence of further government policy measures.

Other significant conclusions are:

• budget surpluses are expected to continue until about 2022–23, then the federal government’s net debt is expected to rise quickly to about 30 per cent of GDP in 2046–47
• rising health and aged-care expenses are expected to be the main contributor to the fiscal gap, and
• rising age pension payments are also projected to contribute significantly to the fiscal gap, but will not be nearly as significant as rising health costs.

Comparisons with the first report

The overall conclusion of the first intergenerational report was that the fiscal gap would be about 5 per cent of GDP by 2041–42. The improved projections for the fiscal gap in the second report are based on:

• a projected lower rate of growth in spending per person, mainly in health areas, and
• a higher projected rate of GDP per person, mainly from improving terms of trade, increased rates of workforce participation and higher levels of skilled migration.

Significantly, the second report notes that most of the rise in health costs can be attributed to such factors as the introduction of new, higher-cost medical technologies. That is, most of the health-cost increase is not simply due to the structural ageing of the population.

What is not covered

The intergenerational reports deal only with the projected fiscal position of the Commonwealth Government. However, the Productivity Commission in a 2005 study projected the fiscal positions of both the state and Commonwealth governments, and broadly confirmed the conclusions of the first intergenerational report.

Howard Government Treasurer Peter Costello also noted that the second intergenerational report did not include the impact of climate change. Rather, its conclusions are based on tangible historical factors such as demography, participation rates, tax and expenditure, and do not include the intangible variables associated with environmental change.

Documentation
Australian Government, Intergenerational Report 2007, Commonwealth of Australia, Canberra, 2007.
Australian Government, Budget Paper No. 5, Intergenerational Report 2002-03, Commonwealth of Australia, Canberra, 2002.