Restoring productivity growth key to Australia

Restoring productivity growth key to Australia’s fiscal health

Click here for the full Note and disclosures.

• Boosting productivity growth is key to future economic prosperity and fiscal health

• Continuation of the current downtrend in productivity growth yields a federal deficit of A$50bn by 2050

• The growing pool of aged persons will drive health costs above revenue by 2.75% of GDP

Australia’s Federal government recently released the findings from the latest Intergenerational Report (IGR)—Australia to 2050: Future Challenges. The IGR showed that the central challenge facing the government is countering the economic impact of the aging population. In response, the Rudd government has said that “decisive action” is needed to lift productivity to avert the looming slowdown in GDP growth that would otherwise emerge due to the growing pool of aged persons. The 4Q GDP report highlighted the issue, with productivity, or GDP per hour worked, falling 0.2%q/q, the first fall since mid-2008.

If the current downtrend in productivity growth continues, GDP growth will average 2.7% over the next 40 years, well below the 3.3% average over the last 40 years, according to IGR estimates. This trend needs to be reversed in order to boost economic prosperity and bring the federal budget back to balance more quickly. If not, government revenues will not offset the rising burden on public finances stemming from the aging population. Treasury estimates that economy-wide health costs will exceed government revenue by 2.75% of GDP by 2050, with over half of all government spending going toward health-related services (compared to 20% today, or 5% of GDP). It also suggests that the budget deficit will near A$50 billion, as there will be proportionately fewer taxpayers to fund the rise in costs.

ENDS

© Scoop Media