Intergenerational Report 2023: Six key points for Australian businesses

The latest Intergenerational Report has arrived, projecting what the Australian population and economy will look like in 40 years.

Across 296 pages, the Treasury document envisions an ageing Australian population, decades of budget deficits, and material risks caused by climate change.

It also spells out opportunities for businesses to boost their productivity through technology adoption, the prospect of Australia becoming a green energy superpower, and the benefits of increased market dynamism.

Here’s what you need to know.

Australia is getting older

In broad terms, the report projects Australia’s projection to grow both older and larger.

Life expectancies for both men and women are scheduled to increase.

Men born in 2022-2023 are expected to live around 81.3 years, but men born in 2062-2063 will likely live to 87 years.

For women: 85.2 years and 89.5 years, respectively.

Older Australians will make up an increasingly large portion of the population, too.

This is most evident in the 65-84 age group, which counts around 4 million people today, but will rise to 7.4 million in 2063.

The number of Australians aged 85 and above will grow from about 600,000 today to 2 million over the next 4 years.

The Intergenerational Report contextualises this with the Old-age dependency ratio, which compares the number of people aged 65 and above to those within the traditional working age of 15-64.

Today, the Old-age dependency ratio sits at 26.6 but will expand to 38.2 in 2063.

The fertility rate is forecast to decline slightly from today’s level of 1.66 to 1.62, where it will stay for the next 40 years.

At the same time, the proportion of population growth attributed to overseas migration will drop from 1.5% today to 0.6% in 2062.

The cost of care will rise

In simple terms, the ageing of Australia’s population will greatly expand government expenditure on healthcare and aged care.

Healthcare is set to grow from 4.2% of national GDP today to 6.2% in 2063.

For aged care, the figures are 1.1% and 2.5%, respectively.

Productivity is paramount

These shifting demographics, and the transition of more people from working age into retirement, will have a significant effect on overall productivity.

This, in turn, will determine how much value the Australian economy actually creates.

Annual GDP growth will slump from 3.1% in 2022-2023, which was largely the result of strong resource prices, to 1.9% in 2062-2063.

Given the way labour productivity has slumped in recent years, it is imperative that Australian industries become more productive to provide for the nation’s shifting demographics.

“Continuing to improve productivity will be important to realising future economic opportunities and ensuring continued strong growth in living standards,” the report says.

The report lists several key ways Australia could meet its productivity challenges.

More market dynamism

Ensuring new businesses can enter the market to challenge the incumbents with cheaper, more efficient, and higher quality goods and services is vital to ensuring productivity growth, the report states.

But:

Many measures of dynamism, such as firm entry, exit and job-switching rates, have declined in Australia and overseas. Similarly, measures of market power, such as concentration rates and mark-ups, have increased in Australia and overseas. This has lowered business incentives to innovate and reallocate resources to more productive uses. Furthermore, many of the gains from past innovations and trade expansion, such as cheaper production and specialisation, have already been realised.

Recent moves by the federal government, including a new review of competition policies, are intended to address these issues and clear a path for innovative businesses to enter the arena.

Continued tech investment

Continual adoption of technology will be essential across all industries, including those highly dependent on human capital, the report says.

Investing in cutting-edge technologies may not appear to provide immediate productivity gains, the report notes.

However, the potential benefits of emerging technologies like artificial intelligence and large language models should not be overlooked:

Newer technologies like artificial intelligence and large language models may also require complementary intangible investments such as business reorganisation and building of organisational knowledge – investments which are not always captured in balance sheets – and whose benefits take a long time to manifest. This can lead to an underestimation of productivity in the early years of these technologies, with a productivity surge later when the technologies and complementary investments reach maturity.

Learning the lessons of COVID-19

Pandemic-era lockdowns saw Australian businesses adopt new technologies at a massive scale and unprecedented pace.

Australian businesses should not underestimate what they are capable of in terms of technological adoption, the report states:

The experience of the COVID-19 pandemic highlighted the ability of Australian businesses to rapidly adopt new technologies when conditions demanded it. There are now further opportunities to lift the transfer of innovative processes and technologies from the most productive in any given industry – frontier firms – to the rest of the economy.

Personal income tax to grow as proportion of tax base

The Intergenerational Report states that without any significant interventions, personal income tax will grow as a proportion of total tax receipts, from 50.5% of total tax receipts in 2022–23 to 58.4% in 2062–63.

Overall, company tax contributions are set to shrink as a proportion of the overall tax mix.

“Company tax receipts are projected to fall from 23.5% of total tax receipts in 2022–23 to 18.0%t by 2033–34, and remain at that share until 2062–63,” the report states.

The report does not map out the implications of any major tax reforms, like replacing GST and business taxes with an all-purpose cash flow tax, a measure some advocates say would simplify the tax system while kickstarting business productivity.

Opportunities in the net zero transition

A global shift away from fossil fuels is likely to rock the Australian economy, which remains heavily reliant on exports of thermal coal and natural gas.

“The global net zero transformation may be the most profound driver of change in the economy,” the report says, beyond even the consequences of Australia’s demographic shift.

Yet there are opportunities for Australian industries to benefit from that transition to green energy sources.

Australia has abundant access to sunshine and wind, providing significant opportunities for innovative renewable energy solutions.

Australia also has an abundant supply of lithium, cobalt, and rare earth elements essential for clean energy technologies.

There are significant opportunities for Australian firms to add value along the battery supply chain, instead of simply digging those minerals up and exporting them overseas:

Expanding Australian industry’s capacity further along battery mineral value chains is also possible, through businesses building capabilities in downstream refining, manufacturing, and battery integration and services.

Climate change is already here

While those net zero efforts are intended to mitigate climate change caused by fossil fuel usage, it is too late to avert man-made climate change altogether.

This will influence how work is conducted in Australia, one of the hottest and driest continents on Earth.

Higher temperatures will impact labour productivity and require us to work differently. As temperatures rise, workers in exposed industries may need to reduce their exposure to heat or the physical intensity of their work. Higher temperatures will also increase some occupational safety risks such as heat stress.