After studiously ignoring population ageing in his ten year budget plan issued before the 2019 Election, Josh Frydenberg now says population ageing will be an economic and fiscal timebomb. So which of the two Frydenberg narratives are we to believe? The pre-election one or the post-election one?
Frydenberg’s ten-year budget plan said that during the decade of the 2020s, real economic growth would average 3 percent per annum, budget revenue would grow strongly despite the massive third stage tax cuts, net debt would be eliminated by 2029-30 and we would create 250,000 jobs per annum whilst cutting permanent migration.
Economic and budgetary nirvana rather than a timebomb.
The optimism in Frydenberg’s ten year plan contrasts starkly with his predecessors who argued population ageing would reduce economic growth to well below the long-run average but still above the current level of around 1.4 percent (see Chart 1).
From a budget revenue perspective, Frydenberg’s ten-year plan ignores the fact older households pay a fraction of the income taxes paid by working age households (see Chart 2). Population ageing will drag down average income tax paid per household even before the impact of the third stage tax cuts is taken into account.
Frydenberg’s predecessors also worried about the impact of ageing on our age pension, health and aged care budgets. Peter Costello projected government expenditure rising to 27.4 percent of GDP by 2041-42. He identified three major areas of additional spending:
- health services – projected to rise from 4 percent of GDP to 8 percent of GDP;
- aged care – projected to rise from less than 1 percent of GDP to almost 2 percent of GDP; and
- age and service pensions – projected to rise from 2.9 percent of GDP to 4.6 percent of GDP.
But Frydenberg’s ten-year budget plan says government expenditure as a portion of GDP will fall below the historical average of 24.7 percent to 23.5 percent by 2029-30. This is despite a 60 percent increase in the number of Australians aged 80 plus over the next decade and a steep fall in our working age to population ratio (see Chart 3). By 2025, every baby boomer will have turned 60 and be eligible for the pension phase of super (and franking credit refunds).
Of course if Frydenberg was to talk about population ageing prior to the 2019 Election, that would have focussed even more attention on the unsustainability of current policy on franking credits. Sensible policy in the face of our ageing population would be to divert the massive expenditure on franking credits for a small minority of rich retirees – yes less well-off retirees and age pensioners who get franking credits should be protected from the change – to supplement our health and aged care budgets for our growing aged population.
But it seems that is not what we are going to do.
It is good Frydenberg is now belatedly focussing on the impact of population ageing. But he had the chance to be honest about this before the election. Even if Treasury was too coy to say anything about the impact of ageing in the ten-year budget plan, the independent Parliamentary Budget Office (PBO) was not.
On the day prior to release of the 2019 Budget, it said “over the next decade, the ageing population is projected to subtract 0.4 percentage points from the annual real growth in revenue and add 0.3 percentage points to the annual real growth in spending. In real dollar terms, this equates to an annual cost to the budget of around $36 billion by 2028–29. This is larger than the projected cost of Medicare in that same year”.
With the next Intergenerational Report due next year, Frydenberg has the chance to correct his ten year budget plan and give Australians a more honest picture of our future.
Will he do so?
Abul Rizvi was a senior official in the Department of Immigration from the early 1990s to 2007 when he left as Deputy Secretary. He was awarded the Public Service Medal and the Centenary Medal for services to development and implementation of immigration policy, including in particular the reshaping of Australia’s intake to focus on skilled migration. He is currently doing a PhD on Australia’s immigration policies.