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P oliticians are frequently accused of short-termism, so Australia’s intergenerational report (IGR) is unusual in projecting the big trends affecting the economy, and in particular the federal budget, over a 40-year horizon. The former treasurer Peter Costello introduced the concept of the IGR, now in its seventh edition, shortly after the millennium. The idea was to garner support for budget reforms given the challenges that were coming with an ageing population and a shrinking number of workers needed to support them.
Oh, for the good old days when the “boomer bulge” appeared to be the most significant budgetary problem that we faced. With each new IGR, the challenges have been mounting – not just for Australia, but for the whole world. I’m certainly finding it harder and harder to keep my usually optimistic frame of mind in the face of geopolitical fragmentation, rising trade tensions, apocalyptic predictions on AI, fading productivity, the climate crisis and demographic change.
In one respect in particular, the 2026 IGR’s projections represent a watershed moment. Women are projected to continue to have fewer babies over the next 40 years such that population growth is expected to slow to just 0.9% over four decades, compared with 1.4% over the past four. And that growth only comes through migration, as deaths start to outnumber births.
The IGR points out the significance of this slowdown for economic prospects: our future growth will be held to around 2% rather than the average 3% we have become accustomed to. This has raised alarm bells among many, but slower overall economic growth doesn’t have to be a bad thing. It is the quality of that growth that matters.
As the latest IGR lays out, economic growth is driven by the “three Ps” – population, participation and productivity. Of these three, it is only the latter two that deliver growth with better living standards. Population growth makes the economic pie (as measured by GDP) bigger, but not the size of our individual slices (as measured by GDP per person).
To keep the culinary analogy, it is an empty sugar hit. And before you object, I acknowledge that GDP is not a particularly good or complete measure of our wellbeing by any means. It ignores a multitude of social and environmental impacts – but that is a whole other article!
And, of course, the shape of the population matters as well as relative size and growth rates. Increasing numbers of older people relative to the number of workforce-aged people puts a large tax burden on the latter. Unless, of course, we want to cut back on health and aged care, not to mention pension payments for those unable to save for their retirement.
Participation and productivity, on the other hand, can deliver a bigger serve that is also a high-protein meal – one that has economic, social and environmental benefits, if well managed. The IGR tells us the participation rate – the number of us that are in, or actively looking for, work – will rise a little over the next 15 years, buoyed mainly by more women and older workers. However, after 2040 the participation rate will decline again as the population ages even more.
So that leaves us entirely reliant on productivity growth to drive per capita economic growth. We’ve heard this song before, yet Australia’s productivity performance has been pretty woeful in recent years, and on a downward trajectory over a number of decades. This is the result of insufficient investment by businesses coupled with the apparent evaporation of willingness among governments at all levels to introduce meaningful reforms (does anyone remember last year’s productivity roundtables ?) Despite this current poor state of affairs, the IGR tells us that productivity growth over the forecast period will average 1.2% a year.
And what will drive this much-needed fillip? Why – drumroll, please – AI of course! (AI appears 1,352 time in this IGR, which tells you just how much is hanging on it. This compares, for example, to just 39 references to that other existential crisis, climate change.) We do not yet know either the timing or the extent to which AI technologies will shift productivity in Australia.
Nor does it consider its likely impact on the workforce – which the IGR assumes is benign and will have no impact on GDP over the forecast period. Nevertheless, if we put on our rose-coloured glasses and assume that we can achieve the forecast level of long-term productivity growth, that is what will deliver sustainable improvements in living standards for Australia. Better, then, that the government spends its scarce revenues and political capital on supporting technology uplift, rather than pointless policies of the “baby bonus” type.
And let’s not equate our economic prospects with women’s fertility, but rather with encouraging their participation in the workforce and the resulting increased productivity from greater access to more brain power.
Source: The Guardian
