Population ageing will increase spending on health, age-related pensions and aged care.
Escalating health costs associated with technological enhancements, such as new medicines, and increasing demand for higher quality services, will add to fiscal pressures from ageing.
At the same time, slowing economic growth as a result of an ageing population will reduce the capacity of Australia to fund this increasing spending.
Today, around a quarter of total spending is directed to health, age‑related pensions and aged care. This is expected to rise to around half by 2049‑50.
As a result, total spending is expected to grow to around 27 per cent of GDP by 2049-50, around 4¾ percentage points of GDP higher than its low-point in 2015-16.
Rising health costs are by far the biggest contributor to fiscal pressures, accounting for more than two-thirds of this projected increase in spending.
Rapid growth in real spending during the 2000s economic expansion has locked in permanent increases in spending, compounding the challenges of an ageing population. This is in contrast to the temporary stimulus introduced by the Government.
Together, these forces – ageing pressures, rising heath costs and a structurally high spending base – are expected to result in spending exceeding revenue by around 2¾ per cent of GDP in 2049‑50.
If steps were not taken to close the fiscal gap over time, the Budget would be in deficit by 3¾ per cent of GDP and net debt would grow to around 20 per cent of GDP.
This is the case notwithstanding the substantial savings that will be achieved with the implementation of the Government's fiscal strategy.
The spending pressures of ageing…
…will result in a growing fiscal gap