The 2021 Intergenerational Report (IGR) shows Australia can’t afford another lost decade of policy reform, says CEDA Chief Executive Melinda Cilento.
We must tackle the costs of climate change, our reliance on income tax, boost productivity and digitisation and fund essential services like health and aged care if we are to manage well the impacts of our ageing population.
“The report rightly highlights the costs of these challenges, and points out that with a solid and growing economy, we are better placed than most other countries to meet them,” Ms Cilento said.
“Now is the time to take serious action to address these challenges.”
The IGR highlights the generational challenges posed by a population that is expected to grow more slowly, and age more rapidly, than previously expected, due to the pandemic population squeeze and our closed borders.
It warns the most enduring economic effect of COVID-19 is likely to be this smaller population: while the 2015 IGR projected Australia’s population would hit almost 40 million by 2054-55, this IGR projects it will only reach 38.8 million in 2060-61.
This is the first time there has been a downward revision of the long-term population projections in an intergenerational report.
“With our ageing population, and the population freeze caused by our closed borders, our future growth will rely on productivity,” Ms Cilento said.
“CEDA has been calling for Australia to re-open its borders sooner than mid-2022.
“The Federal Government should ramp up the vaccination program now, to help us on this path.
“Australia must also recalibrate its skilled migration program to attract not only the best and brightest migrants, but also those with the right skills and experience for the jobs we need to fill – and we need to start now.
“Right now, governments around the world are fine-tuning their migration programs to respond to greater competition in a post-pandemic world. We will fall behind if we don’t do the same.”
The report makes clear that Australia faces an enormous productivity challenge.
It assumes labour productivity will return to 1.5 per cent per year, our 30-year average to 2018-19. But our productivity growth in 2019-20 was roughly one-third of that and averaged just 0.8 per cent in the five years to 2019-20, with GDP growth largely driven by population growth in the lead up to the pandemic.
“Lifting annual productivity growth to 1.5 per cent over the next decade will require sharp policy focus and depend on more Australian businesses performing at or close to world’s best,” Ms Cilento said.
“We can’t underestimate how tough this will be.
“Research by Federal Treasury before the pandemic showed leading Australian firms were not keeping up with leading global firms on productivity.
“Australia had its worst result in 25 years in the recent IMD World Competitiveness Yearbook 2021, a global ranking of the competitiveness of 64 nations.
“Business efficiency led Australia’s slide, driven by poor performance on management practices, company agility and entrepreneurship.”
“Our rapid digitisation through the pandemic brought opportunities, but moves to establish domestic supply chains may reduce competition and scale and specialisation benefits.
“On trade, we have also heard that seizing new market opportunities and maintaining relationships are getting harder the longer borders remain closed.
“The growing share of services in our economy – particularly personal services, which have traditionally shown low levels of productivity – will also create headwinds.”
The impacts of climate change and the transition to carbon neutrality must factor into our longer-term thinking and planning.
The recent NSW IGR found climate risks would have a material impact on the state’s long-term economic and fiscal outlook. We would have liked to see a concrete effort from the Federal Government also to model these scenarios.
Ratings agencies such as S&P are increasingly considering climate risks in their long-term risk assessments.
Meanwhile, 60 per cent of Australia’s major trading partners have committed to net-zero emissions by 2050.
“The Federal Government should commit Australia to net-zero by 2050, and it should announce more ambitious policies to get us there, to provide greater certainty to business and the broader community,” Ms Cilento said.
“More than nearly any other country, Australia is ideally placed to be a renewables superpower. This is our new energy advantage.
“We have the sun, the wind and the minerals needed to build and power new renewable technologies. If we don’t take advantage of this, we will miss out on enormous job opportunities along the way.”
The 2021 IGR highlights the opportunities Australia must leverage through digitisation to boost productivity across the economy.
“Our success in adopting new technologies will determine whether Australian business can compete with the best in the world,” Ms Cilento said.
“Making the most of data and digitisation is also essential to improving the quality and efficiency of care services, amid rising costs and service expectations.
“Australia really must become a leading digital nation if it is to meet the challenges outlined in this report.
“While there were important initiatives in the recent Federal Budget, including the $1.2 billion digital economy strategy, greater clarity is needed on what it will take to achieve the Government’s aspiration to be a leading digital nation.
“A good way to start is by appointing a Chief Technologist to guide the implementation of digital and tech services, and communicate the opportunities and risks of these technologies, as CEDA has previously recommended.”
With a shrinking working-age population, this report shows Australia’s tax mix will rely mostly on income tax.
“This is not a realistic assumption,” Ms Cilento said.
“Comprehensive tax reform must be put back on the table, with a renewed resolve to reshape the system to sustain a strong and dynamic economy and pay for the essential services so important to our communities.”
This report reinforces that both federal and state governments face growing budget gaps and can only close those gaps and boost the tax base by working together.
“Australia should move to a whole-of-federation intergenerational report for National Cabinet,” Ms Cilento said.
“We need an authoritative baseline to examine future spending and revenue trends.
“A combined report would also provide a fuller picture of the challenges we face in the decades to come. Having that picture would make the opportunities for reform in areas such as tax more clear.”
The Federal Government should also ask the Productivity Commission to kick off its next five-yearly productivity review, which should focus on how to drive business-led productivity.
It is now nearly four years since the PC delivered its previous review.