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Preparing for an ageing population

Speech

Date : 18 November 2019

Author: The Hon Josh Frydenberg MP

The Hon Josh Frydenberg MP

Treasurer

Speech to the Committee for Economic Development of Australia

Preparing for an ageing population

19 November 2019

Four Seasons Hotel, Sydney

Introduction

Thank you to CEDA for the opportunity to speak at tonight’s dinner.

CEDA has a proud history of contributing to public policy discussions that advance Australia’s economic and social development. CEDA continues to lead the way in focusing on long-term solutions to some of our nation’s most complex issues.

Tonight, I will focus on three issues:

1. The state of the domestic economy

2. The headwinds facing the global economy

3. The challenge of an ageing population and how we are responding.

The state of the domestic economy

With the budget back in balance for the first time in eleven years and on track to return to surplus, it’s important that we focus not just on the ‘what’ but the ‘why’.

At $19 billion per annum, our interest bill is more than double what we invest in childcare and nearly as much as we spend on schools.

Our debt burden represents not just a cost to the budget and therefore every taxpayer, but also an opportunity cost as it constrains the Government’s ability to invest in other areas.

If we don’t remain fiscally disciplined today, the next generation will have to pick up the bill tomorrow.

The return to surplus will have been hard-fought.

When we came to Government, we inherited a budget deficit of $48.5 billion or 3 per cent of GDP; the second highest in Australia’s history even though five-years had elapsed since the GFC.

Since then, we have steadily improved the bottom line with real spending growth halved to 2 per cent per annum, the lowest level of any government in fifty years.

While we have benefited from a positive terms of trade, we have been prudent in our budget forecasts.

For example, the spot price of our largest export, iron ore, is today trading around US$70 per tonne, whereas it’s in the Budget at US$55 per tonne.

This conservative approach has ensured our record spending on health, education and disability support is not contingent on high commodity prices.

A good illustration of our increased funding on essential services is the NDIS.

Our share of funding has increased to $8.5 billion this year and will increase by more than 50 per cent again as the Scheme extends from 300,000 people on it today to more than 500,000 when fully rolled out.

In terms of understanding the drivers of our improved budget position, the strength of the labour market with more than 1.4 million new jobs being created since September 2013 has been key.

Last financial year, more than 300,000 jobs were created which was 100,000 more than Treasury had forecast.

Unemployment is at 5.3 per cent compared to 5.7 per cent when we came to Government and employment growth remains at 2 per cent compared to the OECD average of 0.9 per cent and the 0.7 per cent we inherited.

With more people in work, welfare dependency is now at a thirty- year low.

This stronger budget position has enabled us to cut taxes for more than 10 million income-earners and more than 3 million small and medium-sized businesses while keeping our tax to GDP ratio below our self-imposed cap of 23.9 per cent.

The $158 billion of tax cuts we legislated since the election were the largest in a decade.

Together with $144 billion of tax cuts announced and legislated in last year’s budget, we are creating a stronger, simpler and fairer tax system.

We are completely abolishing the 37 per cent tax bracket which will see 94 per cent of tax-payers, who earn between $45,000 and $200,000 a year, pay a marginal rate of no more than 30 cents in the dollar.

Treasury has estimated that the Coalition’s tax cuts will boost aggregate household disposable income by around $8 billion each year for the next four years.

The Government has also delivered lower taxes for small and medium sized businesses.

This includes delivering lower company taxes 5 years earlier than planned and supporting investment by increasing the instant asset write-off to $30,000 and expanding access to businesses with an annual turnover below $50 million.

The stronger budget position has also given us the fiscal flexibility to respond to significant calls on the public purse, like the drought.

The Morrison Government has committed over $1 billion of additional funding since the election to provide much-needed support to farmers and local communities.

I have seen first-hand the devastating impact the drought is having.

Farmers whose families have been on the land for more than a century have said there’s been nothing like it.

With over 95 per cent of New South Wales and two-thirds of Queensland are affected by drought the impact on the economy has been significant.

If we look at the past two financial years, the output of Australia’s farm sector is now around 14 per cent lower. Lower farm output is weighing on rural exports and food manufacturing.

In addition to our drought response, we have also said we will also be providing more funding for aged-care, in light of the findings in the interim report of the Royal Commission.

This will build on what is already record funding for the sector, having increased by more than 50 per cent since 2013-14.

The state of the global economy

In addition to the immediate spending pressures affecting the budget, such as drought and aged care, the economy is also confronting significant global economic headwinds.

In recent months, the IMF, World Bank and OECD have all downgraded their economic forecasts for global growth.

A principal driver of these revisions has been the flow on effect of the US-China trade dispute.

Now nearly two years on, hundreds of billions of dollars of reciprocal tariffs have been placed on each other’s goods.

The US is threatening further tariffs next month which, if applied, will see the amount of trade covered by tariffs reach US$735 billion.

While this would represent tariffs covering only 4 per cent of global trade, the impact has been far more profound.

In trade wars, there are no winners, only losers.

It’s not just the protagonists who are affected, it’s the bystanders as well.

As a result of the uncertainty and instability caused by the tariff war, confidence has been hit, investment decisions have been deferred, capital flows reduced and the growth in global trade volumes severely curtailed.

Some countries are feeling the impacts more than others.

Germany, the UK, South Korea and Singapore have all experienced negative quarters of growth this year.

The other significant dynamic at play in the global economy is the extended period of record low interest rates which has seen central banks in more than fifty countries cut rates this year.

Unconventional monetary policy is already underway in Europe and Japan and, remarkably, one quarter of all government bonds are trading at negative yields.

In effect, investors are paying governments to hold their money as they expect interest rates to stay lower for longer and they look for the stability and certainty that sovereign bonds offer.

Australia is not immune from these global forces.

At 0.75 per cent, our cash rate is at a historic low as the RBA has also moved.

In the words of Governor Lowe “we live in an interconnected world which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates.”

The challenge of an ageing population

While we navigate our way through these choppy international waters, Australia like many other countries around the world, is working through longer-term structural economic challenges, in particular, that posed by the ageing of the population.

In 1950, 5 per cent of the world’s population was aged 65 or over.

In 2015, it was 8 per cent.

By 2050, it will double to 16 per cent.

Some experts are predicting China’s population will start to shrink as early as 2027 with the projection that by 2050 there will be more women in China aged over 84 than there are people in Australia today.

In Australia, we may not be ageing as fast as Europe, Japan or China, but we face this trend nonetheless.

Since the first IGR was released in 2002, we have gone from 13 per cent, or 2.5 million people, being aged sixty-five and over to 16 per cent, or 4 million people, today.

Our median age, now thirty-seven, has increased by two years since then and life expectancy has gone to eighty-one for males and eighty-five for females.

With the sixth highest life expectancy in the world, we are seeing an increase of almost one year every four years.

In Australia today there are 5,400 people over the aged of 100.

This number will increase five-fold to around 26,000 over the next thirty-years.

As more Australians live longer, the number of working age Australians for every person aged over sixty-five diminishes.

Whereas in 1974-75 it was 7.4 to 1, forty-years later in 2014-15, it was 4.5 to 1, it’s now estimated over the next four decades to fall to just 2.7 to 1.

As this trend plays out, the impact on the budget will be felt on both the revenue and spending side.

In a report published by the Parliamentary Budget Office earlier this year, it is estimated that the ageing of the population will reduce annual average real growth in revenue by 0.4 percentage points and increase annual average real growth in spending by 0.3 percentage points over the decade.

In dollar terms, this equates to an annual cost to the budget of around $36 billion.

As the PBO point out, this is more than the projected cost of Medicare in that year.

As our ageing population puts pressure on our health, aged care and pension systems, we need to develop policies that respond effectively to this challenge.

It is a great development that people are living longer but we must be prepared for the implications.

Our policies need to leverage the three P’s: population, participation and productivity.

When it comes to workforce participation, we are at record highs and the participation rate for those aged 65 and over has increased from 12.3 per cent to 14.6 per cent over the last five years.

The participation rate for this cohort was less than 6 per cent twenty years ago.

However, with Australians in work currently undertaking 80 per cent of their training before the age of twenty-one, this will have to change if we want to continue to see more Australians stay engaged in work for longer.

It is not about forcing people to stay in the workforce, but rather giving them the opportunity and the choice to pursue life-long learning and skills training if they so choose.

Governments at all levels have a role to play.

Federally, we announced a program in last year’s budget that was designed to provide career advice and funding support for those aged between 45 and 70 who were re-tooling for the workforce.

In this year’s budget, we announced a National Skills Commission and pilot skills organisations in areas like digital technologies, human services and mining which is available to support people of all ages.

As Ian Yates from the Council of Ageing has rightly pointed out today, employers also have an important role ensuring flexibility in the workplace which facilitates the continued and valued workforce participation of senior Australians.

The Morrison Government also recognises the importance of allowing older Australians to earn more form a part-time job without affecting their aged pension.

It was with this in mind that the Pension Work Bonus was extended to $300 a fortnight in this year’s budget.

Population factors are also critical in how we meet the ageing challenge.

Our migration program has served us well.

With the median age of new migrants being between twenty to twenty-five, or ten years younger than that of the broader population, immigration has helped to soften the economic impacts of an ageing population.

The Government is ensuring that we understand all the challenges associated with the changing size and structure of our population.

Last year the Prime Minister established a new Population portfolio within Treasury with the aim of addressing the challenges while supporting our economic growth.

And last month, the Government launched the new Centre for Population to work closely with the states and territories, academics and think tanks in order to share data, research, ideas and expertise on population.

The work of the Centre will provide a crucial evidence base for policies that ensure that we have the right services and infrastructure to meet the future needs of our ageing population.

The third P, productivity, is, however, one area where we must do better.

Like other developed countries, Australia’s productivity growth has slowed, but is better than that in any of the G7 countries and the OECD average.

Australia’s 30-year historical average annual rate of labour productivity growth is 1.5 per cent. But our 5-year average annual rate of productivity growth is 0.6 per cent.

Productivity is the most important source of income growth over the long-run — contributing three-quarters of real gross national income growth over the past 30 years.

With productivity tracking at less than half the long-term average, our focus is on deregulation, skills, industrial relations and other micro-economic reforms to improve service delivery.

Infrastructure is also a key area where the Prime Minister announced yesterday a $400 million plus package which involves new money as well as bringing forward spending on six projects in South Australia, with announcements in other states to come.

Our 10-year $100 billion infrastructure plan will better connect people to jobs, their homes and their communities, and improve access from our farm gates and factories to domestic and export markets.

Finally, when it comes to meeting the challenge of an ageing population, it’s vitally important we get the settings right around retirement incomes.

Under our retirement income system, the combination of the Age Pension, superannuation and voluntary savings work together to secure the living standards of Australians in retirement.

As the superannuation system matures, future retirees will have higher superannuation balances to support them in retirement.

Consequently, the Age Pension will make up a smaller proportion of future retirement incomes, and a higher proportion of pensioners will be on a part rate pension rather than the full rate.

In the context of this changing dynamic, I recently announced a review into the retirement income system with Mike Callaghan, Professor Deborah Ralston and Carolyn Kaye.

The review will look at the three pillars of the existing retirement income system.

This is the first comprehensive review of the system since the establishment of compulsory superannuation 27 years ago and follows a recommendation from the Productivity Commission.

Through its work, the review will establish a fact base of the current retirement income system that will improve the understanding of its operation and the outcomes it is delivering for Australians.

The Panel will release a consultation paper in the weeks to come and will provide its final report to Government by mid next year.

Conclusion

As we implement our economic plan to repair the budget, grow the economy and guarantee spending on essential services, we do face some significant domestic and global economic headwinds.

This will require calm and considered decision-making and not engage in knee-jerk reactions to every economic event or request for more government spending.

Our ability to effectively manage these short-term challenges as well as the longer-term challenge of an ageing population will depend on it.

[END]

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