Monday, April 02, 2007

Why Australia's 'aging timebomb' is fizzing

It is amazing what a big difference a number of small changes can make. Back in 2002 the projections in the first intergenerational report were apocalyptic.

In 40 years time Australia’s budget deficit was to climb to 5 per cent of GDP.

Those of us who were still around by then were to face massively higher taxes - paying an extra $87 billion by 2042.

That is more than the total collected in company tax at the moment, and more than is spent on defence, health and education combined.

Five years later, that figure has shrunk to 3 per cent of GDP. The hands on the doomsday clock have been wound back.

What went right was a number of very small things.

Our birth rate turns out to have increased, not fallen as the first report projected. As a result the number of babies born per woman is now expected to be 1.7 per cent four decades ahead, rather than 1.6...

Also we are more willing to work. As a result the workforce participation rate is now expected to be 57 per cent, instead of 56.

And there’s a chance that we will be even more willing to work than that. Yesterday’s report said that if our workforce participation rate climbed to nearer the top of the OECD pile the Australian economy would be an extra 5 per cent bigger by 2047, an increase more than big enough to fund the all of the extra tax needed.

It well might. Already we have seen that a low unemployment rate and lots of jobs on offer gets people out of their houses.

The intergenerational report predicts that Australia’s present low unemployment rate of around 5 per cent will continue for decades.

If it does employers are likely to overcome their reluctance to mine the ranks of men aged 50 and older looking for workers and our participation rate is likely to climb towards the world’s highest.

Some of the changes since the last intergenerational report make the budget outlook worse. We are living even longer than expected five years ago and our higher than expected birthrate will mean higher spending on education.

But those financial negatives are overwhelmed by the positives.

Even at the time of the first intergenerational report Australia’s aging future wasn’t particularly scary (for one thing our buying power was expected to double). It is likely to get even less scary in the reports to come.