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(Bloomberg) — Australia faces slowing growth, declining living standards and dwindling productivity without changes to ensure higher workforce participation, according to a report released by the government today. Gross domestic product is forecast to grow at an average 2.8 percent a year in the four decades to 2055, down from an average of 3.1 percent in the previous 40 years, the Intergenerational Report said. Productivity expansion is projected to remain at about 1.5 percent a year over the period, down from 2.2 percent during the 1990s, it said.“A lower proportion of Australians working will lower economic growth over the projection period,” the report said. Continuing “economic growth and prosperity cannot be taken for granted.”
The Intergenerational Report, released every five years, studies the implications of demographic change for economic growth and uses current policy settings and trends to give financial forecasts for the next four decades. Tony Abbott’s Liberal-National coalition, which was elected 18 months ago promising to end a “debt and deficit disaster,” is likely to point to the report as it seeks to pass savings measures through parliament and tackle economic reform. The government has faced Senate opposition to savings measures while falling prices of key exports have cut tax revenue. With legislation blocked in the upper house, Abbott has abandoned or reworked some of the government’s budget policy, costing about A$20 billion ($15.6 billion) of savings over the next four years.

Abbott’s Challenge

The economy is struggling to transition to non-mining drivers of growth as a resources investment boom wanes, even as the central bank cut its benchmark cash rate to a record-low 2.25 percent last month in a bid to encourage spending by consumers and companies. The scale of Abbott’s challenge was shown in the mid-year economic and fiscal outlook released in December, which forecast the underlying cash deficit will deteriorate to A$40.4 billion in the fiscal year ending June 30, 2015, from a May estimate of A$29.8 billion. Treasurer Joe Hockey wants to raise the nation’s retirement age to 70, the highest in the world. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing up the retirement age to head off a gray time bomb caused by a growing army of pensioners and a declining pool of taxpayers.
Australia’s aging population will see the labor force participation rate for people aged over 15 fall to 62.4 percent by 2055, compared to 64.6 percent now, according to the report. In four decades’ time, male life expectancy is forecast to increase to 95.1 years and to 96.6 years for females.

Population Growth

The aging demographics mean the ratio of people aged between 15 and 64 for every person aged 65 and over will fall from 4.5:1 now to 2.7:1. Australia’s population growth rate will fall by 0.1 percentage point over the next 40 years to 1.3 percent, giving the nation a total population of 39.7 million in 2055 from about 23 million now. Abbott, who fended off a challenge to his leadership from his own lawmakers last month, has suffered the biggest fall in public approval for a new government in 30 years after reneging on promises not to cut planned spending on popular programs including schools, hospitals and the nation’s public broadcaster. Unpopular policies that were blocked in the Senate have been ditched, including a plan to charge Australians A$5 to visit a doctor and re-introducing indexation of the fuel excise. The report shows that under current legislation, net debt will reach almost 60 percent of GDP by 2055 and spending will reach 31 percent of GDP. Should the government’s proposed policy be legislated, Australia would have a surplus of about 0.5 percent of GDP by 2055 with spending at 26 percent of GDP, according to the report.

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net To contact the editors responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net Edward Johnson, Victoria Batchelor