Australia's Demographic Challenges
Over time, the ageing of the population will result in a greater demand for Age Pensions and health and aged care spending. Already the need to keep up with changing technology and community expectations of accessing the most advanced diagnostic tests and treatments are increasing demands on health spending. The IGR projects that these pressures will continue.
Spending on health and aged care accounts for much of the projected rise in Commonwealth government spending over the next four decades (Chart A4).
Chart A4: Projected growth in components of Commonwealth health spending
The Commonwealth is the primary funder of health and aged care services in Australia. It funds Medicare, which incorporates the Medical Benefits Scheme; the Pharmaceutical Benefits Scheme (PBS), which subsidises selected pharmaceuticals; and the Private Health Insurance Rebate. It also contributes to State funding of public hospital services and provides funding to non-government organisations for services such as residential aged care, community care and indigenous health care. Over the past three decades, Commonwealth health spending has more than doubled, to 4.0 per cent of GDP in 2001-02. In recent years, spending on the PBS has been the fastest growing component. In the decade to 2000-01 PBS spending as a percentage of GDP more than doubled.
Although population growth and ageing affect health spending, these factors account for only around one-third of the recent growth. Much of the growth has come from the demand for new technology and treatments. Australians now expect to access more expensive diagnostic procedures and new (and more expensive) medications listed on the PBS. Unless addressed, these trends are likely to continue to drive health spending over the next four decades, pushing up Commonwealth health spending from 4.0 in 2001-02 to 8.1 per cent of GDP in 2041-42.
Payments to individuals include Age and Service Pensions, unemployment allowances, Disability Support Pension, Parenting Payment and family payments. They account for about a third of Commonwealth spending. The number of people receiving social safety net payments has been rising significantly and is a key driver of rising spending on these payments.
Commonwealth government spending on education and training accounts for 7 per cent of all Commonwealth spending, with around half of this allocated to government and non-government schools, and around a third to higher education institutions.
In recent years, demands for a more skilled labour force and the desire for education have increased, driving up the rate of participation in the university sector, and in vocational education and training. At the same time, the proportion of the population in the principal age group for education (5 to 24 years) has fallen from 36 per cent in 1972 to 28 per cent in 2002.
Overall, Commonwealth spending on education and training, while continuing to grow at a solid rate, is likely to decline as a share of GDP over the next four decades, from 1.8 per cent of GDP in 2001-02 to 1.6 per cent of GDP by 2041-42.
The IGR projects that spending by the Government will exceed the amount it raises in taxes by around 5 per cent of GDP by 2041-42. To put this into perspective, if we had a budget deficit of 5 per cent of GDP today, then we have a deficit of around $40 billion instead of the forecast surplus of $4.6 billion.
Next: So what are the choices?