Rising tax burden or rosy prospects? Australia faces a test of its economic model

Australia faces rising national debt and a heavier tax burden for younger generations unless its productivity crisis is fixed, according to Treasury’s long-term outlook, which forecasts significant economic disruption as deaths start to outpace births.

Treasurer Jim Chalmers defended his economic management in the face of criticism from Labor figures, justifying rosy forecasts on productivity in this term’s Intergenerational Report, released on Monday, and acknowledging “the budget will be strained” by decades of deficits.

The report, which maps economic and social changes likely to emerge over four decades, predicts that population growth will rely more heavily on migration as fertility rates drop in line with those of many developed economies. Labor tightened the migration program last week but did not alter its forecasts for 225,000 net migration next year.

The report claims Australia is relatively well-placed to face 21st-century global turmoil because the renewables rollout will make power cheaper, Australia is an attractive base for the AI data centre boom, and demographic problems are not as stark as those experienced elsewhere.

“Accelerating change is putting more pressure on people. It’s eroding trust in the institutions of our democracy,” Chalmers said.

“It’s exacerbating the strain felt by younger generations in particular. The division in politics now is not between those who accept this and those who don’t, but between those who prey on it and pick at it and politicise it and catastrophise it – and those who seek to alleviate it.”

The population aged 85 and over is projected to treble to 1.9 million by 2066, putting additional pressure on the budget. By the 2060s, deaths are expected to exceed births in Australia, as they already do in Japan and Germany. Australia’s population growth is expected to slow from a nearly world-leading 1.5 per cent to about 0.9 per cent, much of which will continue to come from migration.

Core to the political debate over Chalmers’ announcement are the government’s assumptions on productivity growth, which represents the economy’s efficiency and underpins government predictions of rises in wages and living standards.

Economists have contested the government’s assumption of 1.2 per cent yearly productivity growth as overly optimistic because the rate has been 0.8 per cent over the past 20 years and just 0.3 per cent over the past decade.

Under the 1.2 per cent scenario, gross debt as a share of GDP is projected to decline from 33 per cent of the economy in 2025-26 to a low of 22 per cent in the mid-2050s. But using the lower assumption of 0.8 per cent, debt would balloon to 55 per cent and annual deficits would reach a large 4 per cent of GDP.

At a household level, the lower assumption would mean the average Australian’s income in 2066 would be 13 per cent smaller, at $136,000 instead of $157,000. It would also mean government spending rising to 30 per cent, a huge rise from 26.5 per cent today.

Deloitte Access Economics partner Stephen Smith said the vast difference between the two assumptions was “an economy that is smaller, poorer and more indebted”, warning that Australia had relied too much on migration and not enough on making the economy more efficient.

“A forecast that once looked conservative now appears increasingly dependent on hypothetical productivity gains from a successful economy-wide AI rollout. At 1.2 per cent, the [Intergenerational Report’s] baseline appears unusually optimistic relative to recent experience. The downside scenario modelled in the report … looks more realistic,” he said.

Shadow treasurer Tim Wilson claimed Labor’s economic model was stoking inflation and failing to create dynamism.

“The Reserve Bank has already highlighted and cited that the data underpinning the Intergenerational Report is unrealistic. What we have is a report from the Albanese government that seeks to cook the books to justify their economic model, which will only lead to lower standards of living,” he said.

Chalmers said the government’s figure “strikes a pretty effective balance”.

“It is below some other comparable countries’ assumptions, and it’s above others,” the treasurer said, noting that projections for debt and deficit were better than in the previous Intergenerational Report, in 2023.

Labor elder Bill Kelty has joined economists in urging the government to reduce the burden on younger wage-earners by lowering income taxes and finding other sources of revenue.

As tobacco excise collapses from the decline in smoking and the rise of illegal cigarette sales, Coalition frontbencher Andrew Bragg backed economists’ calls to raise indirect taxes such as the GST.

The report released on Monday states: “Without further reform, fiscal pressures from an ageing population and trends in the tax base will add to pressures on working-age Australians.”

Chalmers said Labor had never considered changing the GST and indicated he may give tax relief to workers before the next election, after the government introduced a tax offset in the last budget.

Labor has released the report as members of the party’s caucus say privately that there is growing unease with the government’s handling of inflation and productivity. Government MPs have petitioned the cabinet to give greater emphasis to growth, after Labor used the budget in May to wind back property tax concessions and raise taxes on capital gains.

Chalmers said the report’s findings on the burden on younger people would one day vindicate the “difficult decisions that we’ve taken, reforming the housing market and reforming the tax system”.

University of NSW professor of economics Richard Holden said he was struck by the partisan tone of this year’s report, which has attracted similar criticisms under governments of both stripes.

“The report is a quite political document,” Holden said. “So many of the government’s talking points get replayed (AI productivity, aged care, energy transition). It doesn’t read like a bottom-up Treasury analysis but more like a top-down political narrative with some modelling to support that narrative.”

Independent MP Allegra Spender said Prime Minister Anthony Albanese should stake his legacy on boosting the economy.

“The government must take on union interests and pursue greater employment flexibility and competition. They must prioritise a dynamic economy,” she said.

“The Coalition must drop the climate wars and embrace a bipartisan commitment to decarbonising the economy at lowest cost.”

One Nation treasury spokesman Barnaby Joyce said the government’s productivity forecast was “wacky” and “completely at odds with our obvious reality”.

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