The OECD has warned that Australian living standards could take a hit in the absence of meaningful economic reform and a clear path out of debt in the wake of the pandemic, as the nation’s population ages.
An update to the OECD’s latest fiscal outlook to 2060 saw the world’s wealthiest nations relegate Australia’s per capita gross domestic product forecast — a go-to indicator for global living standards — from a 2018 prediction of 1.4% to 2030, to 0.9% to 2060.
The reduced forecast comes just weeks after the OECD urged the Morrison government to consider reforms to the Goods and Services Tax, reduce tax cuts and concessions, and forge a roadmap out of the mounting debt shouldered as a result of the pandemic, as Australia works toward economic recovery with an ageing population and closed borders.
“In a no-policy-change scenario, population ageing and the rising relative price of public services will keep adding fiscal pressure onto OECD countries in the decades ahead,” the report said.
In mid-September, a separate OECD forecast suggested that government debt across both state and federal levels would float between 60% and 70% of GDP through to 2060 if policy continues unchanged, and the costs of healthcare continue to bloat, along with an increase to retirement tax concessions.
According to the federal government’s intergenerational report, released in June this year, Australia’s old-age dependency ratio in 2019–20 was 4.0 working-age people for every person aged over 65. The ratio is projected to fall further by 2060–61 to 2.7 working-age people for every person over 65.
The fall, according to the report, offers cause for concern for Australia’s long-term economic growth and fiscal outlook, as the taxes of working-age Australians will be required to support a swelling cohort of people aged over 65, with no revenue mechanisms yet in place to offset the nation’s aging population.
It highlighted that a larger, older population will require greater government spending in healthcare, the Age Pension and end-of-life support, and in some cases could have dire implications for participation and productivity growth.
“If financing conditions remain favourable, additional borrowing could absorb some of this pressure,” the OECD said. “However, letting public debt rise comes with risks and trade-offs, so this strategy cannot permanently sidestep the need for policy reforms,” the OECD said.
“Encouragingly, labour market reforms to raise employment rates, including reforms to lengthen working lives, have the potential to make a substantial dent in future fiscal pressure.”
The long road to tax reform
The OECD’s warnings arrive in the wake of a years-long call for tax and economic reforms from analysts across the financial services industry.
The Australian Chamber of Commerce and Industry on Tuesday released a new strategic paper titled ‘Better Australia — Securing the foundations for a stronger and smarter future’, which proposes urgent tax reform, lifting migration caps, and decarbonising the economy.
ACCI chief executive Andrew McKellar said that the Australian economy faces clear short-term challenges that could have damaging impacts on living standards, and that the nation is ripe for landmark reform.
“There are no guarantees that the living standards we enjoy today will be assured for future generations. While Australia has enjoyed remarkable economic growth and improvement in living standards, there is no question that Australia faces clear challenges. We cannot afford to be complacent,” he said.
“As the country begins to emerge from the most challenging health and economic crisis in decades, we now have a once-in-a-generation opportunity to pursue landmark reform.”
McKellar’s calls for reform were sounded just hours before consulting firm Deloitte released a new report detailing suggestions on how the Australian economy can remake its “luck” as complacency has gripped the nation’s policy makers off the back of decades of uninterrupted growth.
Deloitte Australia chief executive Adam Powick said the Australian economy has defied expectations for “a long time”, but that the nation’s leaders should now be looking to embrace long-term sustainability.
“That growth wave we’ve ridden has turned the phrase ‘the lucky country’ into shorthand for our success,” Powick said. “But this isn’t guaranteed for the next 50 years.”
“Particularly as we bounce back from COVID, it will be more important than ever for our policy makers and business leaders to understand structural changes underway and how we can effectively compete in a more complex and fragmented world,” he said.
Deloitte Access economics leader Dr Pradeep Phillip said although the Australian economy has performed well historically, it has grown increasingly fragile in the face of technological advances, climate change, an aging population, evolving geopolitical tensions and, of course, the pandemic.
“Even as we’re facing new challenges that are highly complex, we’ve also become complacent,” Dr Philip said. “And that’s a big problem. Complacency poisons investing in the new.
“Letting the good times roll has come at a cost when we haven’t built the capabilities and capacity to ensure the resilience of our economy,” he said.
“We have many of the building blocks to deliver future growth and prosperity — from access to strategic minerals and renewable energy assets, to proximity to Asia and good education infrastructure.
“But with a shifting global economic and geopolitical landscape, we need a new economic lens, new tools, and new methods to address disruptions and challenges, and target the areas where tomorrow’s opportunities lie.”