Part IV: Overall results
Aggregate impact
The projections of Commonwealth spending and revenue show that current trends in spending are likely to lead to significant fiscal demands with spending starting to exceed revenue in around 15 years. By 2041-42, the gap between spending and revenue is projected to grow to around 5.0 per cent of GDP (Chart 30).
Chart 30: Projections of the fiscal pressure
Source: Treasury projections.
By 2041-42 Commonwealth spending is projected to be 27.4 per cent of GDP. These spending projections incorporate the health, social safety net payments to individuals, education and government superannuation spending projections from Part III (Table 13). The diverse nature of other areas of Commonwealth government spending makes it difficult to project this spending based on trends. Spending as a proportion of GDP may increase in some areas, while spending in other areas may decrease. Consequently all other spending is assumed to remain the same proportion of GDP to 2041-42 as is currently forecast for 2005-06. This is 8.3 per cent of GDP.
Revenue projections assume that total revenue will remain constant at 22.4 per cent of GDP from 2005-06.
Previous studies of population ageing1 have concluded that the Commonwealth is likely to face greater pressure for increased social spending than State and Territory governments. This is because Commonwealth social spending is more concentrated on the aged than State expenditure and because Commonwealth health programmes have shown higher non-demographic growth. For example, the Commonwealth has responsibility for age pensions and nursing homes, while 25 per cent of State and Territory spending is on education.
Chart 31 provides an indicative comparison of projections of Commonwealth social spending and State and Territory health and education expenses.
Chart 31: Projections of Commonwealth social spending and State and Territory health and education spending
Source: Treasury projections.
For the Commonwealth, increased health and age pension spending should be partly offset by CPI-indexed unemployment payments and family payments and, to a lesser extent, by education spending (Table 13).
Table 13: Projections of Commonwealth demographic
spending
(per cent of GDP)
Source: Treasury projections.
Commonwealth health and aged care spending is projected to grow significantly, due to the increasing cost of new procedures and medicines, with the ageing of the population also increasing demand for health spending. Technological change and income effects generally drive the increases in real health spending per person.
The expected slight decline in Commonwealth education spending as a proportion of GDP is because younger people will comprise a smaller proportion of the overall population. The projections assume that education participation rates and real costs per student will increase.
Commonwealth spending on Age and Service Pensions also is projected to increase significantly over the next four decades. However, the projected increase in spending is smaller than for most other industrialised countries because the Australian pension has a maximum rate that is not related to an individual's earnings, and is means tested. The projected increase in Age Pension spending as a proportion of GDP is partly offset by the projected decrease in payments which grow more slowly because they are indexed by the CPI rather than wages. These include unemployment allowances and significant components of family payments.
1 For example, Social Welfare Policy Secretariat 1984 and Department of Community Services and Health 1990.
