2002-03 BUDGET PAPER No. 5

INTERGENERATIONAL REPORT
2002‑03

CIRCULATED BY
THE HONOURABLE PETER COSTELLO, M.P.,
TREASURER OF THE COMMONWEALTH OF AUSTRALIA,
FOR THE INFORMATION OF HONOURABLE MEMBERS
ON THE OCCASION OF THE BUDGET 2002-03
14 MAY 2002

  Commonwealth of Australia 2002
ISBN 0642 74142 5
This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available from the Department of Communications, Information Technology and the Arts. Requests and inquiries concerning reproduction and rights should be addressed to:
The Manager
Copyright Services
Info Access
GPO Box 2154
CANBERRA   ACT   2601
or by e-mail:
cwealthcopyright@finance.gov.au

Printed by Canprint Communications Pty Ltd

Foreword
This is Australia’s first Intergenerational Report. The report provides a basis for considering the Commonwealth’s fiscal outlook over the long term, and identifying emerging issues associated with an ageing population.
The Intergenerational Report is one of a series of Budget papers, the purpose of which is to provide information supplementary to that in the Budget Speech.
As required by the Government’s Charter of Budget Honesty Act 1998, 
‘An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change.’
While the National Commission of Audit, established by this Government in 1996, considered the impact of demographic change on Commonwealth finances, this report is the first by any Australian government to assess the long‑term sustainability of government finances in detail. 
The United Kingdom, United States and New Zealand governments, and the Organisation for Economic Co‑operation and Development (OECD) and European Economic Policy Committee (EEPC) have also recently prepared similar long‑term reports on public finances. These reports, like this Intergenerational Report, use projections to consider long‑term sustainability.
The report presents these projections as a percentage of Gross Domestic Product (GDP) so they are considered relative to the size of the economy. Small changes in GDP, even 0.1 per cent, are equivalent to significant amounts in dollar terms when prices are assumed unchanged (real terms). However, the amounts are even more significant in dollar terms when the effect of likely price changes over time is taken into account (Table 1).
Table 1:  Projected real and nominal GDP ($m)

Source:  Treasury projections. 

Notes
(a)	The following definitions are used in this Budget Paper:
•	‘real’ means adjusted for the effect of inflation; and
•	one billion is equal to one thousand million.
(b)	Figures in tables and generally in the text have been rounded. Discrepancies in tables between totals and sums of components are due to rounding.
(c)	 The following notations are used:
$m	$ million
**	information is not available
neg	negligible
 (d)	References to the ‘States’ include the Territories.

Contents
Foreword	iii
Overview	1
Fiscal sustainability	2
Future prospects	3
Implications for government finances	6
Part I:  Maintaining sustainable government finances	13
The benefits of sustainable government finances	13
The Government’s approach to fiscal sustainability	15
The Government’s record in achieving fiscal sustainability	16
Part II:  Australia’s long‑term demographic and economic prospects	19
Demographic prospects	19
Fertility and mortality	19
Migration	21
Population projections	22
Economic prospects	25
Productivity	25
Employment	26
Prices, the GDP deflator and wages	30
Economic growth projections	30
International comparisons	31
Part III:  Projections for spending and revenue	33
Spending	34
Health and aged care	34
Payments to individuals	41
Education and training	46
Government superannuation	49
Defence	51
Environment	52
Revenue	53
Taxation revenue	53
Non‑taxation revenue	55
Part IV:  Overall results	57
Aggregate impact	57
Alternative scenarios	60
Assessment of sustainability	66
Appendices
Appendix A:  Demographic spending projections	69
Appendix B:  Labour force projections and sensitivity analysis assumptions	71
Appendix C:  Modelling approaches used to project spending	77
Appendix D:  Key drivers of taxation revenue growth	85
References	89
Index	93