Australia is facing four decades of budget deficits, according to the latest Intergenerational Report.

The report unveiled by Treasurer Jim Chalmers paints a sobering picture of financial challenges ahead, with the prospect of being trapped in debt if corrective measures are not taken.

The report forecasts that the federal budget will plunge into deficit this year and remain in the red for the next 40 years. 

This trajectory is attributed to several factors: a growing elderly population increasing spending demands, a shrinking tax base, and the disruption caused by climate change affecting traditional revenue streams while imposing additional economic costs.

The stats suggest gross debt as a percentage of GDP will initially decrease from the current 39.3 per cent to 22.5 per cent by 2048-49. However, it is projected to surge back to 32.1 per cent of GDP by 2062-63, marking the end of the 40-year forecast period. 

During this time, Australia's GDP is expected to grow to approximately $5 trillion, a 2.5-fold increase from its current level.

Treasurer Jim Chalmers said visionary policy measures are needed to fortify the economy for the coming decades. He drew parallels to the policy vision demonstrated by the Hawke/Keating government in the 1980s, which laid the foundation for the nation's economic prosperity over the past 40 years.

Chalmers outlined eight reform priorities to address both immediate and long-term challenges highlighted in the report. 

They include reducing the cost of living, implementing fiscal discipline, transitioning to a net-zero carbon economy, enhancing workforce skills, diversifying the industrial base, bolstering capital investment, optimising market efficiency, and reforming key institutions like the Reserve Bank of Australia and the Productivity Commission.

The report predicts that Australia's population will reach 40.5 million by 2062-63, with a doubling of individuals over 65 and a tripling of those over 85. 

The number of centenarians is expected to increase six-fold during this period. 

These demographic shifts are expected to drive a substantial increase in government spending, from the current 24.8 per cent to 28.6 per cent of GDP within four decades. Approximately 40 per cent of this projected spending increase is attributed to the ageing population.

The report also highlights the five fastest-growing expenditures in the budget, including the National Disability Insurance Scheme, interest payments on debt, defence, aged care, and healthcare. 

Together, these areas are projected to cost $140 billion more annually in today's dollars compared to the present. 

By 2062-63, they are expected to account for half of all Commonwealth spending, up from one-third today.

Climate change poses a substantial threat to revenue sources that have traditionally relied on exports of commodities like coal and gas. 

The report indicates that global demand for these commodities, and therefore associated tax revenue, is expected to decline, particularly if efforts to limit global warming are successful.

However, the report also identifies opportunities in Australia's capacity for renewable energy and rich deposits of critical minerals. 

It suggests that Australia is well-positioned to capitalise on the global shift toward net-zero emissions, with a potential 350 per cent increase in demand for critical minerals by 2040, particularly lithium, cobalt, manganese, and rare earth elements, essential for battery manufacturing and renewable energy technologies.

Chalmers acknowledged the growing income tax burden on a shrinking workforce and emphasised the need for measures to address this issue. He said that the government would focus on encouraging retirees to continue working if they choose to, in an effort to alleviate the pressure on personal income tax.
Australians are projected to live longer, with a narrowing gender gap in life expectancy. However, the average annual population growth rate is expected to slow to 1.1 per cent over the next 40 years, compared to 1.4 per cent in the past four decades.

Former Treasury boss Ken Henry has called for significant tax reform in response, including cuts to company taxes to attract more investment. 

He notes that Australia's company tax rate remains high compared to other countries and suggested implementing a separate tax system for mining profits to enable broader company tax cuts.

The report includes projections based on various climate change scenarios, with potential economic impacts. 

It stresses the importance of addressing climate change, particularly in terms of productivity losses and disaster recovery costs, but acknowledges the difficulty of predicting specific tipping points that may trigger climate-related crises.

The full report is accessible here.