Chalmers says intergenerational report will 'vindicate' difficult housing decisions

Younger Australians face a future of working longer and struggling more to buy a home without the same early gains in income and wealth experienced by the generations before them.

The latest Intergenerational Report released on Monday by Treasurer Jim Chalmers has laid out how an aging population and falling birth rate would reshape Australia's economy in the next 40 years.

Fertility is expected to fall to just 1.34 children per woman by 2065, which has sparked debate about what, if anything, could be done to persuade younger Australians to have more children.

The report, which is produced by Treasury every three years, found Australians born in the 1990s and after are better educated and likely to live and work longer, but the traditional path of accumulating wealth through home ownership has become harder.

The economy is expected to more than double in size in the next 40 years, with living standards continuing to rise, and the long-term budget outlook has had "significant" improvements since 2023.

But an older growing population, weaker productivity growth and rising costs in areas such as defence and health will put increasing pressure on government finances.

Handing down the report, Mr Chalmers said the global and generational risks faced by Australia were "serious" but argued the country was well-placed to deal with them.

"Australia's opportunities are endless," he said.

Birth rates spark baby bonus debate

Australia's declining fertility rate has prompted discussion about the return of financial incentives to encourage more people to have children.

Finance Minister Katy Gallagher said the government would not go into "promoting choices for individual families" but recognised Australians who did have children should be supported.

"That can be through our investments in early education and care, our three-day guarantee, our extending (paid parental leave) … ensuring that dads or second parents can take it, putting super on that so that people don't have that economic hit when they have children," she said.

Nationals leader Matt Canavan has called for greater support for families but said he did not think a revival of the "baby bonus" was the right way to encourage more Australians to have children.

"I think anything that we should do should be more … designed around the idea that if you … work for yourself, if you're helping yourself, we'll help you some more," he said.

"The baby bonus, it was just 'Here's some cash', without you having to put in the effort as well."

Young Australians not achieving early wealth gains

The new report found fertility had fallen in Australia due to "complex economic, social and cultural factors" including more time in education, and career establishment, living with parents longer, as well as delayed partnership and childbearing.

Those demographic shifts have occurred as the economic fortunes of younger Australians have started to diverge from the generations before them.

Treasury said younger millennials were reaching their 30s without experiencing the early-career real disposable income increases compared with those born in the 1980s.

The average real household net worth rose from $0.5 million in 1993-94 to more than $1.3 million in 2019-20, but much of this wealth growth was concentrated among older households.

It is a trend that has been emerging for decades, with only about two-thirds of Australians born in the 1960s onwards doing better than their parents, compared with 80 per cent of people born in the 1950s.

Fewer home owners now

There would be about 250,000 more home owners aged between 25 and 34 if ownership rates had held up at 1981 levels.

House prices have risen about 400 per cent since 1999, which was more than twice as fast as the average income.

Australia is also building homes at roughly half the productivity of 30 years ago.

Treasury said population growth and smaller households have increased demand for housing, while weak construction and productivity has constrained the supply response.

The report also specifically identified investor tax concessions, like negative gearing and the 50 per cent capital gains tax (CGT) discount as contributing to the problem.

"These tax advantages have increased the share of housing owned by investors, at the expense of Australians looking to buy a home," it said.

Mr Chalmers said the government was changing arrangements for capital gains and negative gearing "to deal with plummeting home ownership rates among young people".

"To address one of the biggest drivers of intergenerational wealth inequality, we're reforming the tax system to reduce distortions in the housing market,"

he said.

Treasury noted between 80 to 90 per cent of investor housing lending since 2019 had gone towards the purchase of existing housing stock rather than new dwellings.

Australians to work for longer

Australia has more people participating in the workforce than Treasury expected thanks in large part to women working at increasing rates.

Female workforce participation is expected to continue rising until the mid-2040s, with the gap between men and women shrinking from 7.7 points now to a projected 5.4 points by 2065-66.

Older Australians are also working substantially more than previous generations, with participation among people aged over 65 rising 9.5 per cent since the 2002 Intergenerational Report.

Since 2023, an extra 1 per cent of Australians have continued to work beyond the age of 65, which the report has linked to the physical aspects of modern jobs and changes to retirement settings.

In his speech, Mr Chalmers said an aging population means a proportionately smaller workforce, and broader demand for health and aged care.

He said the number of Australians over 85 will triple by 2066, and a third of new healthcare spending over the next 40 years will be because of aging.

But he said Australia's workforce participation would continue growing while most OECD countries would see a decline.

Migration is also helping Australia maintain a workforce, with Treasury expecting the actual working-age population to continue growing due to overseas arrivals.

AI has potential to help economy grow

Despite worse demographics, Treasury now thinks Australia will spend less, run smaller deficits and carry substantially less debt than was forecast in 2023.

Looking at the budget long term, officials have projected Australia would run a surplus from 2029-30 for twenty years before aging and other pressures would push it back into deficit.

Health would remain a significant spending pressure, rising from 4 per cent to 6.2 per cent of GDP.

Public hospital funding is expected to account for more than 60 per cent of additional Commonwealth health spending.

At the same time, Australia's transition to electric vehicles (EVs) is expected to have a significant impact on budget revenue as fewer motorists would pay the fuel excise charged on petrol and diesel.

The net fuel excise was projected to collapse to just 0.1 per cent of GDP by 2065-66, which is expected to drive the case for some form of EV road user charge to replace it.

Australia's productivity growth is expected to remain below its historical average, however Treasury said artificial intelligence (AI) presented a major opportunity to lift economic output.

AI is expected to be a significant force impacting Australia's economy in the next 40 years, but the potential benefit would depend on how effectively the country adopts and takes advantage of the technology.