What will the Australian community look like in 40 years? We look at the key takeaways from the Intergenerational Report.
The 2023 Intergenerational Report (IGR) is a crystal ball insight into what we can expect Australian society to look like in 40 years and the needs of the community as we grow and evolve. It doesn’t map out our path to flying cars and Jetsons style robotic domestic help (unfortunately) but it does forecast structural trends that will give many of us a level of anxiety about what we need to be doing now to successfully navigate the future.
The report links the continued growth and prosperity of Australia to five significant areas of influence:
Thanks for the reminder. The number of people aged 65 and over will more than double and the number aged 85 and over will more than triple. We’re expected to live longer with the life expectancy of men increasing from 81.3 to 87 years and from 85.2 to 89.5 for women by 2062-63. And that’s a problem for the younger generation.
Who bears the burden of an ageing population?
Australia’s low birth rate, limited migration and increased longevity all have an impact. The old age percentage – the number of people aged 65 and over for every 100 people of traditional working age (15 to 64) in the population – will increase from 26.6% to 38.2%.
From a tax perspective, Australia’s reliance on personal tax means workers will bear an increasing proportion of the tax burden under current fiscal policy. In a recent interview, former Treasury boss Ken Henry labelled it an “intergenerational tragedy” with personal tax growing from 11.7% of GDP to 13.5% based on current policy. The report says that “only 12% of Australians aged 70 and over pay income tax and this age group now makes up 12.2% of the total population. This age group is expected to increase to 18.1% of the total population in 2062-63.” Wholesale tax reform will be required to prevent the growing tax burden on individuals dragging on the economy. With economic growth expected to slow to 2.2% from 3.1% over the next 40 years, the solution will not magically arise from corporate Australia. If it was not for our high rate of inflation you would think an increase to the GST was imminent.
Services and who pays
Demographic ageing alone is estimated to account for around 40% of the increase in Government spending over the next 40 years.
The outcome of an ageing population, as you would expect, is increased demand for care and support services that will push the Federal Budget back to a point where deficits are the norm if the current policies remain in place.
From a consumer perspective, it also means that the trend towards user-pays will only increase. As individuals, we need to ensure that we have the means to fund our old age because Government resources will be limited by increasing demand and this demand is funded by a deteriorating percentage of workers contributing to tax revenue.
It’s also likely that we will need to look at how we generate income. For some that might mean working longer, for others it is value adding – creating, buying and selling assets in some form, whether that is business, innovation, or through more traditional assets such as property or financial products.
Superannuation the size of a nation
Australia currently has the fourth largest pool of retirement assets in the world, with total superannuation balances projected to grow from 116% of GDP in 2022-23 to around 218% by 2062-63. Our superannuation system will be what underwrites retirement for most Australians. At present, around 70% of people over aged pension age receive some form of Government income support. Over time, and as our superannuation system matures, this percentage is expected to decline sharply as a percentage of GDP with Government support supplementing rather than providing for retirement (the first generation of workers with superannuation guarantee throughout their working life hit retirement age around 2058).
However, the IGR points out that, “the cost of superannuation concessions will increase, driven by earnings on the larger superannuation balances held by Australians.” The proposed tax on future earnings on super balances above $3m may not be the last.
You can expect the management of superannuation to be a priority for Government to ensure that retirement savings are maximised to reduce the reliance on Government support, and to ensure that this enormous pool is leveraged for the gain of not only members, but the nation.
Growth of services
Like most advanced economies, global competition has shifted Australia’s industrial base from the production of goods to services. Ninety percent of jobs are now in services.
With an ageing population, demand for health and care services is expected to soar. People aged 65 or older currently account for around 40% of total Australian health expenditure, despite being about 16% of the population. The IGR estimates that the workforce required to support this sector will need to be twice the size of what it is now to meet demand by 2049-50.
The Government’s biggest spending pressures will be health, aged care, the NDIS, defence and interest payments on government debt. Of these, the NDIS is the fastest growing at 7% per year.
The role of technology
The speed of technological change is difficult to predict, and the IGR doesn’t attempt to make predictions. But what we do know is that technology has had a transformational impact on labour productivity (the value of output of goods and services produced per hour of work). Over the last 30 years, labour productivity has accounted for around 70% of the growth in Australia’s real gross national income. But, tempering this is a slowing of labour productivity growth since the mid-2000s.
We know technological disruption is coming and the debate about the role of artificial intelligence is only just beginning. We also know that unless technology is accessible, our future will be one polarised by those who have and have not benefited from technological change.
Climate change transformation
There are two key aspects to climate change; the cost of rising temperatures, and the opportunity created by the shift to renewable energy.
Temperatures are anticipated to increase by 1.5 degrees before 2100, potentially before 2040.
From 1960 to 2018, climate disasters reduced annual labour productivity in the year they occurred by about 0.5% in advanced economies. However, for severe climate disasters labour productivity is estimated to be around 7% lower after three years. With rising temperatures, floods, bushfires and other extreme weather events are expected to increase in frequency and severity. The impact of climate change spelt out in the report is sobering with disruptions and changing patterns impacting agriculture, tourism, recreation and industries that rely on labour intensive outdoor work.
On the positive side, Australia could benefit from new “green” industries, such as hydrogen and other clean energy exports, critical minerals and green metals. It is also likely to drive new, innovative ideas as businesses invest in and develop low emissions technologies, providing a source of future productivity growth in a more sustainable economy. Australia’s potential to generate renewable energy more cheaply than many countries could also reduce costs for both new and traditional sectors, relative to the costs faced by other countries.
Australia relies on open international markets. Trade disputes and military conflicts pose an external threat to Australia’s economy and well being. While the IGR cannot predict the nature of geopolitical events, it notes the importance of investing in national security, presumably this includes cybersecurity, ensuring access to international markets, and deepening regional partnerships to reduce supply chain vulnerabilities.
What a difference timing makes. A recent case before the Administrative Appeals Tribunal (AAT) is a reminder about the tax impact of the timing of employment income.
In this case, the taxpayer was a non-resident working in Kuwait. As part of his work, he was entitled to a ‘milestone bonus’ but, the employer was not in a position to pay the bonus at the time.
When the job ended, the taxpayer moved to Australia and became a resident. Once in Australia, the former employer honoured the performance bonus and paid it as a series of instalments.
The dispute between the ATO and the taxpayer started when the Commissioner issued amended assessments taxing the bonus payments received.
The dispute focused on when the bonus was derived. Had the bonus been derived while the taxpayer was still a non-resident then it would not have been taxed in Australia. This is because non-residents are normally only taxed in Australia on Australian sourced income. Employment income is typically sourced in the place where the work is performed (although there can be exceptions to this).
Australian tax case law says that employment income is normally derived on receipt. In the taxpayer’s case, this was when he received the payments from his former employer, not when he became entitled to the bonus. Because the taxpayer received the bonus when he was a tax resident of Australia, the bonus was subject to tax.
The difference for the taxpayer was quite dramatic. Had he been paid the bonus when it was due, he would have paid no tax as Kuwait does not impose income tax.
Please call us if you are concerned about tax residency or managing overseas income.
Economic uncertainty is an ongoing worry for any business owner.
You can control your own financial management, but you don’t have any direct control over the wider macro-economy. And in the first few years of the 2020s, there have certainly been plenty of tricky ups and downs for your business to navigate.
Current economic uncertainty stems from a number of factors, including:
- Fluctuating markets
- Geopolitical tensions
- Pandemic recovery
- The impact of climate change.
This unpredictability poses significant challenges for sustained growth and stability – but there are simple steps you can take to react to these challenges.
Simple strategies for overcoming the challenges of economic uncertainty
Good financial management is the key to riding any period of economic uncertainty. When sales, revenues, supplier prices and operational costs are all highly dynamic, it’s good to know that your business has cash in the bank and a solid financial strategy to stick to.
But how do you get tighter control over your business finances? And what are the main areas to focus on, track and manage as a business owner or financial director (FD)?
Here are five straightforward ways to tackle economic uncertainty:
- Manage your cashflow effectively – cashflow management is the process of tracking your cash inflows and outflows, identifying potential problems and being proactive about taking action. It’s helped by running regular cashflow forecasts and sticking to budgets.
- Carry out spend management – spend management involves tracking your expenses and identifying areas where you can cut costs. You do this by switching to more cost effective suppliers, cutting back unnecessary expenses and having tighter approval processes.
- Negotiate better terms and prices with suppliers – negotiation can help you save money on your raw materials, labour and other important costs. You can also negotiate better payment and credit terms by building trusted relationships with your suppliers.
- Embrace AI automation to cut costs – artificial intelligence (AI) tools are a great way to automate tasks, such as customer service, billing and inventory management. This frees up time for strategic activities and saves you money on labour costs.
- Diversify into new products or markets – diversification helps you reduce your dependence on a single product or market, making your business more resilient to economic downturns. It’s important to choose products or mark
Talk to us about strengthening your financial management
With the world in such an unstable state, it’s always difficult to know exactly what lies around the corner for your business. But it’s safe to say that with a robust and agile financial strategy, you’re in a better position to flex your revenue streams and overcome any cashflow pitfalls.
As your adviser, we’ll help you get tighter control over your cashflow, budgeting and financial forecasting – giving you the numbers you need to navigate uncertain times.