Australia’s 40-year economic outlook rests on a productivity rebound that may never arrive. Without it, governments face bigger deficits and harder choices about funding the services Australians need.

The main purpose of the Intergenerational Report (IGR) is to consider the longer-term economic and fiscal challenges facing the government budget over the next 40 years.

The economic projections underpinning the IGR are based on Treasury’s assessment of the outlook for population growth, labour force participation and productivity, while the budget projections reflect Treasury’s assessment of the financial implications if the government’s present policies are maintained.

On this basis the key assumptions underpinning the recently released IGR are:

Population growth is expected to be 0.9 per cent per year over the next 40 years, down from 1.4 per cent over the past 40 years.

The population is expected to age, with the number of Australians aged 65 and over almost doubling, and fertility gradually declining to 1.34 children by 2065-66. Population growth will therefore be almost entirely dependent on net overseas migration, which is assumed to be 235,000 per year over the long run.

Labour force participation is projected to continue to rise, but more slowly than in the past, reflecting increases among women and older Australians.

The long-run increase in productivity is assumed to be 1.2 per cent per year – the same as the previous IGR in 2023. The main justification is the adoption of AI and Australia’s cost advantage in producing and using renewable energy.

Based on these assumptions, real GDP is projected to grow at an average annual rate of 2 per cent over the next 40 years, lower than the average of 3 per cent over the past 40 years. Nevertheless, by the end of the IGR projections, the real Australian economy is projected to be more than twice the size and living standards to be 55 per cent higher than today.

However, the budget would remain in deficit throughout the next 40 years, with the deficit falling to 0.3 per cent of GDP in 2036-37 before increasing again to 1.8 per cent of GDP in 2065-66. Gross government debt is projected to........

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