Inflation remains stubbornly high and drives up costs of living dramatically. This forces the Reserve Bank of Australia to keep raising interest rates.

Economists calling for significant government spending cuts rightfully argue that reducing public demand would take significant pressure off inflation and thereby lower interest rates.  

As a demographer, I naturally want to know much government can realistically cut under current and future demographic circumstances?

Let me spoil the column for you right away – Australia is demographically becoming more expensive to govern, regardless of who is in power. 

Not all populations cost the same 

Imagine you were the treasurer tasked with designing the ideal population for your federal budget. 

You would want as many healthy, highly educated, well-paid workers aged between 25 and 60 as possible.

These people pay lots of income tax, spend money in the economy, and generally require fewer taxpayer-funded services than children or elderly Australians.

You would want high workforce participation, low unemployment, and few people relying on welfare payments.

For each individual budget, you would prefer few children needing education and few elderly residents requiring expensive care. 

From a purely fiscal perspective, this would be close to the perfect population. 

Of course, such a society couldn’t survive for long. Today’s children become tomorrow’s taxpayers, while today’s taxpayers become tomorrow’s pensioners. 

Still, this simple thought experiment helps us understand why some demographic profiles make balancing a government budget easier than others.

Not all populations bring the same revenue 

The other half of the equation concerns government’s ability to raise revenue. 

A prosperous population with strong employment generates more tax revenue than a population characterised by low wages, unemployment and economic inactivity (see my NEET column). 

As a treasurer, you’d wish for a large tax-paying population – you, of course, hope to see mostly high-paying jobs so you can extract more income tax.

Further, you’d hope for low unemployment, super-high female workforce participation, high productivity, a migration system that takes in high-earners filling just the right skill gaps. Of course, you also want people to retire at a very advanced age.  

The ideal fiscal demographic profile combines strong tax revenue with relatively modest spending obligations. 

And this brings us to Australia’s changing demographic fortunes. 

The demographic sweet spot of 2006 

In 2006, Australia was close to enjoying such a sweet spot. 

The Howard government was running substantial budget........

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