Australia faces a major challenge of an ageing population, made worse by the lingering effects of the COVID-19 pandemic, Josh Frydenberg has warned.
Releasing the 2021 Intergenerational Report, the treasurer said the economy will be smaller and the population will be older than it otherwise would have been with flow-on implications for economic and fiscal outcomes.
The report shows Australia faces 40 years of budget deficits, relative high levels of debt and slower economic growth than had been previously experienced.
"The fact that we are living longer is to be welcomed but the impacts on our economy and our budget are profound," Mr Frydenberg said, launching the report at a Committee for Economic Development of Australia event on Monday.
The five-yearly IGR provides a guide to how the economy will look over the next 40 years and what it means for the budget.
It is the fifth in the series, which was first introduced by former Liberal treasurer Peter Costello in 2002.
"The IGR does not give us a fixed picture of our fate," Mr Frydenberg said.
"Instead it provides us with guard rails to help guide for future government decisions. To set us up for tomorrow, as we tackle the challenges of today."
Mr Frydenberg expects the economy to grow by an average annual rate of 2.6 per cent from 2020/21 to 2060/61, 0.4 percentage points lower than the past 40 years.
Australia's population is expected to grow to 38.8 million by 2060/61.
In the last IGR released by former Liberal treasurer Joe Hockey in 2015, the population was projected to hit almost 40 million by 2054/55.
"This is the first time there has been a downward revision of the long-term population projections in an Intergenerational Report," Mr Frydenberg said.
"This means the economy will be smaller and Australia's population will be older than it otherwise would have been, with flow-on implications for our economic and fiscal outcomes."
By 2060/61, for each person aged over 65, there will be only 2.7 people working, compared with four people now and 6.6 people in 1981/82.
"This makes it more important than ever to make careful and informed choices about our migration settings as international borders reopen," Mr Frydenberg said
"With fertility rates falling migrants will continue to be our largest source of population growth."
As such, he said the composition of the migration program has to be well targeted and skills focused so it can supplement the stock of working-age people and slow the transition to an older population.
He said economic growth will continue to be highly dependent on productivity gains and a vital ingredient in lifting long term living standards and wages.
"Growing the economy is Australia's pathway to budget repair, not higher taxes or austerity," he said.
He earlier pledged on ABC radio to fully fund the NDIS, while noting health and education spending was also at record highs.
"That's not to say Australia doesn't continue to make important reforms to grow our economy. That's the key for our prosperity and that's underlined in this report," he said.
"We want to continue to pursue reforms that encourage more investment by business, improve the provision of skills across the country and also ensure a more flexible workplace."
Mr Frydenberg wants to revisit some of the government's industrial relations reforms rejected by parliament.
