Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
These demographic pressures are likely to be reflected in the form of increasing
demand for many public services. The Government’s capacity to respond to these
demands may also be constrained by slowing revenue growth. A decline in the
proportion of children will only partially offset the fiscal effects.
The Commonwealth’s recently released Intergenerational Report (Commonwealth
Government 2002b) highlights the budget pressures facing the Commonwealth
Government in coming decades. For the Commonwealth, the gap between spending
and revenue from the demographic change is projected to grow to 5 per cent of gross
domestic product or around $87 billion in real terms by 2041–42. Most of this increase
will be in the area of health care, where the Pharmaceutical Benefits Scheme accounts
for over half of the gap. The age and service pensions will also show sharp increases.
However, focusing too narrowly on the Intergenerational Report’s headline figures can
obscure a number of features relevant to reform of Commonwealth–State financial
relations.
(1) The Intergenerational Report projects that the Commonwealth’s
demographically-driven spending will fall by 0.6 per cent of gross domestic
product, or around $5 billion in real terms, by 2006–07. It is not until 2017–18 that
the demographic change will have a net negative impact on Commonwealth
finances. Consequently, there is a long lead-time before the impacts highlighted in
the Intergenerational Report begin to affect the Commonwealth adversely. This
provides time to implement more robust fiscal arrangements in Commonwealth–
State funding, which can contribute to an appropriate policy response to
demographic change.
(2) Most of the pressure on Commonwealth health care spending arises not from
demographic change, but from non-demographic factors such as new technology
and increased use and costs of services. This is particularly the case with the
Pharmaceutical Benefits Scheme, which has carried sharp cost increases in
recent years. However, unlike demographic change, the long-term financial
impacts of non-demographic factors (e.g. new technology) are highly speculative.
Simple extrapolation of current trends can be misleading, particularly when a
small change in the model assumptions can produce a significant change in the
projection of the long-term impact. 13 The sensitivity of the fiscal position to
uncertain future movements of non-demographic factors suggests the need to
manage this risk in the relevant Government programs, rather than to respond
now as if the projected outcomes were certain to occur.
(3) While the ageing of the community will slow economic growth, the living standards
of Australians are likely to be significantly higher in 2042 than they are now. For
example, Guest and McDonald estimate that living standards will be 76 per cent
higher in 2042 than they are now. The community will have growing capacity to
fund increased health care and other services either privately or publicly through
Governments, raising the possibility of adopting new funding models for these
services – possibly involving building up resources through some form of prefunding.
All Australian Governments, not just the Commonwealth, will face pressures resulting
from demographic and other developments, although these pressures will manifest
themselves in different ways.
13
For example, changing the real non-demographic growth by 0.5 percentage points (e.g. from 2.5 to 3.0) changes
the projected value of Commonwealth health spending in 2041–42 by 2.0 percentage points of gross domestic
product (Commonwealth Government 2002b p. 40).
FINAL REPORT [188]