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Appendix B: Sensitivity analysis of long–run economic and spending projections

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Projections in this report have been developed using a range of assumptions. These assumptions are detailed in Table B.1. There are significant uncertainties around these assumptions. As such, this report should not be viewed as a forecast.

This appendix contains analysis of how variations to assumptions related to population, participation and productivity may impact on the proposed policy projections. The results show that the proposed policy results are robust to variations in underlying assumptions.

Table B.1 Assumptions underlying sensitivity analysis
  Lower Proposed policy Higher
Economic      
Total labour force participation rate (15+) (%) 61.5 (a) 62.4 63.3 (b)
Unemployment rate (%) 4.0 5.0 6.0
Labour productivity growth (%) 1.4 1.5 1.6
Demographic      
Net migration (no. of people per year) 180,000 215,000 250,000
Fertility (total fertility rate) 1.7 1.9 2.1
Life expectancy at birth (years)      
Males in 2054-55 84.7 (c) 88.1 90.7 (d)
Females in 2054-55 87.9 (c) 90.6 92.6 (d)

(a) The lower labour force participation sensitivity assumes that total participation decreases by 1.5 per cent by 2054–55 which is factored in from 2018–19 across all age and gender groups.

(b) The higher labour force participation sensitivity assumes that total participation increases by 1.5 per cent by 2054–55 which is factored in from 2018–19 across all age and gender groups.

(c) Lower life expectancy uses the ABS's Medium Series which assumes that male and female life expectancy increases from 2009–2011 levels by 0.25 and 0.19 years per year respectively, until 2015–16 and then increases at declining rates. Life expectancy figures are calculated using the period method reflecting ABS figures.

(d) High life expectancy uses the ABS's High Series which assumes that male and female life expectancy increases from 2009–2011 levels by 0.25 and 0.19 years per year respectively until 2054–55. Life expectancy figures are calculated using the period method reflecting ABS figures.

Source: Treasury projections.

Table B.2 Sensitivity analysis results
  Proposed policy in 2054-55 Participation Unemployment Productivity
    Low High Low High Low High
Economic              
Real GDP (growth rate)(a) 2.78 -0.04 0.04 0.03 -0.03 -0.10 0.10
Real GDP per person (growth rate)(a) 1.48 -0.04 0.04 0.03 -0.03 -0.10 0.10
Real GDP per person(b) $121,900 -$1,800 $1,800 $1,300 -$1,300 -$4,300 $4,500
Real GNI (growth rate)(a) 2.74 -0.04 0.04 0.03 -0.03 -0.10 0.10
Real GNI per person (growth rate)(a) 1.43 -0.04 0.04 0.03 -0.03 -0.10 0.10
Real GNI per person(b) $117,300 -$1,800 $1,800 $1,300 -$1,300 -$4,300 $4,500
Labour force participation(c) 62.4 -0.93 0.93 0.00 0.00 0.00 0.00
Labour force size(d) 20,340,000 -1.48 1.48 0.00 0.00 0.00 0.00
Dependency ratio(e) 2.7 0.00 0.00 0.00 0.00 0.00 0.00
Spending (per cent of GDP)(c)              
Health 5.5 0.06 -0.06 -0.05 0.05 0.14 -0.14
Aged care 1.7 0.02 -0.02 -0.02 0.02 0.07 -0.07
Age and Service Pensions 2.7 0.05 -0.05 -0.03 0.03 0.03 -0.03
Payments to individuals 3.2 0.04 -0.04 -0.10 0.10 0.07 -0.07
Education 1.0 0.02 -0.01 -0.01 0.01 0.04 -0.04
  Proposed policy in 2054-55 Fertility  Life expectancy Migration
    Low High Low High Low High
Economic              
Real GDP (growth rate)(a) 2.78 -0.08 0.07 -0.02 0.01 -0.14 0.14
Real GDP per person (growth rate)(a) 1.48 0.04 -0.04 0.03 -0.02 -0.02 0.02
Real GDP per person(b) $121,900 $1,700 -$1,700 $1,300 -$1,200 -$900 $1,100
Real GNI (growth rate)(a) 2.74 -0.08 0.08 -0.02 0.01 -0.15 0.15
Real GNI per person (growth rate)(a) 1.43 0.03 -0.03 0.03 -0.02 -0.03 0.03
Real GNI per person(b) $117,300 $1,500 -$1,500 $1,200 -$1,100 -$1,200 $1,300
Labour force participation(c) 62.4 -0.34 0.32 0.86 -0.73 -0.58 0.61
Labour force size(d) 20,340,000 -3.07 3.08 -0.79 0.25 -5.28 5.42
Dependency ratio(e) 2.7 -0.09 0.09 0.18 -0.13 -0.12 0.11
Spending (per cent of GDP)(c)              
Health 5.5 -0.03 0.01 -0.14 0.15 0.02 -0.05
Aged care 1.7 0.05 -0.05 -0.11 0.10 0.08 -0.08
Age and Service Pensions 2.7 0.08 -0.08 -0.19 0.19 0.03 -0.12
Payments to individuals 3.2 -0.05 0.05 0.01 0.00 -0.02 -0.03
Education 1.0 -0.06 0.06 0.01 0.00 0.00 -0.02

(a) Represents the percentage point difference in the average annual growth rate for the period 2014–15 to 2054–55, compared to proposed policy.

(b) Represents the real dollar value difference in 2054–55 compared to proposed policy.

(c) Represents the percentage point change in 2054–55 compared to proposed policy.

(d) Represents the percentage change in the size of the labour force by 2054–55 compared to proposed policy.

(e) Represents the difference in the number of people aged 15–64 years to support people aged 65 years and above, compared to proposed policy.

Source: Treasury projections.

Table B.2 contains results of the sensitivity analysis. Lower unemployment, higher migration and higher labour force participation increase the proportion of the population in the workforce at a particular time. This generally leads to decreased government spending. Higher migration, for example, increases participation by 0.6 percentage points in 2054–55 compared to proposed policy. This results in lower spending as a per cent of GDP on Age and Service Pensions by around 0.12 percentage points in 2054–55.

Factors that increase participation also increase growth and incomes. For example, under the higher participation assumption, the annual average growth rates of real GDP per person and real GNI per person both increase by 0.04 points. This highlights that encouraging and valuing greater workforce participation, in particular amongst older age groups and females, presents an opportunity to further lift economic and income growth.

Higher fertility and life expectancy lead to lower levels of real GDP per person and real GNI per person. This is because the corresponding increases in the population are greater than the increases in real GDP and real GNI. Higher fertility and higher life expectancy lead to increases in government spending as a per cent of GDP because the oldest and youngest people in the population tend to participate less in the labour force and utilise more government support programs and services. Government spending on payments to individuals and education are concentrated on these two groups. Spending on aged care and Age and Service Pensions decreases as a per cent of GDP when fertility is higher because the older cohorts are a smaller proportion of the population. The full impact of higher fertility on the labour force is not seen within the 40-year projections due to the delay before the young reach working age.

Real GNI per person is affected the most by productivity. Whereas the sensitivity analysis of the other underlying assumptions projects increases and decreases in real GNI per person of between $1,100 and $1,800, higher productivity would lead to a projected increase of $4,500 and lower productivity would lead to a decrease of $4,300 (Chart B.1).

Variations in the growth of productivity have the most significant direct effect on the economy. For every 0.1 percentage point increase in the productivity assumption over the projection period, a corresponding change to real GNI per person of $4,500 would be projected. A 1.7 per cent productivity assumption would be expected to increase real GNI per person by $9,000 and likewise a productivity growth rate of 1.3 would be expected to decrease real GNI per person by $8,600 in 2054–55.

This sensitivity analysis highlights the importance of increasing productivity to driving income growth over the coming decades. If productivity growth slows then growth in living standards will be at risk. If productivity growth is lifted through economic reform then future growth in living standards can also be lifted substantially.


Chart B.1 Change in real GNI per person in 2054–55 compared with proposed policy

Real GNI per person is affected the most by productivity. Whereas varying other parameters would lead to projected increases and decreases in real GNI per person of between $1,100 and $1,800, higher productivity would lead to a projected increase of $4,500 and lower productivity would lead to a decrease of $4,300 in 2054-55.

Source: Treasury projections.

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