Demographic and Social Change:
Implications for Education Funding.
Part IV
Social Expenditures
Health expenditures
Social security and welfare expenditures
Labour and employment expenditures
Total social expenditures
An ageing population and greater private funding appear
quite compelling reasons for the projected decline in government education
expenditures and, in particular, higher education expenditures to the Year
2021. However, it is not sufficient to view education funding in isolation
from all the other calls on resources that the community may wish to make.
Indeed, technical change and changes in tastes and preferences are
pervasive influences on the structure of the economy and government
spending. In this view of the world, the demand for education resources
competes with many other claims on resources. Thus the size and role of
the education sector by the Year 2021 will be the end result of the
interplay of much broader forces.
The aim of the present section is to briefly outline some
key trends in other social expenditures. Social expenditures generally
refer to those items of expenditure that appear to have a varying impact
on different age groups. For example, education expenditures directly
benefit mainly younger persons. On the other hand, old age pensions, as
the name implies, benefit older persons.
The health sector is currently not much larger than the
education sector; in 1995-96 it accounted for about 8 per cent of GDP.
However, the health sector is a key area because health costs are
increasing more rapidly than any other area of social expenditure. Changes
in medical technology, treatments and the like, particularly in areas such
as pharmaceuticals and diagnostic testing, are leading to rapidly
escalating costs in addition to the effects of an aging population.
In an environment of rapidly increasing health costs it is
difficult to make sensible projections about longer term changes in health
expenditures. Current trends are clearly difficult to sustain in the
absence of changes in community attitudes in support of higher health
expenditures. The task therefore is to show possible pressures on the
basis of pre-existing trends. This will enable judgements to be made about
possible orders of magnitude of changes in the health sector relative to
other areas of social expenditure or indeed any other expenditure.
We assume in a base case scenario that per capita health
costs for each age group increase by 2 per cent per annum[1]. This compares with the assumption in the base case
scenario that all other education and welfare expenditures rise in line
with growth in living standards (of around 1 – 1 ¼ per cent per annum).
The 1996 Budget measures have temporarily curbed the growth
of health expenditures as shown by Figure 18 below. Beyond the forward
estimates, however, health expenditures are projected to increase from 8.1
per cent of GDP in 2000-01 to 11.1 per cent of GDP by the Year 2021, an
increase of 3 percentage points in the space of 20 years. That this
scenario is not altogether unrealistic is supported by the fact that the
share of health is already almost 10 per cent of GDP in several European
countries and 14 ½ per cent in the United States.
Figure 18:
Social expenditures as a percentage of GDP, 1995-96 to 2020-21
Social security and welfare expenditures largely comprise
transfer payments to beneficiaries. They presently represent just under 10
per cent of GDP. Age and service pensions and family payments comprise the
bulk of social security outlays and these are principally borne by the
Commonwealth Government. Transfers to the unemployed and disabled persons
are of lesser magnitude but nevertheless are quite sizeable, about $6-7
billion in each case.
Reduced entitlements following as a result of 1996 Budget
measures largely account for lower social security expenditures over the
forward estimates period. These expenditures are projected to fall to 8.7
per cent of GDP by 2000-01.
Under the base case scenario it can be seen that the ageing
of the population is projected to lead to social security expenditures
increasing by ½ a percentage point to the Year 2021 as shown by Figure 18
above. The ageing population and growth in age and service pensions is
anticipated to more than offset relatively lower family payments.
We used projections by the Retirement Income Modelling Task
Force (RIM, 1997), which show that age pension outlays are expected to
rise by 0.7 percentage points to 3.7 per cent of GDP to the Year 2021. The
RIM projections make allowance for factors such as the Superannuation
Guarantee, changes to preservation arrangements and changes in labour
force participation and so on. These factors all influence earnings,
superannuation and therefore age pension entitlements over the longer
term.
The Commonwealth Government announced a fundamentally
different approach to the delivery of labour market services in the 1996
Budget that resulted in major changes to labour market programmes. As a
result, public labour market and employment expenditures are projected to
almost halve in size as a share of GDP over the forward estimates period.
Beyond the forward estimates labour and employment
expenditures are projected to decline marginally as a share of GDP from
0.38 per cent in 2000-01 to 0.35 per cent to the Year 2021. As shown by
Figure 18, labour and employment expenditures account for a relatively
small share of social expenditures.
The 1996 Budget measures are expected to lead to a sizeable
reduction in all areas of social expenditure and in combination, as a
share of GDP, they are expected to fall from 24.6 per cent in 1995-96 to
22.9 per cent by 2000-01. Interestingly, social expenditures as a share of
GDP are projected to regain 1995-96 levels by the Year 2016. Then by the
end of the projection period social expenditures are projected to increase
to 25.7 per cent of GDP by the Year 2021. Thus in one sense the 1996
Budget measures negate the impact of the ageing population for the next
twenty years.
The key factors driving longer term movements in social
expenditures are the ageing population, and its impact on health and age
pension expenditures, and also rapidly increasing health care costs. As
Figure 18 shows, the health care sector represents the major source of
expansion in social expenditures over the longer term. Finally, increasing
health and welfare costs are projected to more than fully offset the
impact of diminishing education and labour market expenditures beyond the
forward estimates period.
[1] Australian Institute of
Health and Welfare, Health
Expenditure Bulletin, No. 12, December 1996.
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