Australia is heading towards a dramatic demographic shift, with deaths projected to outnumber births by the 2060s as fertility rates continue to fall and the population ages, meaning net migration would become the country's only source of population growth.

Treasurer Jim Chalmers said migration would remain important as Australia confronts a shrinking share of younger people and a rapidly ageing population.

'Despite these pressures, we're better placed than many others. Migration will play a role here too, an important source of skills that complements our domestic workforce.'

The report said new migrants arrive with a median age of 26, compared with 38 for Australia's resident population.

Australia's population is still projected to grow, but at a much slower rate, reaching 39.3 million by 2065–66.

'Deaths are projected to outnumber births by the 2060s – the first time this has been forecast in an IGR – at which point natural increase will no longer be a driver of population growth,' the report states.

While many advanced economies, including Japan, South Korea and Germany, have already reached that milestone, it would mark a significant turning point for Australia.

The fertility rate is projected to fall from its current level of 1.48 babies per woman to 1.34 by 2065–66.

Australians aged under 20 are now projected to increase by just 10.4 per cent by the early 2060s, compared with the almost 28 per cent increase forecast in the 2023 report.

At the same time, the number of Australians aged 85 and older is expected to triple over the next 40 years.

Chalmers said Australians living longer was overwhelmingly positive despite the additional pressure it would place on the federal budget.

'Australians living longer and healthier lives is obviously overwhelmingly a good thing,' he said.

'It's welcome recognition of the quality of our universal healthcare and the contribution that older people make, and it's worth every dollar of extra pressure that it puts on our budgets.'

The ageing population is expected to place increasing pressure on public finances as demand for hospitals, aged care, disability support and other health services rises.

Federal government payments are forecast to climb to 27.7 per cent of GDP over the next four decades, with population ageing identified as one of the key drivers of higher spending.

Chalmers said one-third of all additional health spending over the next four decades would be driven by ageing alone.

Treasury now expects population growth to average 0.9 per cent a year over the next 40 years, down from the 1.1 per cent projected in the 2023 Intergenerational Report and below the 1.4 per cent average recorded over the past four decades.

Chalmers took a veiled swipe at Pauline Hanson as he spoke about the report.

'Of course the findings and forecasts in this Report will challenge us and some of them in confronting ways,' he said.

'And of course much of it will be weaponised by those who always see things through a more pessimistic and often more political lens.

'If people are unmoored economically, generationally, they feel disconnected from and disregarded in our politics. At worst, that's what we're seeing now. At best, it's what's at stake.

'Accelerating change is putting more pressure on people. It's eroding trust in the institutions of democracy. It's exacerbating the strain felt by younger Australians and younger generations in particular.

And so the division in politics now is not between those who accept all of this and those who don't. It's between those who prey on it, and pick at it, and politicise it, and catastrophise it, and those who seek to alleviate it.'

He also suggested extending political terms could help governments focus more on long-term challenges. 

'So much of the incentive in our political system encourages people to think in shorter and shorter term ways, in shorter and shorter term cycles,' he said.

The Treasurer said Australia's future prosperity would increasingly depend on emerging industries as the economy adapts to an older population and changing global demand.

He added that renewable energy, critical minerals and AI-powered industries would become increasingly important sources of growth.