The Disability Support Pension (DSP) is an income support payment to individuals with permanent physical, intellectual or psychiatric impairments that prevent them from engaging in employment.  It is one of the largest programs of Australian government spending.  In 2016–17, DSP expenditure was $16.3 billion (10.6 per cent of social security spending) and there were around 760,000 DSP recipients.

Following the global financial crisis, DSP expenditure increased strongly, averaging 8.7 per cent annual real growth from 2008–09 to 2011–12.  More recently, growth has slowed significantly, with annual real growth averaging 0.2 per cent from 2012–13 to
2016–17.  DSP expenditure has fallen in nominal terms since 2014–15, and the ratio of recipients to the working-age population (15 to 64) has now returned to levels recorded in the late 1990s.

The main driver of the slowdown in DSP expenditure has been policy measures which have focussed on stemming the flow of people onto the payment.  In particular, new compliance and assessment measures, which applied from 1 January 2012, have led to a sharp decline in the number of people being assessed as being eligible for the payment.  This resulted in the share of applicants granted access to the DSP (known as the grant rate) falling from an average of 63 per cent from 2001–02 to 2010–11, to 43 per cent from 2011–12 to 2014–15. Correspondingly the number of new DSP recipients fell from a peak of 89,000 in 2009–10 to 32,000 in 2016–17.

Underlying these overall trends, the population of DSP recipients has also undergone a marked compositional shift.  The proportion of DSP recipients with physical impairments has declined and the proportion with psychiatric and intellectual impairments has increased.

In 2001–02, recipients with musculoskeletal conditions accounted for around 40 per cent of new DSP recipients.  This fell to 11 per cent in 2016–17.  Over the same time period, the share of new recipients with psychological conditions increased from 25 per cent to 33 per cent, and the share with intellectual conditions increased from 6 per cent to 17 per cent.

Taking these historical trends into account, we have significantly revised down the PBO medium-term projections for DSP expenditure.  Our current projections for expenditure in 2027–28 are $4.8 billion lower than our 2017–18 Budget projections.  Over the medium term, we are projecting that DSP expenditure will average 1.0 per cent annual real growth, which would see recipients as a proportion of the working‑age population continue to drift lower.

The PBO’s projection incorporates the 2017–18 Mid-Year Economic and Fiscal Outlook estimates up to 2020–21, which imply a significant rebound in new DSP recipients.  The limited historical experience following the introduction of new compliance and assessment measures, makes interpreting the recent few years challenging.  Given this uncertainty, the PBO has analysed a number of scenarios with alternative recipient projections to determine our medium-term projections.  These scenarios suggest there are further downside risks to the DSP expenditure projections.

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