Growing demand for services like health care will steadily overtake the federal budget, according to a new report that raises questions about how Australia will pay for essential services in the future.

Over the next four decades, expenditure growth in just five areas is on track to subsume the nation’s finances, a new edition of Treasury’s Intergenerational Report to be published on Thursday finds.

The combined cost of healthcare, aged care, the National Disability Insurance Scheme, paying down debt and funding the defence force takes up one-third of the federal budget today.

By the 2063 financial year, they will take up half of all government spending, according to projections to be published in this week’s report, which outlines the long-term trends affecting the nation’s finances.

“The projected growth in spending reflects growing cost pressures and demand for public services as the population ages as well as improvements in the quality of care, including from new health technologies and treatments,” the report concludes.

The cost of Australia’s ageing population accounts for 40 per cent of the increase.

The future spending growth is equivalent to an additional $140 billion in costs in today’s dollars.

That is nearly three times the current $52 billion annual defence budget.

How to pay for it poses a difficult question for Treasurer Jim Chalmers and his successors and Australians who expect to rely on publicly funded services such as Medicare.

The budget is already in what economists call a structural deficit, which means the amount of money the government raises in taxes does not cover the cost of the services it delivers.

It’s a shortfall already equivalent to about 2 per cent of Australia’s economic output.

Funding additional need for services projected by the Treasury would require additional spending equivalent to another 5.6 percentage points of Australia’s gross domestic product.

Last year the Treasurer said he wanted to spark a national conversation about how Australians could continue to pay for essential services.

Last year, Treasury figures listed the revenue the government forgoes each year across various tax breaks, including $18.6 billion in negative gearing concessions for property investors. 

The report finds that the cost of paying the interest on government debt will double, from 0.7 per cent today to 1.4 per cent of GDP by the 2064 financial year.

“We’re getting the budget in much better nick, but what the Intergenerational Report reveals is after this year, the pressure on the budget intensifies,” Dr Chalmers said.

The Treasurer says the government has begun building fiscal buffers into the budget in anticipation of future trends.

It’s also trimmed superannuation concessions for people with balances over $3 million and expects to bring in more tax from multinational corporations and through changes to the Petroleum Resources Rent Tax.

The government has also improved the quality of its spending, says Finance Minister Katy Gallagher.

Maintaining it, she says, will take work.

“The (report) shows that the hard work must continue to keep the budget on a sustainable footing, while ensuring we deliver the services that Australians rely on every day,” Ms Gallagher said.