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Australia has an ageing population, with the proportion of people aged 65 and over expected to more than double over the next few decades. This situation will affect Australia's long term economic prospects. This draft research report responds to an Australian Government request for the Productivity Commission to examine the productivity, labour supply and fiscal implications of likely demographic trends over the next 40 years. The report has been prepared for further public consultation and input, and the Productivity Commission will submit its final report to the Treasurer and the Council of Australian Governments in March 2005. The study complements but updates and builds on the Australian Treasury's Intergenerational Report published in 2002 (indexed at TD/TNC 69.85). A key distinguishing feature is that it includes detailed projections for the States and Territories. Key points from the report are that: population ageing will give rise to economic and fiscal impacts that pose significant policy challenges; as more people shift into older age groups, overall labour force participation rates are expected to drop; falling participation and average hours worked will slow Australia’s labour supply growth, in spite of a projected decline in unemployment rates; based on the average labour productivity performance of the past three decades, gross domestic product (GDP) growth per capita will drop to around half its present level by the mid 2020s although this could be improved with a sustained increase in productivity; the major source of budgetary pressure will be health care costs; fiscal gaps opened by ageing are mostly expected to fall on the Commonwealth government, but there are significant burdens on State and Territory governments; it will be important to improve productivity and achieve more cost-effective services provision, particularly in health care.