Australia's first Intergenerational Report 2002-2003 (The Department of the Treasury, 2002) provides a basis for considering the Commonwealth's fiscal outlook over the long term and identifies emerging pressures. Health expenditure was projected to be a source of very significant future spending pressure, with spending on health projected to increase from about 4 per cent of GDP in 2001-2002 to about 8 per cent in 2041-2042. The pharmaceutical benefits scheme was projected to be the fastest growing component, increasing about five-fold as a percentage of GDP. Technological change and increased use and cost of services were found to be the main drivers of Commonwealth health spending, with population growth and ageing being much less significant drivers of growth. Projections are presented for the main components of health spending and the sensitivity of the projections to demographic and other assumptions is assessed.