“Clearly you can’t take that much money out of the system and it not have an impact,” the body’s chief executive Sean Rooney said.
“Government subsidies, including annual funding indexation, have also not kept pace with rising operating costs.”
Mr Morrison said there was a “disturbing trend” of non-compliance, abuse and failures in the sector and a Royal Commission would reveal the extent of these problems.
“I think we should brace ourselves for some pretty bruising information about the way our loved ones, some of them, have experienced some real mistreatment," he said.
"I think that will be tough for some of us to deal with, but you can't walk past it.”
Labor’s shadow minister for ageing, Julie Collins, said while she supported the Royal Commission, Mr Morrison had cut almost $2 billion from the sector during his first year as treasurer.
“We want to make sure that it looks at the impact of these cuts and it looks at future funding and sustainability of the sector as well as workforce issues around the sector.”
The terms of reference will be finalised in the next few weeks, with the Commission to begin its work before the election. It will run until at least the second half of next year.
It will look at the quality of care provided to older Australians, the challenges of providing care to people with a disability, particularly young people, in aged care, the rise of dementia and the system's ability to cater to an ageing population.
Despite revelations of exploitation of the elderly in retirement villages, Mr Morrison indicated this is a state responsibility and would not be a focus of the Commission.
The announcement came after Aged Care Minister Ken Wyatt told an upcoming Four Corners investigation into aged care, which will air on Monday, that he would prefer to spend money on frontline services instead of a Royal Commission.
On Sunday, he said he'd changed his mind.
Monash University professor Joe Ibrahim, who heads the Health Law and Aging Research Unit and recently completed a large study on preventable deaths in aged care, said there’d be no need for a Royal Commission if people had acted on information unearthed during numerous inquiries.
“We have ended up with a Royal Commission because no one has acted for 10 years,” he said. “There have been numerous inquiries with little action - there have been at least six in the past 18 months.”
He hopes a Royal Commission leads to greater accountability in the sector, including public data on suicides, resident-to-resident aggression, sexual assault and unexplained absences.
“The problem in aged care is we don't know what is going on,” he said.
“Investigative reporting is the reason the Royal Commission has come about - the series in The Age last year and Four Corners. That is what has led to change.”
Gary Mason, a former senior ANZ auditor whose wife died in a nursing home two years ago, said the Royal Commission must examine the finances of for-profit aged care providers.
“The disparity between the salary of executives and the meagre salaries paid to the frontline staff is enormous,” he said.
He also called for an overhaul of accreditation standards, saying that providers were currently accredited based on how well they kept computer records, rather than the quality of care they provided.
“The standards should relate to care: how often people in rooms are visited and changed.”