Inside Story

Two intergenerational reports for the price of one is no bargain

A serious message has been swamped by politics in this latest attempt to model the next forty years, argues Tim Colebatch in Canberra

Tim Colebatch 5 March 2015 1748 words

Lost opportunity: treasurer Joe Hockey talks to journalist about the federal government’s Intergenerational Report 2015, released by the government this week. Lukas Coch/AAP Image

The latest Intergenerational Report is two reports in one. It is partly a serious exercise in trying to anticipate future pressures on the federal budget. And it is partly a political stunt that tries to blame the budget’s problems on Labor and the Senate.

Launching it on Thursday in avuncular mode, treasurer Joe Hockey declared the report “a call to arms in relation to reform… We need a conversation with the Australian people, and this is a conversation that the nation wants to have.”

Well, maybe; I for one hope we do have it. But, Joe, if you put a politically partisan message and an economically responsible message in the same document, you know which is going to get more airplay.

We would have a more fruitful conversation had the report stuck solely to its serious message, because it raises real issues that the partisan side of the report will swamp in the usual bickering. Instead of getting unity behind a common purpose of reform, we will get nowhere.

That’s a shame. Hockey promised us that some of the numbers here would make us fall off our chairs, and to my mind, some really are stunning. Here are three:

• On assumptions that seem to me reasonable, the report projects that the average baby boy born in 2055 will live to be ninety-five, and the average girl will live to be ninety-seven. That would mean that future generations will still have a third of their lives ahead when they turn sixty-five – our current retirement age.

• On equally reasonable assumptions, it projects that by 2055 almost two million Australians, or 5 per cent of the population, will be aged eighty-five and over – with 40,000 of them over one hundred.

• Healthcare data shows that Australian men aged eighty-five and over account for thirteen times more hospital spending per person than those in their twenties, twenty times more spending on pharmaceuticals, and eight times more medical benefits.

Can you see what all that implies for the budget? I hope so.

The report is subtitled “Australia in 2055,” but that’s a misnomer. It is really a modelling exercise to try to estimate the future course of the Commonwealth budget over the next forty years to 2055, on assumptions supplied by the government.

Its real focus, like that of the previous three IGRs (2002, 2007 and 2010) is on the budget costs of an ageing population. It ignores many other issues Australians care about: home ownership is not mentioned, global warming gets perfunctory treatment. The revenue side of the budget is ignored, apart from a crucial assumption that Commonwealth taxes will not rise above 23.9 per cent of GDP – their average level between 2000 and 2008, before the global financial crisis.

Remember that assumption when you see or hear the scary headlines produced by Treasury’s modelling: that under what the report coyly calls the “previous policy,” net debt by 2055 would be 122 per cent of GDP – $5.6 trillion in today’s money; or that even after the spending cuts the Coalition has so far got through the Senate, the debt would be 60 per cent of GDP, or $2.6 trillion.

The annual deficits in 2054–55 would be $533 billion in the first scenario, and $267 billion in the second. Yet the IGR assumes that every government in the next forty years will take no action to address them, but on the contrary, will keep cutting taxes so tax revenues do not top 23.9 per cent of GDP!

There are serious issues in the report, but this modelling is not serious analysis. It is based on a false assumption, and hence comes up with false answers.

In truth, none of us, including Treasury, has any idea what the budget will look like in 2055. The report contains valuable information and analysis that makes it worth reading. But any forecast is only as good as the assumptions on which it is based, and the key features of the future are unknown.

Suppose Treasury had set out in 1975 to model the budget in 2015. It would have had no idea what lay ahead: the internet, the rise of China, the rise of India and Indonesia, Australia’s free-market reforms, the slow death of Australian manufacturing, the spread of middle-class welfare. Any numbers it came up with would have been worthless.

With great respect to the Treasury team, the numbers in this IGR are likewise worthless. Their central assumption of fixed tax revenues is nonsense. And the dynamics mean that deficits add to debt, which then adds to deficits, so the nonsense then infects all its bottom-line numbers.

If the budget is stuck in deficit, why wouldn’t taxes rise, as they have in the past? In 1974–75, Commonwealth taxes made up 19.9 per cent of GDP. This report’s goal is for them to raise about 23.9 per cent of GDP. In 2055, as an ageing population increases demands on the budget, it is plausible that voters would rather have taxes at 27.9 per cent of GDP than to do without the health, pensions and aged care services that older people need.

One more point to remember about the scary numbers: that “previous policy” scenario is not based on the budget as Labor left it, although Hockey would like you to think so. It is based on the budget position after the Coalition delivered its 2013–14 Mid-year Economic and Fiscal Outlook, or MYEFO, in which it scrapped the carbon tax, scrapped the mining tax, and gave $9 billion to the Reserve Bank. As I have shown earlier, that added a net $14 billion to the budget deficits over the next four years.

So forget the politics, including the implicit message that the Coalition’s blocked budget measures (dubbed here the “proposed policy”) are the only way to get the budget back in surplus. As the report concedes in passing, any other measures delivering equivalent savings, such as tackling tax loopholes, would do the same, and might do it more fairly.

It is traditional for the IGR to be used to play politics, but in this case the politics drowns out the two real issues Treasury is trying to raise.

First, every government over the past decade has contributed to weakening Australia’s fiscal position by cutting taxes while raising or promising to raise spending. There is no budget crisis, but believe me, it is just a statement of reality to say that we have got ourselves into an unsustainable budget position. There is too much spending in the pipeline, and too little revenue. Something’s gotta give.

In just seven years, the Commonwealth has run up cumulative deficits of $240 billion. That is equivalent to every Australian acquiring a debt of $10,000. In that time, one budget document after another has announced a shift into surplus, which has then vanished into smoke.

And the worst is ahead: we have barely begun delivering the Gonski report’s promise of tackling educational disadvantage, and the National Disability Insurance Scheme is just limbering up. Labor promised these big-spending schemes, and the Coalition mostly supported them, without either coming up with a plan to pay for them.

The Coalition’s 2014–15 budget promised to set things right, but did it in a highly partisan way that put most of the burden on the poor and those in the middle: ordinary families, the unemployed, and manufacturing and its workforce. It blew its chance to come up with a program that could unite Australians behind it, and so the Senate has blocked much of it.

Treasury now hopes that we might be back in surplus within a decade. Its graphs here imply that the biggest savings blocked by the Senate are the Coalition’s axing of the Gonski reforms, its plan to index pensions to rises in prices, and its oh-so-gradual extension of the pension age from sixty-seven to seventy. The higher pension age is inevitable, but the first two could remain stuck.

For now, the economy’s weakness and crashing mineral prices are doing more damage to the budget than the Senate has. Since mid 2012, domestic demand has grown by just 0.75 per cent on average; real spending per head has fallen at the same pace. Employment has risen at the rate of little more than one new job for every three new adults.

But the second, and biggest, issue is our ageing society. In itself, an ageing society is a great thing to have: we are living much longer and, for most of that time, in good health. But the more of us live on into our eighties and nineties, the more time we spend on the pension, and the more hospital, medical, pharmaceutical and aged care bills taxpayers have to pay for. Something’s gotta give, and it is the task of government to negotiate politically acceptable reforms that can reduce those bills, and find ways to pay for them.

The biggest budget savings the Abbott government has achieved so far have been to slash the future foreign aid budget by more than half, and to shift more of the public hospital bill to the states. The first makes the world’s poor bear the cost of our savings, by scrapping projects that save lives and lift people out of poverty. The second caps growth in the Commonwealth’s contribution to public hospital costs at 3.5 per cent a year from 2017–18. This improves its own budget bottom line, but puts the states in an impossible position, from which their only way out will be to increase and widen the GST.

Cost shifting is not genuine budget reform. But the Fraser and Hawke governments both got away with it, so it’s no surprise that Abbott and Hockey chose it.

We need a better approach. In Sweden, they headed off the ageing crisis by setting up an all-party committee to come up with reforms that all sides could accept, and would back in public. To Hockey’s credit, in opposition he ensured that the Coalition backed Labor in raising the pension age to sixty-seven, yet now Labor and the Greens, for populist reasons, are blocking its inevitable further extension to seventy.

Reducing the budgetary burden of an ageing Australia is a tough political ask. It would be handled best if the parties accepted joint responsibility for solving it. This report is a lost opportunity to start that conversation. •