Renowned Danish physicist Neils Bohr once remarked that “prediction is very difficult, especially if it’s about the future”. And so it is with the Intergenerational Report released by Joe Hockey last week, the latest of four reports first published in 2002.
Each report since 2002 projects that over the next 40 years we face inevitable crisis with an increasingly ageing population sucking up scarce publicly funded health and welfare resources in a shrinking taxpayer base. This is because our population will increase, but with a higher proportion of older people; economic growth per person will slow as the proportion of the population of traditional working age falls; and substantial ﬁscal pressures will emerge due to projected increases in spending, particularly in the areas of health, age pensions and aged care.
To avoid this catastrophe each report recommends governments take action to boost population, economic participation and productivity (the three Ps).
When comparing the predictions in all four reports the efforts of governments since 2002 seem to have had mixed results.
Based on patterns of migration, fertility and life expectancy (mortality), in 2002 it was thought that population growth would slow to around 0.2% by 2042. In 2015 Australia’s population is projected to grow at 1.3% per year over the next 40 years, a significant positive change.
In 2007 it was estimated that in 2047 there would be only 2.4 working age people for every person over 65. In the 2015 report this is forecast to be 2.7, a slight improvement.
But the comparative forecasts on workforce participation tell a less positive story. The 2010 report predicted that working-age participation (for people aged 15 to 64 years) would increase from 76.2% in 2009-10 to 79.7% by 2049-50. However, the 2015 report suggests that, by 2055, the participation rate will fall to 62.4%, compared to 64.6% in 2014‑15.It’s hard to imagine this gap could be caused by any policy settings introduced over a five-year period between reports.
The significant gap between these predications could mean Treasury has a difficult time modelling participation, or that government policies had a major negative impact on working. However, it’s hard to imagine this gap could be caused by any policy settings introduced over a five-year period between reports.
In terms of the overall GDP end game though, initiatives by governments to lift the three Ps seem to provide a glimmer of hope. In 2002 it was predicted that GDP growth would decline to about 2% a year on average after 2020. But in 2015, GDP growth is projected to be relatively healthy 2.8% a year on average over the next 40 years.
In 2007 it was expected that GDP per person would fall to 1.6% a year over the following 40 years. In 2015 it is anticipated to be 1.5% a year until 2055. This is relatively stable and still represents a rise in the annual income of the average Australian from $66,400 today to $117,300 by 2055.
You’d expect these trends to lead the 2015 report to conclude that more effort was needed to build on the small gains won to date. Like most first dates, you’re going to be disappointed.
It seems like a good idea for Treasury to ring alarm bells, if we are to going to stay the lucky country. After all, unlike places such as Singapore which must survive by wits alone, our long natural resources boom has given us an affluence that inspires complacent planning.
When I talk to colleagues and clients in Asia there is a common view that Australia has never had to face any truly do-or-die economic scenarios, where wrong decisions or ones taken too slowly will cement intergenerational poverty, chronic competitive disadvantage and structural underdevelopment.
Our recycled reviews of the same infrastructure options in rail, airports, roads, ports, energy and telecommunications show that there is no urgency to decide critical issues and move on to the next.
When we do make politically hard but game-changing calls it has a positive impact on our national productivity. The cumulative effect of the seminal economic reforms in the 1980s and ’90s — tariff reduction, floating the dollar, enterprise bargaining, compulsory superannuation, national competition policy — was average annual productivity growth of 2.2%. Since then, weak political expediency, policy confusion and an absence of bipartisanship on fundamental global supply chain issues like infrastructure reform has contributed to a decline in our average annual productivity growth to 1.7%.
The 2015 report predicts that in 2055 this will be worse at 1.5%. I’m assuming Treasury wouldn’t be forecasting this terrible result if it felt confident there were commitments to essential infrastructure development that could not be unwound.
Population, participation and productivity
Government responses to boost the three Ps haven’t been surprising.
Since 2002, each government has looked at the forecasts and reached instinctively for a solution to suit their own ideological fancy, with little regard for the kind of long-term policy consistency which gives us the best chance to be rescued from the abyss.
In every case governments have mixed their budget strategy potions with the report forecasts to administer two kinds of medicine. First, they use their concoction to remind us that the other mob negligently accelerated us towards Armageddon. Second, they ask us to open wide and swallow what they’re prescribing to avoid our destruction.
In some cases this has contributed to push us towards a more rosy future, but it’s never been enough for Treasury to predict something supremely better.… they ask us to open wide and swallow what they’re prescribing to avoid our destruction.
For example, the 2002 report gave the Howard government a good reason to entrench in the Commonwealth budget a range of income subsidies to encourage families to have children. This included the child care benefit and baby bonus. Dishing out cash to families was a key element in former prime minister John Howard’s political strategy. But when you look at forecasts across the four reports it might also have helped us grow the population for the 40-year end game.
Labor’s response to the 2007 and 2010 reports included budget strategies that maintained some of Howard’s spending and introduced new expenditure that a future Coalition government would never abide. Labor opted to support population growth through higher migration and by expanding child care benefits and introducing paid parental leave. It sought to lift participation through increased spending on education and training and a national disability support scheme. It viewed a national broadband network as a key pathway to boosting productivity.
Of the four reports, the 2015 one is the lightest on policy prescriptions to actually boost the three Ps. The only commitment is to continue child care benefits. There is no discussion of population. And only a generic discussion of the importance of infrastructure investment to lift productivity.
This is because the focus of this report is using the 2055 outlook bogie man to support the government’s three budget strategy messages: 1) Labor spent too much because they are wilful intergenerational thieves; 2) if the Parliament blocks the budget measures we might avoid some but not all the future catastrophe; and 3) if the entire budget is approved us and our offspring can pop champagne.
A fly in this ointment is that most of the budget measures aren’t about spending at all, let alone spending on measures to boost the three Ps.
Yes, less spending supports lower taxes which can lead to greater private investment that can boost more employment which may deliver certainty that stimulates families, attracts migrants and encourages work. But private sector investment is only one effort required to boost the three Ps. The spending by Howard, Kevin Rudd and Julia Gillard proves that.
Government spending aimed squarely at the three Ps can also induce private sector investment because it makes skilled resources available, creates the opportunity for future human resources, and provides infrastructure that promotes competition and innovation.
The 2015 report caravan will be gone soon. And we will have to wait until 2020 for the next instalment in our intergenerational soap opera to see what the future really holds.
Don’t hold your breath.