The report happily assumes that the government would not change any spending policy for 40 years and debt by 2055 would reach 122% of GDP

The report happily assumes that the government would not change any spending policy for 40 years and debt by 2055 would reach 122% of GDP

The report happily assumes that the government would not change any spending policy for 40 years and debt by 2055 would reach 122% of GDP





T he

Intergenerational report released on Thursday is a document so weighed

down with imagined economic assumptions made for partisan political

reasons that it is barely worth reading, let alone being the basis of a

“conversation” with the Australian people about the next 40 years.







betraying perhaps an insecurity about his own performance as treasurer,

has decided to act as though he were in opposition and has made the

report as much about kickingLabor’s economic performance than attempting

to paint a picture of the challenges for the next 40 years. Intergenerational reports are always political documents, but they are not supposed to be partisan. Joe Hockey betraying perhaps an insecurity about his own performance as treasurer,has decided to act as though he were in opposition and has made thereport as much about kickingLabor’s economic performance than attemptingto paint a picture of the challenges for the next 40 years.





Every intergenerational report is only as good as the assumptions on

which the predictions are based – especially those pertaining to

demographics. And while some of the predictions about the ageing

population and the implications that will have on employment

participation and economic growth are worth considering, the assumptions

about government spending over the next 40 years are pretty much a

farrago of idiocy.







to include in the report projection based on policies of the former

government. But he takes as the ALP’s “previous policy” that represented

in the 2013-14

– a document produced by the Abbott government and which saw the

2013-14 deficit increase by $10.26bn due to “policy decisions” taken by

the Abbott government. For no good reason whatsoever, Hockey has decided for the first timeto include in the report projection based on policies of the formergovernment. But he takes as the ALP’s “previous policy” that representedin the 2013-14 mid-year economic and fiscal outlook (Myefo)– a document produced by the Abbott government and which saw the2013-14 deficit increase by $10.26bn due to “policy decisions” taken bythe Abbott government.






The

2013-14 Myefo was itself designed to make it appear the ALP had blown

the budget, and thus using that as the starting point to predict budget

deficits over the next 40 years is a fairly dodgy exercise.





But from this beginning, the report happily assumes that under the

scenario the government would not change any spending policy for 40

years, debt by 2055 would reach 122% of GDP.





Yeah, right.





To get to that figure, not only does it assume there will be no

changes in spending, but even more stupidly, that while the deficit grew

ever more over the next 40 years, governments would be cutting income

taxes at the same time.





As Jeanie Bueller would say , dry that one out and you could fertilise the lawn.





The report estimates that from 2020-21 tax rates will be capped at “a

constant 23.9% of GDP”. This level was picked because it was the

“average of the period 2000-01 to 2007-08”. Why this seven year period

was chosen for the average however is left unsaid.















To keep the tax ratio at that level in the face of increasing wages,

which would see income tax receipts rise, the report implicitly suggests

taxes would be cut – all the while debt rises to 122% of GDP?





Yeah ok, seems legit.





There is no logical reason to keep the tax rate fixed at 23.9%. There

is no optimal level of taxation. If we look across advanced economies

from 2001 to 2007, Australia’s level of taxation across all forms of

government was quite low:















That this arbitrary tax level is chosen just highlights the political

nature of this document. It does not suggest that if government

expenditure is growing that revenue must grow to match – but rather that

expenditure must be cut.





It also ignores some quite massive social implications.





Nowhere is inequality mentioned, despite the report assuming that

Newstart will rise only by CPI for the next 40 years, while average

weekly earnings are assumed to rise by 1.5% above inflation.





This would see those on Newstart in 2055 receiving around 10% of average earnings , compared with around 17% now, and just below 25% in 1990.





It also dismisses climate change as no big thing.





Absurdly it contains no budgetary or economic impacts of climate

change beyond 2020, and the document is at pains to make it clear one

nation cannot change the climate.





The report enters levels of satire when it boasts (without any

evidence) that the government’s Emissions Reduction Fund will achieve

“verified domestic emissions reductions through incentives” rather than

simply drive “domestic production offshore — a process which would cost

Australian jobs for no decrease in global emissions”.





Oddly however, given the government specifically compares the impact

of the ALP policies in the 2013-14 Myefo with its own current policies,

it doesn’t compare the costs and impacts of the carbon tax with direct

action out to 2055 – perhaps because after 2020 the government hopes

climate change will go away.





The report also suggests that “some economic effects (of climate

change) may be beneficial – where regions become warmer or wetter this

may allow for increased agricultural output – while others may be

harmful”.





Ahh wonderful – a perfect balance!





The economic growth projections which underpin the assessments about

budget deficits are based on some pretty odd assumptions about

population, participation and productivity growth.





The history of the assumption of net migration over the four

intergenerational reports highlights just how rubbery these “40 year”

predictions can be. Every report has increased the assumption of net

migration over that in the previous report. This year’s report is no

different, but the figure it used remains well below what is the likely

outcome.





Migration is a very important aspect for predicting the next 40

years. The main challenge we face is an ageing population in which there

will be fewer prime working age people for every person retired. It

means our labour participation rates will fall because a smaller

percentage of the adult population will be working.





We’re already seeing this happen. In December 2010 a record high

67.7% of the adult population was participating in the labour force – it

is now 64.7%. In that time the participation rate of workers aged 25-64

is actually holding up quite well. But they make up less of the

population than they used to:















When predicting population growth you use two methods – fertility rate, and migration.





A high fertility rate is actually a cost on the economy and the

budget in the near term because children don’t work. Migrants however,

as the report make clear, “tend to be younger, on average, than the

resident population” and they “increase overall labour force

participation rates.”





The report also notes that “high levels of net overseas migration

might increase productivity, as the skills focus of Australia’s

migration program means that migrants may, on average, be better

educated than the average Australian”.





This is important because higher productivity is one of the great drivers of a higher standard of living.





The intergenerational report estimates net overseas migration (the

number of migrants minus the number of Australians leaving) over the

next 40 years will grow by 215,000 per year. That figure is higher than

the 180,000 estimated in the 2010 report, well above the 110,000

estimated in the 2007 report and miles above the 90,000 estimated in the

first report in 2002.





But even the 215,000 is below what the ABS estimates in its population projections. The median population projection assumed currently by the ABS is for 240,000 migrants a year.





It’s also worth noting that the Department of Immigration estimates net migration to increase from 225,800 last to 256,900 in 2018.





The report even estimates from 2007-2018 annual migration will be the

equivalent of 1.1% of the population, but will then for reasons unknown

fall to just over 0.5% from then till 2055.





The report notes that this 0.5% level was the average observed

between 1973 and 2006. Why that 33-year period suddenly became an

important benchmark for migration levels is unsaid. Why not the past 40

years? Why not 2001-2007 as was the case for tax?





The report thus assumes that in the face of an ageing population,

Australian governments would shrink the real migration intake – even

though that would exacerbate the problem!





The only reason you would make such an assumption is if you wanted to

be able to paint a picture of slowing growth, falling participation,

rising debt and deficits and weak economic growth – exactly the picture

Joe Hockey wants to suggest would have been the case under an ALP

government. And exactly the picture he wants to paint in order to

justify his proposed cuts to government expenditure.





To demonstrate how absurd this suggestion is, the report even notes

that if the net migration intake was estimated at 250,000 per year (i.e.

still less than is expected in 2018), then the improvement in real

gross national income per person by 2055 would be the same as if the

report assumed the unemployment rate for the next 40 years was 4%

instead of 5%.





On ABC’s AM

program, Hockey suggested “Immigration is, you know, is a rather lazy

way to try and grow your economy. What we’ve got to do is increase our

output per hour.” program, Hockey suggested “Immigration is, you know, is a rather lazyway to try and grow your economy. What we’ve got to do is increase ouroutput per hour.”





Yes we do need to increase our productivity, but given immigration

can assist with that Hockey is in essence arguing that we should ignore

that solution in favour of a tougher one!





Joe Hockey asserted in the past month that the report would make

people “fall off their chairs”. It shouldn’t. There’s nothing

particularly scary in it, and as the report itself notes, “the

projections in this report are very unlikely to unfold over the next 40

years exactly as outlined. Things will happen that are not anticipated

in the report’s assumptions, and government policy will change.”



