Features Australia

Treasury’s absurd Intergenerational Report

File it under futuristic fiction

10 July 2021

9:00 AM

10 July 2021

9:00 AM

Take yourself back to Australia in 1920. The Spanish flu is still raging and young, fit people are dying in significant numbers. It is estimated that between one-quarter and one-third of Australians contracted the disease and that around 15,000 Australians died of the Spanish flu, out of a population of 5.4 million.

Imagine the federal treasurer, William Watt, decides to commission his small department to forecast the fiscal outlook for the next forty years, ending in 1960. He wants to know how much the population will grow, what the demographic profile of that population will be, how much the economy will expand and what will be the likely course of government spending and government revenue.

The very proper secretary to the Treasury, James Collins, politely suggests to the treasurer that the proposed exercise would be pointless. So much can change in forty years in ways that are completely unpredictable that any benefits of trying to hazard predictions would be exceeded by the costs. Watt drops the idea.

Now think of the next forty years: the Roaring Twenties, the Great Depression, the second world war, the Cold War, the Korean War, the Korean Wool Boom, the surge in migration, the return to full employment in the 1950s. Believe me, no one was talking about the Spanish flu in 1960.

So fast-forward to the present and the current secretary to the Treasury, Steven Kennedy, has no option but to produce a 40-year intergenerational report. It’s a requirement of legislation, The Charter of Budget Honesty Act 1998.  The most Kennedy could achieve was a delay in releasing the report by one year – Covid, my dear.

The 2021 Intergenerational Report is the fifth report to be released. The first two, produced in 2002 and 2007, were sober, useful documents. They didn’t overegg the pudding, but attempted to make several ‘what if’ statements about the impact of an ageing society on government spending. Both also had valuable short-run objectives – namely, to constrain the expensive Pharmaceutical Benefits Scheme and to trim the rate of increase in spending on health.

Even though the third IGR, released early under Labor treasurer, Wayne Swan, was a shocker – it was mainly about climate change and how Labor’s carbon tax would solve the problem – it did set the scene for slowly lifting the age at which the age pension can be received. It went from 65 to 67 years of age, reflecting rising life expectancies.

The fourth IGR was another shocker, this time released under Coalition treasurer, Joe Hockey. Smarting from the harsh reaction to his 2014 budget, this IGR set out to trash Labor’s fiscal policies while pretending that Hockey could solve all current and future fiscal challenges in the space of a decade or so. He would return Australia to having no government debt, just like former treasurer, Peter Costello, had.

The Treasury describes the most recent IGR as ‘[projecting] an outlook for the economy and the Australian government’s budget over the next 40 years’. Now that sounds soporific enough, but the report is a very good example of what Professor Deirdre McCloskey calls the ‘rhetoric of economics’.

Most readers would look through the 200-odd pages, full of charts and tables and technical sounding sub-headings and conclude that the findings are well-founded, almost incontrovertible.

In reality, there are some key assumptions that completely drive the findings but these assumptions won’t convince a canny reader. Take just one example: productivity and the assumption that it will return to its long-run growth rate of 1.5 per cent per year, which included the purple patch of productivity growth that occurred in the 1990s.

Now productivity growth has been in a slump for most of this century, even more so in the last ten years when the annual rate of increase has been averaging only 0.5 per cent. But such a low rate clearly didn’t suit the authors (or should that be the supervisors of the authors?) and so a trick was executed: let’s just assume a return to 1.5 per cent per year.

And to persuade the reader that the Treasury is not completely bonkers, a lower figure of 1.2 per cent for annual productivity growth is also modelled.  That’s an obvious rhetorical stunt.

Under the higher productivity growth scenario, the underlying cash balance comes in at just over minus two per cent of GDP in 2060-61.

With the slightly lower productivity growth, it’s closer to just over minus four per cent. Productivity clearly matters a great deal.

But the key here is that 1.2 per cent is far too high and what we really need to know is what happens if productivity growth doesn’t recover to anywhere near its historic average. Will the cash balance be closer to minus ten per cent of GDP? And what happens to government debt?

This gilding of the lily clearly suits the government because it downplays the need for any action now. Mind you, if you read the Treasury’s thinking about lifting the rate of productivity growth, it’s easy to despair. Apart from endorsing some very minor recent initiatives of the government – think reforms to bankruptcy laws, patent boxes, national occupational licensing – there is no serious analysis of the factors that drive productivity.

Evidently, Australian businesses lack dynamism – that’s Treasury’s main contribution to the debate. But where is the analysis that we are overregulated, overtaxed and there is too much government spending crowding out private sector activity? You definitely won’t find it in the IGR.

And then there’s the extraordinary attention given to the impact of Covid in a 40-year time frame. Does Treasury really think that Covid will be a major factor explaining the budgetary position in 2060-61?

To be sure, the figures on recent overspending – arising from the overreaction of governments by shutting borders and imposing restrictions – are mind-boggling. A budget deficit of $161 billion in 2020-21 followed by another deficit of $106 billion this financial year is truly troublesome. But any medium-term failure to repair the budget will be the result of a lack of political resolve, not because of the excess spending of a few years.

My suggestion is to file your copy of the IGR under fiction, because that’s what it is: a rhetorical ruse designed to serve the government of the day.

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