Intergenerational reports ought to do more than scare us — they ought to spark action
- Written by Danielle Wood, Chief executive officer, Grattan Institute
The intergenerational reports are former treasurer Peter’s Costello’s fiscal future-proofing scheme — a five-yearly reminder that, without action, an ageing population and other changes will leave public finances looking ugly.
The fallout from COVID means Monday’s 2021 report projects a bigger sea of red ink than the previous 2015 report. It’s a useful reminder that lifting productivity, reforming age-based tax breaks, improving migration and confronting climate change are crucial to leaving a happier legacy for the next generation.
Let’s start with the bad news.
Budget deficits for 40 years, with net debt still at 34.4% of GDP in 2061, and the interest cost of serving that debt growing to 1.7% of GDP.
It’s what happens when ageing population hits up against highly age-skewed spending and tax policies.
The 40-year budget projections look nasty, but the reality is almost certainly worse, because the intergenerational report is too rosy on crucial assumptions.
Projections worse than they look
First, the report assumes productivity will grow at 1.5% per year over the next 40 years, in line with the 30-year average. That’s highly optimistic. Productivity did indeed go gangbusters in the 1990s, growing at 2.2% per year. But in the 20 years since growth has been more sluggish at 1.2%, and under 1% for the past five years.
The same is true of other advanced economies. Structural shifts including slowing technological change, the rise of less-productive service sectors, a reduction in job switching and increases in market concentration are slowing productivity growth almost everywhere.
Read more: Why productivity growth stalled in 2005 (and isn't about to improve)[1]
Many of these headwinds are here to stay, which means an awful lot would need to go right to boost productivity in coming decades, including the unleashing of a new era of technological transformation.
Another big source of misplaced optimism is failure to quantify the impacts of climate change. It simply makes no sense to project fiscal outcomes over 40 years without an attempt to factor in the high and growing costs of a warming planet.
The NSW[2] intergenerational report, released only three weeks ago, didn’t shy from that challenge.
References
- ^ Why productivity growth stalled in 2005 (and isn't about to improve) (theconversation.com)
- ^ NSW (www.treasury.nsw.gov.au)
- ^ NSW properly considered climate change (www.treasury.nsw.gov.au)
- ^ productivity commissions (www.pc.gov.au)
- ^ Grattan Institute (grattan.edu.au)
- ^ Aged care, death and taxes after the royal commission (theconversation.com)
- ^ Skill shortages are no basis for picking permanent migrants (theconversation.com)
- ^ No Barnaby, 2050 isn't far away. The IGR deals with 2061 (theconversation.com)
Authors: Danielle Wood, Chief executive officer, Grattan Institute