What’s the Intergenerational Report really for?

Projecting 40 years ahead is nonsense. The Intergenerational Reports have quite a different purpose – to justify what the government has already decided to do.

 

Whatever Australia looks like in 2063, it won’t have much resemblance to the one described in the latest Intergenerational Report. The Treasury’s record shows it can’t reliably forecast even one year ahead. And forty years?

Everyone in that department from the secretary, Steven Kennedy, down to the third assistant janitor know that and, to their credit, occasionally say so. But if these reports are so uncertain, what’s the point of them?

For Treasurers, they are a useful political tool. They produce scary, far-off estimates of soaring costs: wonderful political cover for any Treasurer wanting to justify budget cuts. But they can also reveal a great deal about a particular government’s intentions than they will openly admit to.

They set the rules

Peter Costello released the first Intergenerational Report 21 years ago as part of that year’s budget. It had become a requirement of the measure he called, with a perfectly straight face, the Charter of Budget Honesty. He – and that report – had some scary things to say.

“The projections in this report,” it said, “suggest that, if policies are not adjusted, the current generation of taxpayers is likely to impose a higher tax burden on the next generation.”

That burden, it said, would mean taxes rising by 5% of GDP.

“Governments will need to exercise sound policy management to minimise the tax burden transferred to the next generation, particularly if Australia is to keep its position as a lower taxing and spending country.”

There you have it: a neat encapsulation of the driving ideology of the Howard, Abbott, Turnbull and Morrison governments. We are living beyond our means. We must lower taxes and cut back government services.

It’s always easy to sell tax cuts to the electorate but much harder to sell the budget cuts that inevitably follow. To do that, it’s helpful to frighten the electorate into complying. An authoritative, thick and apparently independent document like an Intergenerational Report can do that very effectively.

The PBS ... sustainable after all

Health costs were a big focus of that initial report. They were projected to grow by 2.6% a year for the following four decades. By now, 20 years on, federal government health spending was projected to surge to 5.2% of GDP. Every aspect of the health portfolio would grow dramatically, particularly the Pharmaceutical Benefits Scheme, which would expand fivefold by 2042.

The cost of the PBS to the government was projected to increase by 5.6% per person every year. Including population growth, that works out at 7%.

And that, Mr Costello told us, was unsustainable. The country couldn’t afford it.

Howard and Costello had already made their decision: here was the justification. The patient co-payment went up by 21% and kept on rising. The safety-net, already inadequate, was made even less generous.

“The reforms to the PBS implemented in the 2002-03 Budget,” said the Costello report, “have helped reduce the overall cost of the scheme. Ongoing sound management of the PBS will be required to keep long-term growth in the scheme sustainable, to allow governments to continue providing access to affordable medicines for all Australians.”

These cost-cutting measures did not, of course, reduce the price of drugs. They merely shifted the cost from the government onto patients. Now, around a million people every year choose not to fill at least one prescription because they can’t afford the copayment.

It was all for nothing. If that scary predication in 2002 had been right, the PBS would by now be costing the government over $27 billion a year. The real amount is about half that: $14.5 billion.

Before the 2002 report was compiled, PBS costs had been inflated by a string of high-volume “blockbuster” drugs , such as statins for cholesterol, new anti-inflammatory drugs, antidepressants and so on. The report assumed that trend would continue.

It didn’t. In the past 20 years, few blockbusters have appeared. There are plenty of expensive medicines, but are fairly low-volume. And the drugs that were once so expensive aren’t any more. They have come out of patent and are manufactured by a variety of low-cost generic companies.

Estimates of hospital costs were inflated by a simple mistake. The Treasury assumed a direct and linear link between the increasing number of people over 65 and the added pressure they would put on hospital costs.

Richardson ... don't panic!

But as a group of health economists at Monash University led by Professor Jeff Richardson had already pointed out, most of the added hospital costs associated with ageing occur in the last couple of years of life. And because you can die only once, the number of people aged over 65 doesn’t matter as much as that simplistic Treasury calculation assumed.

That first Intergenerational Report massively over-estimated the future costs of social programs generally and used those over-estimates to justify cuts. This table shows the amounts the 2002 report predicted these programs would cost by 2022, compared with the actual results. Health, for instance, was over-estimated by $3.7 billion, welfare by $5 billion and the age pension by $8.6 billion.

All up, those five programs ended up costing 16.6 billion less in 2022-23 than the original Costello report predicted.

That illustrates the problem of trusting governments that use such dodgy estimates to justify policy decisions.

Is the new one any better?

There are two ways of looking at this. Are the projections likely to be any more accurate than those in previous reports? Probably not.

But accuracy isn’t really what these reports are about. The other way of judging this one is to look at what it tells us about what the Albanese government is likely to do. In that, the overall tone is radically different, and far more benign, than its predecessors.

The Costello report in 2002 was all about telling us what we couldn’t afford: justifying budget cuts, smaller government, the supremacy of the private sector. Those were all part of a political and economic ideology that the country has now left behind.

The Chalmers report has a generally different outlook. Except for one big exception – the National Disability Insurance Scheme – there seems to be an underlying assumption that essential services are just that, and we need to find ways of paying for them.

The emphasis of this year’s report, judging by the number of pages devoted to each policy item, is on climate change and the NDIS. Everything else – health, aged care, welfare, defence – gets much less attention. This tells us where the government wants our focus to be.

Climate change hits the economy hard

The section on the economic impacts of climate change runs to 34 pages of close type. Most of the data has been covered elsewhere, thoroughly and often. Its presence here is significant in a policy sense: it shows that the government understands that there is a massive crisis with the potential of devastating agricultural output, labour productivity, capital investment, tourism, manufacturing, insurance and financial services.

There is an acknowledgment of the urgent need to prepare better for this dystopian future – more spending and (by implication) policy changes on disaster management and insurance. The report is pretty thin on climate adaptation, but at least it’s finally being recognised as an issue.

Lithium ... yet again, Australia is the world's quarry

It also acknowledges that Australia and the world have left it too late to avoid many of those economic shocks. But, it stresses, there are also opportunities. Australia has an abundance of the essential ingredients for a world shifting to a low-carbon economy – critical minerals, sunshine, wind.

“China accounts for over half the world’s lithium processing and refining capacity, the report notes, “consuming most of Australia’s spodumene concentrate [a lithium ore]. However, over the next 40 years, there is scope for Australia to pursue other avenues such as precursor chemicals for cathodes, electrolyte production, battery anode plants, battery cell research, and battery manufacturing. By 2025, Australian investments in lithium refinement are projected to lead to a market share of 6.2%. Australia’s natural endowment of critical minerals also has potential to support the development of a domestic battery manufacturing industry.”

Whether Australia, can mature from being the world’s quarry to making the most of these resources is less certain. The fate of Australia’s lithium is a depressing example: we, and the world, are almost totally reliant on China for processing and manufacture. There is nothing in this report to indicate the government has any strategy to turn that around.

It does better in discussing Australia’s potential to become a renewable energy superpower. Nothing here is very new either – and certainly not to anyone who’s been listening to Ross Garnaut lately – but its inclusion, at some length, is encouraging.

Perhaps the single greatest omission in this report is its complete failure to acknowledge any economic and social hazard from the burgeoning revolution in artificial intelligence. It’s mentioned eight times, each time as an economic opportunity. There is no mention of the massive job losses that are expected to begin soon, no mention of the impact on demand when so many people are thrown out of work, and no mention of the impact on the budget of massively higher welfare costs and reduced tax revenue.

The government doesn’t want to deal with this. But ignoring it won’t make it go away.

The NDIS ... what will go?

But it’s in the section on the NDIS that Chalmers reverts to the Costello formula – scary projections to justify cuts that will inevitably impact vulnerable Australians with disability. It justifies the policy, already formulated and announced, of keeping the scheme’s budgetary impact to no more than 8% a year. This year, the government expects the increase to be 13.9%.

It is fanciful to suggest that such a massive reduction can be achieved merely by efficiency, eliminating rorts and targeting payments.

Nevertheless, the report shows that the NDIS will not keep growing at anything like this rate forever. There are various scenarios, but the base case is that expenses will start to moderate quite soon, when the 8% ceiling kicks in. But it will go on rising, both in dollar terms and as a proportion of GDP, until levelling out at around 2% of GDP.

In one sense, this is reassuring: it’s a big cost, but not an impossible one. In another sense, it is disturbing: what will have to go from the NDIS to achieve this result?

The government wants the states to pay more. If the projections turn out to be accurate, the states’ share of the cost of the NDIS will decrease from 32.9% today to around 14.6% in 40 years. Mr Chalmers has said the states will have to increase their contribution.

Though the states’ percentage share would become smaller, the dollar amount would be much higher, going from around $2.7 billion now to $3.8 billion in 2062 (in today’s dollars). That’s a 43% increase.

But even now, the states and territories – with the exception of Western Australia, because of its special GST deal – cannot meet the costs of providing adequate services. And the Intergenerational Report provides no suggestions about how state revenue could be increased.

Mr Chalmers has wisely ruled out increasing the rate of the GST or broadening its base. It would be both politically impossible and economically self-defeating. The GST is a regressive tax: poorer people pay much more GST as a proportion of their income than rich people. And broadening the base to include education and health care would, as the economist John Quiggin points out, be self-defeating. The government would be taxing itself. That would leave only fresh food, which would not raise enough revenue but which is already too expensive for many families.

Funding the states is one of the many questions this report leaves unasked.

Other social programs

Federal spending on the other big-ticket social programs – health, aged care, welfare, education – is projected to remain essentially flat for at least the next decade. The scare-story happens well beyond that point and, as previous Intergenerational Reports have shown, we can’t take such long-term projections seriously. Nobody knows.

Though the ten-year projections will inevitably be wrong, they have at least some credibility. They show us a reasonably plausible trajectory.

But any Labor government that was content with this status quo could not be regarded as either reformist or responsible. In all of these areas, increased federal spending is essential.

Can unemployed people stay condemned to live in poverty for the next forty years? How will public hospitals cope, faced as they are with patient demand far outpacing resources? Will nothing be done about universities? And can we be content with the new government’s fairly minor changes to aged care policy?

Or does the community demand more ambition, more humanity, from Canberra than it’s been used to for the past few decades?

Better services, higher taxes

Unlike its predecessors, this Intergenerational Report puts a strong case for tax increases, not cuts. And unlike its predecessors, it shows explicitly how much less tax we pay, compared with other developed countries.

Mr Chalmers would not have included such data unless he wanted to raise taxes, rather than to reduce government spending – but he’s working with a risk-averse Prime Minister. The overall impression is of a government that doesn’t quite know what it wants to do.

Without major tax reform, government revenue will shrink. The switch to renewables will hit fuel excise. Global demand for minerals is expected to fall, reducing royalty payments. According to the projections, revenue will rely increasingly on personal income tax. The Treasury expects taxes on corporate profits to remain steady as a proportion of GDP.

This is a clear, and not unexpected, call for serious taxation reform. The Treasurer has ruled out the sort of big-bang approaches that have failed before, in favour of small-step reforms that are less likely to frighten the horses.

But if the government wants simultaneously to improve public services and to reduce government debt, will such a careful, softly-softly process be enough? The nation’s schools, hospitals and transport can’t wait much longer for the national government to provide more meaningful leadership and investment. The electricity grid is in urgent need of more investment. We’ve got those submarines to pay for.

And the government says the Stage 3 tax cuts will stay. According to the Parliamentary Budget Office, those cuts alone will take $20.4 billion in 2024-25. They will reduce government revenue by $96.8 billion over the forward estimates of the next budget. You could build over 50 major hospitals for that. Or 6,500 schools. Or 205,000 three-bedroom houses.

This is not what one would expect from a reformist government that is intent on transforming the economy and making the society fairer and more prosperous.

The basic problem with all Intergenerational Reports is that the neoliberal, small-government ideology was baked into them right from the start by John Howard and Peter Costello. They are all about costs, never about benefits. And it’s not possible to frame a serious economic analysis without looking at both sides of that equation.

They are anathema to a reformist Labor government. Or should be.