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Reality may be worse than the Intergenerational Report expects

We’ve had five Intergenerational Reports, the first (IGR02) in 2002, and the most recent (IGR21) in June 2021.

Each has presented a startling picture of a widening gap between the revenue collected from a declining share of predominantly younger taxpayers and the spending needed on an increasingly older population.

In all but the latest, the financial challenge has got 'less worse' over time.

It has worsened this last time because the temporary halt to immigration has for the moment removed one of the tools we have used to slow population ageing and because the COVID crisis meant less economic growth, less growth in tax revenue, and more government spending than we had been expecting.

What’s sobering

Over the next 40 years, the economy and incomes are expected to grow more slowly than in the past, leaving the budget in continual deficit.

This is in part because while needed spending on ageing and health will increase as previously projected, income from taxes will increase only up to a self-imposed cap, reaching it in the 2030s.

But the reality may be worse. The report is optimistic about the rebound to migration, about increases in labour force participation, and about average productivity growth.

If any one of these generous assumptions doesn’t come to pass it will be more difficult than projected to balance the budget as the population ages.

What’s probable

While the demographic fallout from the pandemic is expected to exacerbate population ageing trends, over successive Intergenerational Reports until now, projections for the proportion of the population aged over 65 have become less pronounced.

Even now, projections for the proportion of the population aged over 65 are tracking those in the 2010 report, but haven’t taken us as far back as the first.

Much will depend on net migration. It is assumed to rebound to 235,000 people per year by 2025, with a revamped focus on skilled migrants. If it gets and stays that high, or climbs, our population will age slowly.

Proportion of population over 65, actual (black) and projected

Author’s analysis of ABS and Treasury data

What’s possible

In each Intergenerational Report so far, a greater proportion of the population has been making itself available for paid work than previously expected.

Since 2002, the labour force has grown by 41%. Nearly half of that increase was workers over the age of 50.

There are now a million more women over 50 in the labour force than at the time of the first intergenerational report, and the participation rate of women aged 60-64 had doubled.

But increases in older-age participation are slowing even though each new cohort of older Australians is healthier, more educated, and more employable.

Research shows if older people are to thrive and prosper in the labour market as the treasury’s figures suggest, Australia will need to dismantle barriers related to health, training, discrimination, and work conditions and scale up strategies to help employers recruit and retain older workers.

Proportion of people aged 15+ in the labour force, actual and projected

Author’s analysis of ABS and Treasury data

What looks over-optimistic

At the launch of the Report, Treasurer Josh Frydenberg quoted economist Paul Krugman that “Productivity isn’t everything, but in the long run, it’s almost everything.”

With greater labour productivity (GDP per hour worked) we earn more with the same or less effort, potentially offsetting the economic and fiscal impacts of ageing.

The report’s productivity growth assumption for the next 40 years is based on the average of the last 30 years: 1.5% per year. Yet recent rates have been much less, and have been declining over time.

Labour productivity annual growth and decade averages, actual and projected

Change in average GDP per hour worked. Author’s analysis of ABS and Treasury data.

Average annual productivity growth over the last decade, including the pandemic recession, has been 1%. Treasury’s sensitivity modelling shows that lower than projected productivity growth of 1.2% would see the economy and incomes 9% to 10% lower by 2060-61 and the budget deficit 2.2 percentage points wider. Australia isn’t alone in experiencing a slowdown in productivity growth and it isn’t clear how much Australia by itself can do about it.

The Report points to a suite of microeconomic reforms related to competition, digital technologies, patents, research and development, and skills, some of which were recommended in a landmark review by the Productivity Commission in 2017. But as the Treasurer pointed out, many of the big reforms have already been done. As he put it: “You can’t float the dollar twice.

What’s unmodelled

And a key set of figures are missing from the report - those relating to the impact of climate change. There is a chapter on the environment describing risks, but it doesn’t feed them into formal projections in the way this month’s NSW Intergenerational Report did.

Frydenberg’s Report is commendable. It presents an opportunity to talk about ways to achieve a better future – not just the one it outlines.The Conversation

 

Rafal Chomik is a Senior Research Fellow at ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW and responsible for the Centre’s research translation program. This article is republished from The Conversation

 

4 Comments
Trevor
September 14, 2021

"While the demographic fallout from the pandemic is expected to exacerbate population ageing trends, over successive Intergenerational Reports until now, projections for the proportion of the population aged over 65 have become less pronounced." There were around 900 deaths from COVID-19 in Australia in 2020 (909 notified through surveillance systems and 866 registered and compiled by the ABS)......89% of deaths were in Victoria and 7% in NSW. The majority of deaths were in the older age groups: 24% in the 85–89 year age group and 34% in those aged 90 and over. [ That is about 68% of fatalities in "old folk" ! ] By 20 June 2021, there were just over 30,000 confirmed cases of COVID-19 and 910 deaths in Australia." "During 2020, 7% of all COVID-19 cases in Australia and 75% of all deaths were in people living in residential aged care facilities." So.....Covid is basically killing old people already ill or with compromised health.

Stephen
September 10, 2021

Rafal Chomik points out that the federal budget is in deficit and is getting worse. He says it is expected that the budget will be in deficit for the next 40 years. This is disturbing. The government is already in a net debt position, so it will only grow bigger with budget deficits for the next 40 years. But the really disturbing thing is that nobody seems to care. Government debt is out of sight, out of mind. The modern generation has been brought up on credit. It is okay to buy things with credit cards and simply hang out for the next weekly pay. It takes a really courageous federal treasurer to have surplus budgets and pay off the government debt. Peter Costello is the only treasurer in recent times to have done so. He reduced the federal government to zero and even moved the government to a net cash position.

But if we shift the picture to a family situation, most people would be shocked to see their neighbour living beyond the means of the family so that the debt is increasing every year with no prospect of ever paying if off. They certainly wouldn't want to be in that situation themselves. So there are two standards. What we are doing as a country is loading up the next generation with a huge debt, and not caring about it. The next generation don't even care about it themselves, maybe because nobody has pointed it out to them. It is all about fiscal responsibility. Financial planners are acutely aware of fiscal responsibility and planning for the future. It is our job every day. Unfortunately when it comes to public finances it seems there is no such thing.

Karun
September 09, 2021

IG reports are political in nature. They have to be, otherwise the govt. will not allow it to be published without changes. So, expecting an independent report is wishful thinking. If what is to be investigated and the parameters used are made clear before the research is done for the IG report is started, then it is likely a more independent report will be published. It is likely, the pollies and/or their yes men will try and get it shaped to their way of thinking.

Daniel
September 08, 2021

Well that is the trouble with the government subsidizing housing to the moon.

For many, their house earns more than their income in a year. Why work?

 

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