Comments on intergenerational report, 2002-2003

Abstract

The Government's Intergenerational Report, tabled as one of a series of 2002 Federal Budget papers is the first in what may become a series of reports of this nature. Such a report is now required from time to time by the Government's Charter of Budget Honesty Act 1998 . The report (Table 13) highlights the concern that the future ageing of the Australian population may over-tax the workforce. So-called "demographic spending" on the part of the Commonwealth is predicted to rise from 13.9 percent of GDP in 2000 to 19.2 percent by 2041, a rise of just over five percentage points. This prediction is derived from baseline projections of demographic and economic trends. The impact of alternative demographic and economic scenarios is summarised in Table 15 of the report, with a downside of an additional two-and-a-quarter percentage points and an upside of a reduction in demographic spending of just under one -and-ahalf percentage points, relative to the baseline scenario. 1 <P> The results of the report derive from the application of a complex model of future demography, future people-related federal outlays and future labour force trends, including labour productivity, labour force participation rates and unemployment. Clearly, over a 40-year period, there are substantial possibilities for variation in these trends. In general, we conclude that the report is conservative in its assumptions about possible variations as only relatively small variations from recent trends are tested. Future trends in all of the parameters of the model are based upon some form of extrapolation of past time trends. This means that what is presented is a projection of what will happen if demographic, health and economic trends and government policies remain much the same as they have been in the past. This approach is taken despite the fact that the report itself calls for policy initiatives such as encouraging mature-age employment that would lead to changes in the assumed parameters. It is our view that there is a range of possible policy initiatives that could significantly alter the assumptions of the model. These are discussed below. <P> It is important also to realise that the outcome addressed by the report is the balance of Federal revenues and expenditure. The report does not deal with State and Territory budgets or with household budgets. However, given the cumulative impact of the productivity growth that is assumed in the report, output per worker doubles in the 40-year period and, accordingly, households would have considerably higher real incomes. Also, as the costs of children are primarily private costs rather than public costs, households on average would have lower child -related costs as the ratio of children to workers falls. If the sizeable real increase in household incomes leads to higher consumption expenditure, as is likely, then GST revenue would increase commensurately. The report, therefore, draws a picture of ageing leading to severe pressure on the Federal budget while the living standards of Australian households, including households of aged persons, and State revenues increase substantially. This distributional issue is a matter we think should have been addressed more explicitly in the report. <P> While all of the major assumptions of the model are provided in the report, the workings of the model and numerous minor assumptions are not made explicit. This means that we are only in a position to make broad comments on the outcomes. We are not in a position to re-run the model with different assumptions. The assessment method we use, a proportional approach, is described in the following section.