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Analysis of Intergenerational Report -

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Analysis of Intergenerational Report

Eleanor Hall reported this story on Monday, February 1, 2010 12:30:00

ELEANOR HALL: Joining us now with his response to this report is the chief economist with AMP
Capital, Shane Oliver. He has been a close observer of these intergenerational reports since the
first one was released by the Federal Government almost a decade ago.

Shane Oliver, thanks for joining us.

SHANE OLIVER: Thank you.

ELEANOR HALL: Now we heard earlier in the program that the architect of Medicare John Deeble says
the Rudd Government is exaggerating the problem of the ageing population and that the Opposition
says the Government is scaremongering on it.

You've been listening to our correspondent's rundown of the report there. We have been also hearing
that the Government will be in deficit by around 3 per cent by 2050. Do you think the report does
fairly represent the demographic challenges Australians face?

SHANE OLIVER: My feeling is that the report is a fair representation of the challenges Australia
faces. The situation may not be quite as dire as was projected in the first report eight or nine
years ago but that is largely because the population has grown faster and also measures to try and
deal with the ageing population such as you know, encouraging people to stay at work for longer
along with the fact that the mining boom has led to a big increase in government revenue.

But my feeling is that these figures would reflect the best information available to the Australian
Government and the Treasury and therefore it is a pretty good guide to the pressures Australia
faces going forward as the population ages.

ELEANOR HALL: So if an ageing population pushes the Federal Government into a deficit of around 3
per cent by 2050. That doesn't sound like a huge number but what would it translate to in terms of
tax increases for example?

SHANE OLIVER: Well, to try and close that gap, a 3 per cent gap for example would require an
overall tax increase of around 15 per cent. Now of course that can be levied on households or
businesses or a combination of both but whichever way you are looking at it, taxes would have to
rise.

The alternative would be that we cut government spending. In other words services are reduced. So
whichever way you cut it, either we run with higher budget deficits off into the future or
alternatively, we are going to have to cut back in terms of government spending or expect a higher
tax rate so which either way you look at it, with the population ageing and people living longer,
there will be a cost to that.

ELEANOR HALL: Of course the head of the Treasury has been leading a massive review of Australia's
tax system. Do you expect that the Henry Tax Review will recommend tax increases to deal with this
ageing population issue?

SHANE OLIVER: I am not sure that the Henry Review will deal specifically with the ageing population
but I think the Henry Review will include measures designed to broaden the base of the tax system
and one area that seems to be getting some look in there is talk of a broader tax on Australian
mining companies.

We are going through a mining boom. Obviously minerals and energy are a national resource and there
is talk that the national resource tax, resource rent tax might be put in place to tap into that.

So that is sort of one thing that can be looked at and also measures to try and reduce tax
expenditures or and ensure a compliance with the tax system is sort of other areas to look at but
whichever way you cut it, Australia will have to look at higher tax revenue going forward to deal
with this problem.

ELEANOR HALL: Well, there is also option, of course of increasing productivity. The Prime Minister
has been talking a lot about that lately. Do you think that productivity could be pushed up
sufficiently to cover such a large Budget deficit?

SHANE OLIVER: I think productivity can be enhanced. We have seen a steady slowdown in productivity
growth over the last decade or so from the strong productivity growth we saw through the 1990s but
it is difficult to get it up to the high levels we had back then.

Obviously dry, growing the size of the pie so to speak will make it easier, and less painful, in
terms of paying for a health cost of an ageing population. So productivity is a nice way to go but
I think it is worth noting that the huge productivity gains we had in the 1990s were on the back of
the deregulation that occurred in the 1980s and going forward, there is not a lot more we can
deregulate.

It tends to be relatively minor things like deregulating professions and local newsagents and all
those sorts of things and federal/state relations where I think the gains might be somewhat less
than what we had from the deregulation moves of the 1980s.

So, productivity growth can help but I don't think it is going to be a big part of the answer here.

ELEANOR HALL: There are some tough options ahead. Chief economist with AMP Capital, Shane Oliver,
thanks very much for joining us.

SHANE OLIVER: Thank you.