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Costello's intergenerational report is a sham.



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Media Release

BOB McMULLAN MP SHADOW TREASURER FEDERAL MEMBER FOR FRASER

TELEPHONE: (02) 6277 4803 ! FACSIMILE: (02) 6277 8496

9 May 2002

COSTELLO’S INTERGENERATIONAL REPORT IS A SHAM

It is never a bad idea to seek to place current political issues in a longer term context. But as the attached background paper makes clear, it is likely that Peter Costello’s Intergenerational Report (IGR), to be released with next week’s Budget, will have little new to say.

The IGR is little more than a cynical attempt to bolster Costello’s image and at the same time an attempt to justify spending cuts.

If Costello were really serious about intergenerational issues, he would not have scrapped the proposal for a 3 per cent government contribution to superannuation, and he would not have frittered away the Budget surplus buying votes.

There are several key questions about the IGR:

• There has already been extensive research on the demographic outlook, much of it by the same analysts preparing the IGR. So what will the IGR have to say that is new?

• It is doubtful that the IGR will justify Costello’s cost-cutting efforts. Although the IGR will show that health costs are rising, it will also show that increased spending is due mainly to the impact of technological change and rising incomes. This means higher health spending is due mainly to an increase in real costs per capita, rather than the increasing proportion of older people in the population. When you discount increasing health costs for technology and income effects, where is the evidence that ageing will cause a Budget crisis?

• Are journalists correct when they speculate that Costello’s real target is universal health care, that is, Medicare?

• Has the IGR adequately addressed other critical issues, including environmental sustainability, and does it deal with broader issues of population policy? Has it addressed the effect of demographic change on revenue?

Further information: Robert Garran 0419 692 504

Intergenerational Report - Background

Peter Costello has trumpeted the Intergenerational Report (IGR), to be released with the Budget, as a ‘landmark’ document which he claims details for the first time what Government finances may look like over a 40 year time period.

Labor supports the objective of making government policies forward-looking and attempting to anticipate future budgetary pressures. But despite the Government’s rhetoric, there is evidence the IGR has been turned into a cynical political exercise to enhance the Treasurer’s image.

It is likely the IGR will be used to justify spending cuts in the Budget. Media reports suggest the IGR will show that “the government could face a $40 billion to $50 billion-a-year budget blow-out in health, aged care and income support programmes within a generation unless it moves to curb the sharply rising costs.” (Age, 16 April 2002).

What is the IGR?

• The IGR is required under the provisions of the Charter of Budget Honesty Act 1998. The Act requires the IGR be released within 5 years after the Act’s commencement; that is by April 2003, and within every five years thereafter.

• Section 21 of the Act specifies that:

An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change.

Costello has been claiming big things for the IGR

What we are going to do in this year's Budget is, we are going to release for the first time ever in Australia's history, an Inter-generational Report which is designed to look at how this generation is treating future generations. That is, what would Australia look like in 2042, in 40 years time, on current policies, what would the shape of our Budget be? What can we learn about the shape of our Budget in 2042 which can inform us for policy now and can give us some kind of long-term picture of how we want to build Australia? I think it is going to be one of the most exciting documents that we have ever seen. And we know that there are big demographic changes going on in Australia. The population is aging and we have got to think about how we are going to cope with that. And I think this is going to be a visionary, long-term, structural change to the way we think about our Government. Fancy looking out in 40 years time, nobody has ever tried to do that before, and to just try and get a snap-shot of what Australia will look like. [Treasurer, doorstop, 16 April 2002]

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Critique of the IGR

1) It is doubtful that the IGR will offer new insights into the demographic changes

This is the first IGR, but it is clearly not the first analysis of Australia’s demographic outlook for the next 40 years. The IGR has been prepared by the Treasury’s Retirement Income Modelling Unit (RIM). RIM was established in 1992 by the Keating Government to enhance the Government’s capacity to model the long-term implications of retirement income policy. RIM has made substantial contributions to a number of publications that have examined the projected impact of demographic changes on Government finances, and has published its own reports on the issue. Some of these are:

• the Productivity Commission paper of 1999, entitled “Policy Implications of the Ageing of Australia’s Population”,

• the OECD 1999 Survey of Australia’s special chapter on Population Ageing,

• the 1996 Commission of Audit Report chapter on Demographic Change and Commonwealth Finances, and

• the National Strategy for an Ageing Australia, which Bronwyn Bishop attempted to launch amid high farce during the 2001 election campaign. The NSAA was eventually relaunched by Kevin Andrews in February 2002. It was meant to have been launched in 1999 as part of the International Year of Older Persons. The Prime Minister, in his foreword, stated: ‘the national strategy provides us with a long term strategic framework, while setting realistic directions for short to medium term action’. Labor has criticised this document for its absence of specific policy proposals, time lines, and funding.

The OECD (2001) also released a working paper on the ‘Fiscal Implications of Ageing: projections of Age-related Spending’. It is mentioned that “the work presented in this paper has been based on the replies to OECD questionnaires from national authorities and research teams of the reporting countries”. It is understood that RIM provided Australia’s input.

Internationally, long-term budget projections have been published by the US, UK and NZ governments as part of their budget papers.

The already extensive research on these issues raises two points. First, is the Treasurer aware of these publications and RIM’s involvement and is he deliberately creating a false impression to bolster his leadership aspirations? Second, it is difficult to envisage that the IGR will provide any new information, at least at the aggregate level. The papers cited above are recent; it is unlikely that there would be dramatic changes in the methodology and/or assumptions (ie. changes to assumptions concerning fertility rates, longevity, immigration etc) underpinning such projections. We understand it is likely the IGR will include projections at a more disaggregated level than previously, ie. at the programme level, but this will probably be its only new feature. The aggregated data has been publicly available for at least six years.

2) The IGR highlights the Government’s inconsistencies

If, as we expect, the IGR provides few new insights, it will not provide the legitimacy the Treasurer seeks to justify spending cuts in this year’s budget.

• This information has been in the public domain for some time now. If the Government were serious about fiscal sustainability then it would not have embarked on the massive

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vote-buying exercise prior to the election that has systematically eroded such sustainability. Whatever the merits of these particular proposals, they are not measures which a government focussed on the fiscal implications of demographic change would have taken.

• The Coalition’s approach to superannuation highlights the inconsistencies in its claims to be concerned about an ageing population. The government has been undermining the adequacy of retirement incomes, therefore placing greater pressure on public age pensions in the future.

o Costello failed to deliver the Government's 3 per cent contribution to superannuation in the 1997-98 Budget despite the fact that it was included in the 1996-97 Budget estimates; and

o tax collection from superannuation under Costello has increased substantially, from $1.5 billion in 1995-96 to $4.6 billion in 2000-01.

• There is genuine concern that the Treasurer’s hidden agenda is to undermine universality in health care, that is, to undermine Medicare.

3) There is little to suggest that there is an ‘ageing crisis’.

The scare mongering that will inevitably take place with the release of the IGR needs to be put into perspective. To begin with projections over such a long period need to be treated with an appropriate degree of caution. They are very sensitive to the underlying assumptions. For example, in projecting health costs adjusting the estimated annual productivity growth rate can vary the estimated health costs considerably (table 29, page 127 OECD 1999).

The assumptions behind claims of a budget blowout of $50 to $50 billion deserve careful scrutiny: in particular whether the assumptions about both expenditure and revenue are reasonable, and whether they take account of the GST as a crucial element of the Commonwealth’s tax base. A more instructive way to look at future costs is to focus on costs as a percentage of GDP. On that basis:

• Both RIM and OECD projections indicate that growth in the age pension will be relatively small, increasing from 3% to around 4.5% of GDP by 2050.

• The growth in health costs is expected to be greater, but this is due to a combination of factors including the increasing cost of medical technology rather than ageing per se.

o OECD (2001) estimates that age-related health and long-term care public spending will increase by 6.2 per cent of GDP by 2050. In level terms, this means an increase from 6.8 per cent in 2000 to 13 per cent of GDP by 2050.

o RIM (1999) estimated that total health costs (public plus private health costs) would increase from around 8.5 per cent of GDP to between 15-19 per cent of GDP by 2041 depending on productivity assumptions.

• The increase in pensions and health costs will be partially offset by reductions in education, child-care and other programmes due to a smaller proportion of the population being young. Taking these offsetting factors into account, the OECD (2001) estimates that total public age-related spending will increase by 5.6 per cent of GDP by 2050. In level terms, this means an increase from 16.7 per cent in 2000 to 22.3 per cent of GDP by 2050.

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• The increase in total age-related spending in Australia is similar to the OECD average of 5.5 per cent.

Key questions:

• Information on Australia’s changing demographics has been public knowledge for some years. The government is attempting to use the Intergenerational Report (IGR) to preach the virtues of fiscal responsibility while it has engaged in fiscal profligacy on a huge scale.

• Even if it is accepted that there is a looming problem with ageing, there are many options open to policy makers. This government has predictability reached for the cutting social expenditure lever. A preferable solution would be to lift Australia’s growth potential and thus increase our capacity to afford such things as expensive medical technology. Lifting our growth potential rests on a foundation of greater emphasis on education, training and lifting our innovative capacity. This is consistent with Labor’s sustainable growth agenda.

• There is also the concern as to whether the IGR will be too narrow in focus. For example, will it encompass environmental sustainability? Clearly the issues of land degradation and water rights are important issues that have intergenerational consequences and real financial costs, as evidenced by the estimated cost of addressing the problems with Australia’s river systems.

• Furthermore, any adequate response to the issues raised in the IGR would require the development of a formal population policy which dealt in a sophisticated way with the intersections between immigration and the impact of ageing and the relationship between population and economic growth. The government has consistently said there is no need for such a policy and has snubbed the efforts of the business community and the Victorian Government to generate a debate on population policy.

In contrast Labor is committed to developing a population policy which deals not just with population targets but also with the major issue of population dispersal so that growth can be targeted in areas of Australia that are likely to lack behind and pressure can be taken off the Sydney basin.