Opportunity abounds in IGR. Can Chalmers and political class grasp it?

In a political world obsessed with the ultra-short term, the 2023 Intergenerational Report (IGR) launched this week is a somewhat incongruous document — as it focuses on what might happen in 40 years’ time.

Rest assured though, the government of the day always manages to insert its political priorities into the IGR one way or another, and this year is no exception.

For example, the ALP highlights the supposed growing cost of superannuation tax concessions and the wisdom of its policy to change superannuation balance taxation.

However, how the cost of those concessions is calculated remains contested.

The government may claim that concessions will soon ‘cost’ more than pension payments but only if you apply an unrealistic assumption that contributions and earnings would otherwise be taxed at full marginal tax rates.

Of course, in many respects the IGR is a rather mechanical document; its predicted outcomes are almost completely dependent on the assumptions made up front.

Interestingly, as it has been 20 years since the first IGR, the 2023 one reflects on the accuracy (or otherwise) of the original predictions in IGR 2002. While many of these projections were fairly close to the mark — such as life expectancy, fertility and Real GDP — others were quite a long way off.

Most notably, IGR 2002 predicted the budget would remain in surplus until 2022 and then move into deficit.

Instead, like a struggling swimmer caught in a rip, the budget was quickly dragged underwater and into deficit for most of that time; only briefly surfacing for a gulp of surplus air in 2022, soon to sink below the waves again.

Consequently, net debt is some 30% of GDP larger than predicted in 2002.

On the positive side however, the 2002 IGR substantially underestimated both net overseas migration and the participation rate. As the 2023 IGR noted, the increase in migration and higher participation “was offset by lower-than-projected productivity growth … the slowest in 60 years”.

The problem is these offsetting effects are not expected to be enduring. The IGR predicts that net overseas migration will fall to just 0.6% by 2062, down from its current level of 1.5%. This drives population growth below 1% by 2052 (it has averaged 1.4% over the past 40 years), while participation is expected to decline to 63.8% (down from its current level of 66.6%).

Meanwhile productivity is projected to stay at its 20-year average of 1.2%.

The end result is that real GDP will grow at just 2.2% a year and the annual growth in real gross national income per person is projected to fall to just 1% a year; less than half the level of the past 40 years.

Reading the IGR has always been a somewhat gloomy experience — the central message of every report has been that the good times won’t last — but the projections in this IGR represent a turgid, torpid future for a country that has been a world-leading economy for much of the past 30 years.

It is perhaps little wonder that younger Australians feel disillusioned by the current trajectory of the economy.

For example, the IGR highlights the fall in homeownership rates from 1981 through 2001 and then to 2021.

While homeownership fell significantly for those under 40 between 1981 and 2001, those 50 and above had a slightly higher ownership rate in 2001 than 1981.

Unfortunately, homeownership has continued to fall for the under-40s between 2001 and 2021. The result is an approximately 15 percentage point decline in homeownership for those under 40 between 1981 and 2021.

Worse still, the decline in homeownership has continued right across the age spectrum between 2001 and 2021. Given the importance of homeownership to living standards in retirement, the hope that homeownership will remain above 80% for those in retirement may end up being more important than it seems.

It is important to note that the IGR does not preclude the prospect of reforms that could turn the gloomy future around.

But there is also perhaps less to hope for there than it seems.

The government has previously indicated it believes in a government-led, ‘co-investment’ approach to our productivity challenges.

We are constantly reassured that this ‘doesn’t mean picking winners’, but in practice that is exactly what it does mean. For example, at one point the IGR — rather unrealistically, it must be said — contemplates Australia’s future exporting clean energy via undersea cables.

Others have already been speculating that Australia needs to up its industry policy game to compete with massive US subsidies in clean energy manufacturing.

The Treasurer has characterised our current economy as being based on digging up minerals and shipping raw materials and primary produce around the world. Labor, predictably, believes it would be better to revive manufacturing.

But as the IGR makes abundantly clear, this view of the country is far too narrow. Australia is overwhelmingly a service-led economy; not one focused on manufacturing or mining.

Competing subsidies are exactly the wrong approach, as anyone with even a cursory knowledge of Australian economic history must know. Far from being a future-focused industry program, this is exactly what Australia used to do prior to the reforms of the 80s.

Subsidies are effectively a straight transfer of wealth from taxpayers to consumers of the subsidised product. As other countries compete to throw their tax dollars at us, we should be picking up this free money — not trying to outdo them with our own tax dollars.

Not to forget: subsidising inefficient industries will send our stalling productivity even further backwards. It’s a dead end.

The IGR could serve as a wake-up call for a country that has largely eschewed reform for almost 2 decades now, living on the benefits of reforms past and relying on high migration, rising participation and a massive boom in the terms of trade for our prosperity.

But can our political class grasp the opportunity?

Simon Cowan is Research Director and Matt Taylor is Director of the Intergenerational Program at the Centre for Independent Studies.

Photo by RDNE Stock project