Tuesday, April 03, 2007

The Treasurer's unprescient look at the future

There is something seriously out of whack about the intergenerational report launched by the Treasurer at the press club yesterday. Despite all the talk about the ‘aging time bomb’, the intergenerational report is not and never was intended to be a report exclusively about aging.

The Charter of Budget Honest Act which requires the publication of the intergenerational report every 5 years describes its purpose as being “to assess the long term sustainability of current government policies”.

Aging is doubtless one of the challenges to sustainability over the report’s 40 year time horizon, but it isn’t the only or even the most important one.

The report itself makes clear (in the fine print) that roughly two-thirds of the extra government spending it says will needed “is driven by factors other than aging”.

The biggest, according to the report, is the increasing cost and use of prescription drugs - by people of all ages...

It is confident enough of this to predict that for all age groups spending per person on drugs will climb by 6.3 per cent each year, trending down to 3.4 per cent each year by the middle of the century.

But when it comes to the cost of climate change and the cost of doing something about it, it offers no prediction at all.

As the Greens senator Christine Milne said last night - it is as if the Treasurer is obsessed with the cost of pharmaceuticals by 2050 while being relaxed and comfortable about the fact that Australia could be 3 degrees warmer.

It isn’t as if he hasn’t been presented with information about the scale of what is in prospect.

Last Wednesday Peter Costello met Sir Nicholas Stern, the worlds leading expert of the economics of climate change.

Sir Nicholas told him that Australia needed to cut its greenhouse gas emissions by up to 30 per cent by 2020 - and 90 per cent by 2050.

They are far from small targets and they relate to the exact time frame of the intergenerational report, but even the consequence of smaller targets is excluded from the report on the ground of “uncertainty”.

The report devotes 5 pages to the environment (which is 4 more than its predecessor) but says little more than observing that “the extent to which environmental pressures are reflected in increased government spending will depend, in large part, on the choices governments make and, most importantly, the policy instruments they choose for dealing with environmental problems”.

Sir Humphrey Appleby couldn’t have said it better - if he was asked to say nothing while making it sound as if he was saying something.

(When the Treasurer himself has spoken about financial impact of climate change his language has been disturbing. He told parliament last week that there were criticisms of Stern for using too low a discount rate and as a result valuing the future too highly. If Stern had used the rate the Treasurer suggested – the long-term bond rate – his calculations would have shown there was little point in caring about future generations, and little point also in preparing an intergenerational report.)

Where the Treasurer’s report is specific – on the cost to the pharmaceutical benefits scheme of increased spending on drugs - the detail of the report makes it clear that the estimate has little to do with what will actually be needed or will happen. It is an extrapolation of an exponential growth rate.

The first intergenerational report used this technique and was exposed to ridicule. It had PBS spending growing at 5.64% per person per year. Economists Ross Guest and Ian MacDonald from Griffith and Melbourne Universities pointed out that at that rate Australia’s PBS spending would account for one third of GDP by 2100 and 100% by 2126!

This time the Treasury modified the approach by slowing the rate of growth over time, but it has still used a guesstimate divorced from the likely reality.

In recent years we have decided to use a number of very expensive new drugs. Health economist Jeff Richardson from Monash University argues that there is no necessary reason to believe that is going to continue (especially if the new drugs actually do us good).

And should one of the new drugs turn out to do us a lot of good it could drastically cut medical spending, as did the arrival of penicillin less than 100 years ago.

I mention this to make the point that the intergenerational report has attempted to forecast the unforcastable in one area – medical spending, but has regarded it as inappropriate to do so in another – climate change. As a guide to likely challenges facing Australia over the next four decades it is willfully incomplete.

And unnerving.

It treats spending on health as a bad thing, to be kept down. Yet elsewhere it makes clear that we will be much richer in 40 years time than we are today –almost twice as rich in terms of what we can buy.

It is well known that the richer people get, the more of their money they want to spend on their health. Our basic needs include food and shelter. If indeed we are twice as rich as we are now by the middle of the century we won’t need to spend the extra money on food and shelter – we will want to spend it on improving our health.

In an emergency good health care can only be guaranteed by the government, no matter who you are. When Kerry Packer suffered his first massive heart attack while playing polo in 1990 a government ambulance rushed him to the nearest government-run hospital.

By the middle of this century we are likely to feel happy about paying more in tax to buy better health care.

And we might look back on 2007 and wonder why the second intergenerational report was so unprescient about the big change we have just lived through.