Tuesday, March 03, 2015

Be careful when reading the Intergenerational Report. It's meant to scare you

What does a government do when it's lost all authority? It tries to scare people, big time.

Last week it was national security. Abbott used the word "threat" 16 times in 24 minutes. He used "death cult" 9 times.

He promised to cancel welfare payments and revoke citizenships (as if those things would make a difference) and said the courts had been too quick to grant bail (as if the Commonwealth could do anything about it).

Devoid of much practical import, his speech was designed to scare us, as will be Thursday's Intergenerational Report.

We know it's expected to scare us because treasurer Joe Hockey said so.

"When people see some of the graphs in the Intergenerational Report they are going to fall off their chairs," he told a business briefing last week.

To fine tune its impact, his department has given $380,000 to Hall & Partners Open Mind, a specialist in "measuring consumer engagement". It has conducted 30 focus groups since November. Asked at last week's Senate hearing whether an advertising campaign would follow, the treasury said it was "working through the guidelines".

It's an extraordinary approach to what's meant to be an information document; intended to do to it what the prime minister's statement did to national security - to make it an instrument of fear.

The Intergenerational Report is required by law every 5 years. It assesses the long-term sustainability of the government's policies 40 years into the future. This one will take us through to 2055. It's 2 month's late, although that's not the fault of the treasury. Finance minister Mathias Cormann was keen to tell the Senate that it's a report of the government, not the treasury. It's inherently political. Sensitivities over its immigration projections (and possibly what it will say about climate change) have delayed it as government ministers have tossed drafts back and forth.

My sincere advice when you read it is to stay level headed, no matter how frightening its projections. What is prophesied almost never comes to pass, all the more so when it is focus grouped and fine tuned by a government losing its grip...

Let's have a look at what happened to the projections of the first intergenerational report, released by Peter Costello in 2002. It said that by 2042 the aging of the population and (largely unrelated) extra spending on health would help push up the deficit to $87 billion, around 5 per cent of gross domestic product.

Five years later Costello's second intergenerational report halved that figure, cutting it to less than 3 per cent of GDP. Even by 2047, the end of the new projection period, the budget wasn't to reach 3.5 per cent of GDP.

A lot of things had gone right. Spending on health had grown more slowly than expected, more of the population was working than expected, and higher skilled migration meant the workforce was more productive than expected. Small changes to the important assumptions meant big changes to the projections.

And some of the assumptions were ridiculous.

The first Intergenerational Report said spending on the Pharmaceutical Benefits Scheme would climb from 0.6 per cent of GDP to 3.4 per cent by 2042. Professors Ross Guest and Ian MacDonald from Griffith and Melbourne Universities pointed out that at that rate the PBS would account for one third of GDP by 2100 and all of it by 2126. The projection was toned down in the second report, as the author's took to heart the implications of "Stein's Law".

Named after the legendary American economist Herbert Stein who advised both presidents Nixon and Ford, Stein's law says that: "If something cannot go on forever, it will stop".

It's a warning about the dangers of extrapolation. Problems have a way of solving themselves. If for instance we were on track to "run out of money" to pay for our health, welfare and education systems (as Joe Hockey once said) we would either find more money or spend less on those services. If we were on track to run out of workers to service our aging population, we would either find ways to use fewer workers (new technologies) or bid up their wages and call forth more of them, possibly from the ranks of the aged population itself.

This isn't to say that the Intergenerational Report isn't a useful exercise, merely that it can't be a useful guide to the future. The mere act of publishing it changes that future.

The future changed again by the time of the third intergenerational report, published by Wayne Swan. If found that by 2042 the projected deficit would be a good deal less than 2 per cent of GDP, not 5 per cent as originally claimed. The 3.5 per cent projected for 2047 would also be nearer to 2 per cent, and even by 2050 (the end of the new projection period) the deficit wouldn't hit 3 per cent.

This week's report will project things out to 2055. Whatever its projection of the extra demands on the government by then, they are unlikely to be difficult to fund. Swan's report predicted that GDP per head would be 81 per cent higher by 2050, suggesting Australians would be well placed to fund any extra taxes required.

Swan's report said that by 2050 there would be just one and a half Australians of working age to support each Australians of dependent age, down from 2 at present. It would sound scary if you didn't know that that was the ratio throughout the 1960s. Back then the Australians of dependent age were predominantly young rather than old, but we managed to support them.

With the possible exception of climate change (and there it's too early to tell) the future is rarely as frightening as foretold.

So exercise some skepticism on Thursday. If you read the word "timebomb", turn the page.

In The Age and Sydney Morning Herald

Related Posts

. 2010. The real intergenerational change

. 2007. The Treasurer's unprescient look at the future

. 2005. It's a granny gravy train - grab a ticket