Friday, March 06, 2015

Intergenerational Report: How Labor was framed

How much worse under Labor? The Intergenerational Report tells us that had Labor's programs continued uninterrupted, the deficit would have hit $534 billion by 2055. The figure is expressed in today's dollars. It would amount to be 11.7 per cent of gross domestic product.

It's an extraordinary projection. The previous Intergenerational Report, in 2010, predicted a deficit of less than 3 per cent of GDP.

Fortunately the Coalition came to office and turned things around, the report suggests. The measures so far passed by the Senate would have cut the projected deficit to around 6 per cent of GDP and the measures not yet passed (some of which the Coalition has since abandoned) would have abolished it altogether.

As the Treasurer Joe Hockey said: "Last year's budget was a budget that tried to do 40 years of work in one year and it did bite off too much."

How it did it is buried in the fine print of the Intergenerational Report. The biggest change was the decision to stop lifting spending on hospitals in line with the costs of running them. Beyond 2017-18 Commonwealth grants to states for hospitals will increase only in line with the population and the consumer price index. But the cost of running hospitals is continuing to climb. Not meeting that cost is unrealistic (unless the states meet it by doing something such as lifting the goods and services tax) but it holds back the projected deficit.

The other big change was the decision to freeze Australia's foreign aid budget in real terms. Under Labor it was to climb to meet the United Nations target and then keep climbing with gross domestic product from then on. The budget measure passed by the Senate has it climbing by just only consumer price index for the next 40 years.

Neither position sounds realistic... It is likely Labor would have imposed a further pause on its program of lifting foreign aid (it's imposed plenty in the past) and it's likely that the Coalition would have relented, but when compounded over 40 years the difference between the two policies gets very big.

Of the measures not yet through the Senate, the biggest are the Coalition's approach to pensions and Gonski.

The Coalition wants to index pensions only to the consumer price index rather than to wages until the budget is back in substantial surplus. Labor wants pensions to continue to climb with male earnings. The Coalition wants to lift the pension age to 70. Labor had only announced an increase to 67.

On the Gonski education reforms, Labor had committed to an expensive formula that would have supported schools on the basis of need. The Coalition guaranteed that funding only for a few years. Again, over 40 years the difference is huge.

Those measures are about all it takes to eliminate Labor's looming deficit according to the report - those measures, plus the lower interest payments on debt that would result.

It's an implausibly big effect in part because Labor would most likely never have spent as much as the Coalition is suggesting and because the Coalition would never have spent as little.

In The Age and Sydney Morning Herald

Related Posts

. The Intergenerational Report will be right message, wrong time

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

. 2010. The real intergenerational change