Thursday, March 05, 2015

The Intergenerational Report to be right message, wrong time

The economy hasn't had a run as weak as this year's, yet after three straight quarters of exceedingly weak economic growth we are about to be told we've got to tighten our belts.

It's the right message. In order to buy all of the extra health care and aged care and all the other things we'll want over the next 40 years we are going to have to either pay more tax, pay more out of own pockets or scale back what we want.

But it's exactly the wrong time to be saying it. In the past three quarters economic growth averaged an embarrassing 0.47 per cent. If it continued like that for 12 months it would give us an annual growth rate of 1.9 per cent. It's not too far above the 1.7 per cent we endured during the global financial crisis, and well below our potential growth rate of around 3 per cent.

Cutting back on spending now, or raising taxes now, as Thursday's Intergenerational Report will suggest we should, would depress the economy further and smother the "green shoots" of recovery the Treasurer Joe Hockey occasionally tells us are emerging.

The intergenerational report is required by law every five years.

If it had been required a year ago soon after the Coalition took office, its message would have been timely with the economy growing at an annualised pace of 3.8 per cent.

We would have been in a good position to accept the need to lose tax deductions or wind back benefits or to pay more for education and health. We would have felt better about the budget.

We would have been presented with the case for restraint. As it was we were presented with the restraint without the case. It's arriving too late. The government will have to build a case for long-term cutbacks without cutting back right now.

In The Age and Sydney Morning Herald

Intergenerational Report to show Labor's spending was growing out of control

Australia would have needed to lift its tax take by almost 50 per cent to meet Labor's long-term spending promises, Thursday's Intergenerational Report will show.

To be released in the wake of very weak economic growth figures showing income per head barely rising, the report will say that Labor's commitments to hospitals, schools and the national disability insurance scheme would have lifted Commonwealth government spending to an unprecedented 37 per cent of GDP by 2055. It is presently 26 per cent, slightly above government revenue of 23.6 per cent.

On Wednesday, the Abbott government was already signalling it will use the report to ramp up its political attack on Labor while also using the findings to frame the political and economic debate about its next budget.

Prime Minister Tony Abbott told question time debt had been set to "soar" under Labor's policies and in contrast, if the government had been able to get all of the measures in its last budget past a hostile Senate, a surplus would have quickly been delivered "and stayed there for 35 years".

Mr Abbott said the report will show that, even with only some of its controversial budget measures passed, the Coalition's plan "does in fact get close to surplus and ongoing deficits are halved".

Graphs in the report show that the budget measures passed by the Senate have cut the expected spending bill in 2055 to 31.2 per cent of GDP. If they had all been passed, including those now withdrawn, spending would amount to only 24.6 per cent of GDP, allowing a tax take roughly in line with the long-term trend.

"Not only is this government serious about economic reform but we have very significantly and substantially delivered the budget repair that we pledged to deliver," Mr Abbott told Parliament. 

Labor's settings would have resulted in a budget deficit of 12 per cent of GDP by 2055. The measures passed by the Senate have halved that to 6 per cent. If all the measures had been passed the deficit would have been eliminated and the budget would be in a slight surplus.

The report includes a special chapter on what Labor's policy settings would have delivered, the first time such calculations have been included in an Intergenerational Report. It will be used to build the case for further spending cuts in the May budget on top of those introduced as a result of the last budget.

Treasurer Joe Hockey said it would kick-start debate in town halls and on street corners. "We will get the information out but we are not doing it in a way that would be typical for governments to buy those rather droll ads that try and convince people to come this way," he said.

The report assumes an economic growth rate of 2.8 per cent over the next 40 years, down from 3.1 per cent over the past 40 years.

The December national accounts released by the Bureau of Statistics show the economy grew by 0.5 per cent in the quarter, the third consecutive quarter of weak growth. Over the past nine months the economy has grown at an annualised pace of just 1.9 per cent. The annual growth rate, including the higher growth before the May budget, was 2.5 per cent.

Economic growth per person was just 0.2 per cent in the December quarter and just 0.1 per cent in each of the two quarters before that.   

The good news in the accounts was a jump in consumer spending of 0.9 per cent largely funded by running down savings, and a 5.3 per cent jump in spending on home building. Business investment slid a further 0.7 per cent.

The projections in the report are sensitive to the assumptions used. Thursday's report will assume Australia's immigration intake stays constant at 215,000 per year for the next 40 years, resulting in a decline in the immigration rate as the population climbs. A higher rate would have resulted in a better budget outlook. Migration typically boosts the size of the economy and the tax take.

The report assumes population growth of 1.3 per cent per year, down from 1.4 per cent per year in the past 40 years.

It says that by 2055 there will be only 2.7 Australians of traditional working age to support each Australian aged 65 or over. At present there are 4.5. The life expectancy women will climb to 90.5 years and the life expectancy for men to 88.

Although the proportion of the population in work will shrink as the population ages, the proportion of both the working age population in work and the senior population in work will continue to climb.

The release of the report comes more than two months before the federal budget is released, and ahead of major new policy announcements including a families package and others targeting small business and infrastructure.

Labor Treasury spokesman Chris Bowen said the report, which is a month overdue, was being used by Mr Hockey "as a prop to help his flailing campaign to sell his unfair budget".

Australian Greens senator Richard Di Natale has signalled his intention to hold a Senate inquiry into the report.

In The Age and Sydney Morning Herald

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