Bridging generations

We are not alone in this important work – across the country, public servants, expert agencies and frontline workers roll their sleeves up to tackle any number of specific policy challenges that we face as a country.

But tonight, I want to talk to you about the forest, not the trees.

We don’t have a decent shot of improving the lives of Australians – current and future – without effective public institutions, that have broad-based trust and acceptance, and that speak honestly and openly to the public.

At this Forum, we are hearing from those who have been entrusted with carriage of many of the key economic institutions in our democratic system. Those that ensure that Australians can access the goods and services they need, and buy and sell with confidence; those that ensure that our markets are competitive, and our financial services are robust; and those that make technical economic policy decisions independently, in the public interest, within the remit given to them by an elected Parliament.

Australia’s core institutions extend beyond these: to our courts, law enforcement, electoral commissions, public health agencies, schools, and so on.

When we focus on how we eke out more – more growth, more efficiency, more innovation – it is easy to take for granted the foundational role these institutions play in our day to day lives.

But make no mistake – effective institutions that have the trust of the public – they are the bedrock of our economy, and our society.

Part 1 – Institutions drive prosperity

The literature on economic development tells us that inclusive institutions – those that distribute rights and economic gains across a broad swathe of the population – underpin prosperous economies.

This is because prosperity ultimately depends on the behaviour of people: investing in their own education, trying new things, building better things together, caring for each other, and trusting each other. That is what drives higher living standards over time.

In the long-term, human beings need confidence in the institutions that govern them, and that confidence is built by ensuring that the benefits of growth are broadly shared. This is the most effective way to embed both the capabilities and the incentives for education, innovation, and endeavour – by expanding the share of the population that have the chance to build a life that has meaning for them, no matter the cards that they are dealt.

Throughout history, humans have sought out the places where this will be possible for themselves, and for their children. In fact, a large part of the tremendous post-colonial prosperity of settler societies like Australia, Canada, and the United States has been their ability to bring together people from all over the world, who contribute their skills and their drive to their new home.

Conversely, societies that are extractive – using natural or human resources to enrich a colonial power or a narrow segment of society – those societies do not thrive in the long run.

The latest Nobel Prize in economics recognised the contributions that Acemoglu, Johnson, and Robinson (known to their friends as AJR) have made in uplifting this understanding in mainstream economics.  One of their major findings has been how the experience of colonisation in non-settler colonies saw previously rich countries get dragged into a trap of low growth and poverty, by concentrating the returns from labour and resources to a small group rather than distributing these across the population.¹

Over the 1980s and 1990s, there was a strand of thinking that, post-Cold War, it was untrammelled markets that had won best-in-show.

Not so much.

Thorough, empirical cross-country studies show us that, in fact, inclusive institutions – the rule of law, broad-based rights and freedoms, a stable financial system, and well-regulated markets – more reliably correlate with long-term prosperity.

So, it is not the law of the jungle, animal spirits unleashed, that supports an affluent society. 

Rather, when striving for growth and prosperity, what we need are institutions that can devise and maintain rules that strike a good balance across the interests of the broad public, and thereby enjoy high levels of trust and confidence.

Part 2 – Australia as an exemplar

At this specific time, it is tempting to tell a sombre story about Australia’s economy – and I will give in to that temptation shortly. But if we zoom out over the past 50 years, the story of our prosperity since the 1970s is remarkable, and can teach us a lot about the power of good institutions.

The last quarter of the twentieth century saw a substantial transformation of the Australian economy, and society, that set us up for a long period of prosperity.

National expansion in healthcare, education, and social security was achieved alongside an ambitious economic reform agenda that removed long-standing structures of industry protection, and delivered broad-based economic prosperity despite the challenge of vested industry and union interests. Australia turned to face the world, and benefitted from that – materially and culturally. Our economy became more flexible and resilient to shocks. We rose from a middle of the pack country, to higher than average growth in productivity and living standards. To this day, our life expectancy is the highest in the English-speaking world, and we are one of the richest, most liveable countries on the planet.

This period of economic reform put in place the economic ‘playing field’ we have today, and indeed, many of the institutions in this room were either established or achieved their independence during this time. The success of these reforms also rested on clear communication to, and education of, the public around why potentially painful reforms were needed. Modern administrative law and government transparency date back to this period, building upon and modernising the traditional civil service.

Inclusive institutions – in this case our strong social safety net in Medicare, public education, welfare, and comprehensive award and minimum wage system – enabled this country to open up, liberalise, and benefit, very materially, from its advantages in the global economy. Our approach to migration and to embracing a multicultural society, treating migrants as new Australians, not guest workers, who were equally entitled to that safety net, was another critical piece of the puzzle. This enabled Australia to successfully integrate people of all types of backgrounds and education levels into a cohesive society, which to this day shares a broadly held belief in the benefits of migration.

Equity – across race, place, and gender – is not a zero-sum game. Rather, it enables a country to maximise the many talents of its people.²

This stands in contrast to the situation faced by the United States – which is the elephant that seems to have parked itself in every room this past week. The United States is not us. Its voters are more polarised, voting is optional, and there is a significant evangelical vote that does not have an equivalent in other advanced democracies.

I would caution against us jumping to hasty conclusions as to what last week’s US election outcome means specifically for our society. Not without pausing to think about some fairly stark differences in the lessons to be drawn from our respective recent history. While real wages in Australia over the past decade have stagnated, over the 40 years prior to Covid the average US worker has not seen the growth in the US economy shared with them. And they have not benefitted from inclusion in broad-based education, healthcare, and other public services, like we have in Australia.

Nonetheless, right now in Australia, we have some pretty profound policy challenges to confront, above and beyond what any of us have had to contend with before.

The world around us is more unstable, and less democratic.³ The international rules-based order, which has benefitted small countries like ours, is fraying. The needs of our ageing population are placing more pressure on working people, our health system, and our public finances. Productivity growth has slowed across the developed world. Climate change is already upon us, and we are facing down an existential imperative to decarbonise our economy in the next 25 years.

Perhaps most destabilising, people are increasingly getting their information from dispersed sources on social media that evade scrutiny of their claims.⁴

Amidst this it is not surprising – though no less frustrating – to witness the rise of cynical politics, calculated for electoral advantage and escapism, rather than seeking to bring Australians along on real, enduring, solutions.

I firmly believe that we have the ability, collectively, to tackle the challenges ahead of us, and pave a great future for our kids, and those that come after them.

But there are no quick fixes here. We need solutions that grapple with and cut through complexity, rather than ignoring it. And we need to heed the hard-won lessons of the twentieth century on what builds a prosperous, decent society.

There are going to be trade-offs. There always are. Australians making informed choices about these trade-offs, as a collective, is a real test for the strength of our democracy.

And this means that trust and confidence in our public institutions is as important as it has ever been: trust that they will act on evidence, treat people fairly, and pursue the public interest, not be swayed by vested interests.

Part 3 – Trust in Australian government and our institutions

So where do we sit, now?

By global comparison, Australia is coming from a place of relative strength.

According to comparative data, Australians display higher trust in our national institutions than many other advanced economies.⁵ Better than the United Kingdom, Germany and the United States, broadly comparable to the smaller English-speaking countries Canada, New Zealand, and Ireland, and the Scandinavians.⁶

We have particularly high confidence in public frontline services, much higher than we do in our federal parliament.⁷

That said, globally, trust in institutions is declining, so our relative rankings might be cold comfort.

So how are we doing compared to our own past performance?

Annual survey data tells a mixed picture. It doesn’t go back very far and bounces around quite a bit. But broadly, it tells us that Australians’ trust in government shot up during the pandemic, and has since dropped back to around where it was before.⁸

If we want to understand how we are performing over time, the Australian Election Study has looked at public sentiment at each federal election for the past 35 years.

Over that period, trust in government peaked in the mid 1990s, dropped, then came almost all the way back up in 2007.

But since 2007, there has been a slow, steady decline in the proportion of Australians who trust government, from 43 per cent down to 25 per cent, with an uptick after the 2022 election to 30 per cent.⁹

I should say, there is a lag in this type of data.

This means that changes in trust in our institutions are likely to be well underway by the time we see them in the data, and we should be vigilant for warning signs and mindful of the consequences.  For example, the recent COVID inquiry reported a decline in trust, and warned that this might affect people’s willingness to follow public health directives in the future.

If we break down trust in government by age, we see that younger Australians have much less confidence that government can be trusted to do the right thing.¹⁰ And while a large majority of us are pro-democratic, there is a slowly widening age differential amongst those who prefer democracy to other forms of government, versus those who believe it doesn’t matter for someone like them what kind of government we have.¹¹

Higher financial stress also correlates with lower trust in government.¹²

During the pandemic, governments worked to ensure that households were shielded from the financial impacts of the pandemic, providing direct financial support to individuals and businesses.

But that unprecedented support is a distant memory for many households today. Over the past three years, inflation and interest-rate hikes have pushed particularly younger people to the brink.

The Scanlon Social Cohesion survey, conducted annually since 2007, shows a steady decline in the number of people who agree that Australia is a land of opportunity, in which hard work brings a better life over the long term.¹³

The institutional economists will tell us this is not the path we want to be on.

Part 4 – A wretched intergenerational bargain

Earlier this year, I addressed the National Press Club in the lead up to the federal Budget. In that speech, I stated that Australia was sitting on a wretched intergenerational bargain, and it had gone on for long enough.

To be clear: I’ve got no desire to agitate the generation wars – today’s theme after all is Bridging Generations.

Rather my intent tonight has been to lay out the case that it is in all of our interests for younger generations to experience a system of government that works fairly, even if it is not perfect. Intergenerational equity is not a zero-sum game.

We need young people to believe, and believe with good reason, that we have an economic system whereby the decks aren’t stacked against them. We cannot take for granted their acceptance of our economic institutions as currently designed – not if those institutions are not seen to be working for the long-term benefits of all, but are rather seen to deliver short-term gains for those who already have power.

There are some legitimate questions about whether our economy, and our policy choices, are in fact delivering for younger and future generations.

The most obvious is the lost decade on climate action after Australia’s carbon price was dismantled in 2014. Even now, Australia does not have the necessary level of bipartisan agreement on climate action, with a misguided focus on whether or not renewable energy will lower prices, rather than setting a stable framework to put us on the lowest-cost pathway to net zero.

As my Grattan colleagues Tony Wood and Alison Reeve regularly point out – there is no choice to turn back on net-zero emissions, let alone the energy transition. The science is what it is. We can only make the most of the transition or fall behind. What is clear is that young Australians resoundingly believe this is a priority. They expect and need to see our institutions take serious action.

Australians turn to government in a crisis. They expect leadership in a crisis. When governments step up, they are rewarded with trust, as we saw at the height of the pandemic. And when they don’t, the public turns on them, as we saw during the 2019-20 bushfires.

Given the importance of government acting in a crisis, seeing the net-zero transition delayed or blocked for the past decade is very likely a key driver of low trust among younger Australians that government will do the right thing. And why, across all age groups below 65, more than half of those surveyed in the Australian Election Study believe that the government is run for a few big interests, rather than the public interest.

But it isn’t only about climate change. To the current government’s credit, they have set themselves to this task, and that plays a plausible role in the uptick in trust in government after the 2022 election.

But there is a pretty significant economic dimension to the trust story too.

Let’s start with incomes, where we are playing catch up.

For previous generations, each generation has enjoyed substantially higher incomes than their predecessors.

But the generation born in the 1990s, so between 25 and 34 today, are the first to have not seen this progress relative to those born in the previous decade. And real incomes for young people went backwards in the decade after the Global Financial Crisis, driven by young workers being underutilised – that is, being unable to get the hours they wanted.¹⁴

That said, the strength in our labour market today, in terms of both low unemployment and low underutilisation, is a good thing from this perspective. A healthy labour market providing opportunities at the start of people’s working lives sets up our young workers today for a better income trajectory in the future.

But when it comes to wealth, the intergenerational picture is pretty bleak.

I don’t need to labour the point that growth in house prices, which has vastly outstripped income growth since the 1990s, has hit younger generations especially hard. Older Australians have seen their wealth accumulate dramatically through a mix of restrictions on housing supply in well-located areas, and favourable tax treatment.

Meanwhile younger generations are increasingly locked out of stable housing in the places that are well-served by infrastructure, and where their jobs are, firstly as renters and then certainly as homeowners.

The moves by state governments to break the deadlock on greater housing density in well-located areas of our major cities is an important proof point for younger Australians – proof as to whether our political system can actually address the fairly fundamental social and economic problems that our housing policy failures have created, and do so over the objections of certain well-off older Australians.

From the perspective of ensuring that the benefits of the economy are broadly shared across the population, this wealth disparity is especially troubling.

Grattan’s analysis has shown how large the wealth disparity has become over the past 25 years between younger and older Australians.

In 1994, 65-74 year-olds had roughly 3 times the wealth of those aged 25-34. But by 2020, this gap had widened substantially: the average household headed up by a 65-74 year-old had almost 5 times as much wealth as a household headed by someone aged 25-34.¹⁵

Since the pandemic, this has played out in very concrete ways, creating parallel economic realities.

Those buffered by wealth have continued to spend, including growing discretionary expenditure, through a sustained period of high inflation and steeply rising interest rates. While not all older Australians are wealthy, there is a sharp age dimension to this divergence in fortunes.

Younger Australians are working more,¹⁶ yet cutting back on discretionary spending and drawing down their savings; while older Australians are comfortably able to enjoy life and even increase their savings.¹⁷

And here’s the thing: that was already happening before the pandemic. Grattan’s 2019 report, Generation Gap, set out how earning and spending by older households was growing faster relative to younger households, and that younger households were cutting back on non-essentials.

Now I could stop here, because there is something really jarring about people working full-time, or multiple jobs, and running down their savings, as monetary policy tries to cool the economy, while the average older Australian increases their discretionary spending.

But how could I possibly not mention the real kick in the teeth – which is how our system of tax and transfers makes this intergenerational bargain truly a wretched one.

As my Grattan colleagues put it in 2019, our tax and spending policies are underwriting unprecedented transfers from younger households to older households.

Working-age people are being required to shoulder more of the budgetary burden, while it is older Australians who account for the greatest shares of health and care spending, as well as the most substantial welfare transfers – being pensions.

We know this is unsustainable. Multiple Intergenerational Reports have told us so. It is dutifully laid out for us in budget papers year after year.

Yet, while incomes for households over 65 have increased, they have been protected from paying their share of tax through a series of policy decisions that mean that it is age, rather than income, that determines how much tax people pay in this country.

In 2019, Grattan estimated that a working-age household earning $100k would pay around two-and-a-half times as much tax as a household over 65.

Just let that sink in – you are on, say, $120,000 per annum. You are at a stage in life where you may have a young child. You rent, with little security of tenure or control over rent increases, and you cannot afford to buy anywhere nearby. On current policy settings (without the proposed reforms), you carry a HECS debt from the years you spent studying, which you are required to pay back at the rate of 7.5 per cent of your income, on top of your income tax.

And a retired household down the street, also on $120,000 per annum, pays a fraction of the tax you do, with no coherent policy justification for such an inequitable outcome.

There is a lovely diagram that accompanied the Nobel-prize announcement for AJR, illustrating, for those who haven’t read the many tomes they’ve produced, the basic mechanics of what their research shows happens when institutions don’t deliver broad-based benefits.

It’s a cute little cartoon, and in one scenario, you see a person dressed in fancy gear being carried off to a guillotine. That bit of the diagram is labelled ‘revolution’.

I certainly hope never to see the guillotine re-emerge in my lifetime.

But something’s definitely gone awry, no?

And I don’t want to alarm you, but as I said, it is in all of our interests to make sure that younger generations have a sense of hope about the future, rather than a sense that they are being systematically screwed over.

One of the factors that influences people’s trust in government is feeling like they have a say in government decisions.¹⁸ In fact, this dimension appears to be a better predictor of trust than demographic or socio-economic factors.

Yet the perspectives of Australians under the age of 40 are woefully underrepresented in our positions of power.

Fair enough – you may have good reasons to expect that the heads of our independent economic agencies are not there for their fresh youth perspective, but for expertise built over long careers. Likewise, we don’t expect our judges, our police commissioners, our chief health officers to be young.

But our Parliament? Our Parliament is meant to represent us all. Our Parliament should be the counterweight to age imbalances you will otherwise find in senior public positions.

In Australia, fewer than 10 per cent of our federal MPs are under 40.¹⁹

And yet, 39 per cent of the voting population is aged under 40.  So, about 40% of the voting population represented in fewer than 10 per cent of seats.

In New Zealand, also about 37 per cent of the voting-age population is aged 20-39. Yet there, 34 per cent of MPs are aged under 40.

In fact, Australia is one of the worst performers in the OECD in terms of underrepresentation of under-40s in the national parliament, well below the OECD average. The United States is one of the handful of countries that is worse than us.²⁰

Perhaps this has something to do with our parliament’s failure to display the courage to tackle our long-term policy challenges.

For it is younger Australians who are most focused on the long term, who seem most alive to the imperative that our economy deliver for a broad section of the population, not narrow interests.

It is younger Australians who most accept that we need to act on climate change,²¹ even if that is costly; despite it being younger Australians who are the most financially stressed of any generation.²²

It is younger Australians who have the greatest comfort with our levels of migration;²³ despite it being younger Australians whose home ownership rates are falling.

Part 5 – Close

What does this tell us?

It’s not a story of economic resentment fuelling self-interest. I think it may be patience wearing thin.

It is a wake-up call, to remind us all that the job of governments isn’t just to think about our personal interests in the short term, but the broader public interest over the long term.  

In a democracy, we govern ourselves. It is all of our responsibility to seek out actual facts and evidence, to engage thoughtfully, rather than just vote with our tribe.

There are absolutely ways to get back on a better path for Australia. We have clear policy opportunities to improve intergenerational fairness, and a responsibility to ensure that younger generations have a bigger voice in public decision-making.

Taking these opportunities will require older generations to get on board and take the mission of securing Australia’s prosperity for future generations as a shared one. Having benefitted from Australia’s golden run, older Australians are in great position to set us up for an equally prosperous future. 

Our future is bright and for the taking – we share a remarkable continent, that should be well-placed in a net-zero world to achieve durable, inclusive growth.

But we must not squander our greatest strengths. We must be protective of our liberal democracy – its pluralist values and the strong institutional framework that support them. This is why Grattan’s public policy work includes a vital focus on the integrity of our democratic institutions, the independence and capability of our public service, and keeping vested interests in check.

Australia’s historic success in being able to shape our markets in a way that supports a decent life and mobility for a broad swathe of Australians puts us in strong stead to preserve our democracy, at a time when democracy is backsliding around the world. 

We should guard our democracy carefully from those who might find inspiration in the United States and elsewhere, looking for the electoral sugar-hit that you can get from anger and division, from scapegoating others and promising to tear everything down.

Our future is bright, though we have some tough years and tough choices ahead of us. But I’m going to surprise myself and end with the words of Gandalf, the wizard, responding to Frodo’s complaint that he wished all the ring business had not happened in his lifetime.

“So do I,” says Gandalf, “and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us.”