Older woman listening to music with grandson

Generation gap: ensuring a fair go for younger Australians

Today’s young Australians are in danger of being the first generation in memory to have lower living standards than their parents’ generation.

Older Australians today spend more and have higher incomes and greater wealth than older Australians three decades ago.

But living standards have improved far less for younger Australians. The wealth of households headed by someone under 35 has barely moved since 2004.

Poorer young Australians have less wealth than their predecessors and are far less likely to own a home. In contrast, older households’ wealth has grown by more than 50 per cent over the same period because of the housing boom and growth in superannuation assets.

It’s a myth that young people’s spending habits and lifestyles are to blame for their stagnating wealth. This is not a problem caused by avocado brunches or too many lattes.

In fact, younger people are spending less on non-essential items such as alcohol, clothing, and personal care, and more on necessities such as housing, than three decades ago.

Economic pressures on the young have been exacerbated by recent wage stagnation and rising under-employment. Older households are better cushioned from low wage growth because they are more likely to have other sources of income.

If low wage growth and fewer working hours is the new normal in Australia, then we could have a generation emerge from young adulthood with lower incomes than the one before it at the same age. This has already happened in the US and the UK.

Young Australians will also bear the brunt of growing pressures on government budgets.

Because the population is ageing, governments will have to spend more on health, aged care, and pensions. But there will be fewer working-age people for every retired person to pay for it. The number of 15-64 year-old Australians for every person aged 65 or older fell from 7.4 in the mid-1970s to 4.4 in 2014-15 and is projected to fall further to 3.2 in 2054-55.

Governments have supercharged these demographic pressures by introducing generous tax concessions for older people.

The share of households over 65 paying tax has halved over the past two decades. And older households pay substantially less tax on the same income as younger households.

Working-age Australians are underwriting the living standards of older Australians to a much greater extent than the Baby Boomers did for their forebears, straining the ‘generational bargain’ to breaking point.

Policy changes are required. Policies to boost economic growth – such as tax reform, better education and smarter infrastructure spending – are wins for all, but especially for the young. Changes to planning rules to encourage higher-density living in established city suburbs would make housing more affordable. And a fair go for younger people means winding back age-based tax breaks for ‘comfortably off’ older Australians.

Just as policy changes have contributed to pressures on young people, they can help redress them.

The time for action is now: none of us wants the legacy of a generation left behind.

Read the media release

Judges wig, mouse, stethoscope and spanner hanging on a rack

Risks and rewards: when is vocational education a good alternative to higher education?

Some university students with low school results would be better off doing vocational education instead.

Vocational diplomas in construction, engineering, and commerce typically lead to higher lifetime incomes than many low-ATAR university graduates are likely to earn, especially those with degrees in popular fields such as science and humanities.

Especially for low-ATAR men, some vocational alternatives to university are worth considering. Schools need to give them better career advice alerting them to these possibilities – and governments should end funding biases against vocational education.

But vocational education alternatives for women are less attractive.

Few women enrol in vocational education engineering, and those who do often have poor career and earnings outcomes.

Engineering occupations are male-dominated, often deny women employment, and are inflexible in providing part-time work.

Teaching and nursing are popular university courses for low-ATAR women, and often lead to stable careers. These students are unlikely to do better in a vocational education course.

For lower-ATAR men, a few vocational education courses would probably increase their employability and income. But for lower-ATAR women, higher education is almost always their best option.

Higher education has expanded rapidly in Australia over the past 20 years, but vocational education has flat-lined.

This has led to concerns that students, especially lower-ATAR students, are being encouraged to enrol in higher education and to overlook potentially better-paid vocational education alternatives in fields with good job prospects.

These fears are only partly justified. Low-ATAR university students are vulnerable, but only sometimes have clearly better vocational education alternatives.

Like higher education, vocational education has risks as well as potential rewards.

A good tertiary education system steers prospective students towards courses that increase their opportunities and minimise their risks. Australia’s post-school system does not always achieve this goal.

Read the media release

The history and purposes of private health insurance

Australia’s private health insurance industry fears it is in a death spiral, and politicians need to rethink whether or to what extent taxpayers should continue to subsidise the industry.

Australians are increasingly dissatisfied with private health insurance, and policy reform is urgent.

Premiums are rising much faster than wages or inflation. People are dropping their cover, especially the young and the healthy. Those who are left are more likely to get sick and go to hospital, driving insurance costs up further.

Meanwhile, taxpayers subside the industry to the tune of about $9 billion every year: $6 billion for the private health insurance rebate, and $3 billion on private medical services for inpatients.

It’s inevitable that government will have to make tough decisions about whether more subsidies are the answer to the impending crisis.

Governments have failed to clearly define the role of private health insurance since Medicare was introduced in the 1980s. The upshot is we have a muddled health care system that is riddled with inconsistencies and perverse incentives.

Australia needs to confront a fundamental question: what is the purpose of private hospital care?

If its purpose is to complement Medicare, offering people choice of specialists and a wider range of services, then the argument for taxpayer subsidies is weak. But if its purpose is to substitute for public hospital care, then the argument for subsidies is stronger.

Policy makers must grapple with two further questions:

  • Do the current design features of the private health insurance system, including incentives, penalties and regulation, support its desired role (as a complement or substitute or both) in the overall health system? And if not, what other mechanisms or combination of arrangements are needed?
  • Does government support for private health insurance and private hospital care promote overall economic efficiency and the most effective and equitable use of government and community resources? And in the long run, are there better ways of providing support to the sector?

The question then becomes whether government should support private health care directly, or via public health insurance – or not at all.

Future Grattan Institute work will tackle these questions and propose solutions to Australia’s private health insurance woes.

Read the media release

Budget blues: why the Stage 3 income tax cuts should wait

Federal Parliament should pass the Government’s Stage 1 tax cuts immediately but should defer consideration of the controversial Stage 3 cuts.

The Stage 1 cuts would give the economy a much-needed boost at a time of low growth and stagnant wages.

The Stage 2 cuts would help most Australians by giving back bracket creep and are likely to be affordable.

But the Stage 3 cuts, scheduled to come into effect in 2024-25, would cost the budget $85 billion over the subsequent six years. We do not know now whether these cuts are affordable or the right size and shape for the economy so far into the future.

The economy is softening, the budget position is uncertain, and calls for the Government to use fiscal policy to stimulate the economy are growing. Tax cuts now could provide that stimulus, but there are big risks from locking in major tax cuts on the never-never.

Government would have to substantially reduce growth in spending to deliver both the Stage 3 tax cuts and promised surpluses, particularly if the economy worsens.

The Stage 3 tax cuts would reduce bracket creep and boost people’s incentives to work, but they are far from the best way to do so. Committing to Stage 3 now could also ‘crowd out’ the chance of meaningful tax reform over the next decade.

If the Stage 3 cuts pass, the top 15 per cent of income earners would pay a lower share of their income in tax, but middle-income earners would pay a higher share. The income tax system in 2024-25 would be less progressive than it has been at any point since the 1950s. Whether this is desirable is a value choice, but it is a choice that Australia should make with its eyes open.

By contrast, the temporary and targeted Stage 1 tax cuts are well timed to boost consumer spending and economic activity at a time when inflation is virtually non-existent, the labour market is weakening, new building approvals are drying up, and per person living standards have gone backwards for three consecutive quarters.

Given the softening economy, passing the Stage 1 tax cuts should be a priority. But there is absolutely no need for the Government to tie its hands by committing to the Stage 3 tax cuts now.

Read the media release

Commonwealth Orange Book 2019: Policy priorities for the federal government

The winner of the 2019 federal election should defy the national mood of reform fatigue and stare down vested interests to pursue a targeted policy agenda to improve the lives of Australians, according to a new book from the Grattan Institute.

The Commonwealth Orange Book rates Australia’s performance against similar countries and proposes policy reforms to schools and universities, hospitals and housing, roads and railways, cities and regions, budgets and taxes, retirement incomes and climate change.

It includes Grattan Institute’s new ‘International Scorecard’, which shows Australians live longer than most other people, and public debt is relatively low. But our electricity supply is more polluting, less reliable and more expensive than in comparable countries; we lag behind other developed economies on school results; and housing costs and homelessness are relatively high.

Commonwealth Orange Book International Scorecard

Click here for the full scorecard for Australia

The challenge for the next Commonwealth Government is to revive Australia’s proud tradition of enlightened public policy. The next government needs to choose to do less, but deliver more. We can continue to be the lucky country, but we must make our own luck.

Drawing on 10 years of Grattan research and reports, the Orange Book finds Australians’ living standards have stagnated, the pace of economic reform has slowed, people are increasingly anxious about their financial prospects – and our political system is not dealing well with these challenges.

On health, the Orange Book calls for a universal dental care scheme, so all Australians can go to the dentist when they need to; a boost to primary care, with new reforms to Primary Health Networks and GP payments; and a comprehensive review of the private health sector, including private health insurance.

On housing, the book recommends that the Commonwealth provide incentives to states to loosen planning laws so that higher density is permitted in the established middle suburbs of our capital cities; a 40 per cent increase in the maximum rate of Commonwealth Rent Assistance; and funding for additional social housing tightly targeted towards Australians at high risk of homelessness.

On retirement incomes, it urges the next government to abandon the current plan to increase compulsory superannuation payments from 9.5 per cent to 12 per cent, which would force workers to accept lower living standards today even though they are already likely to enjoy living standards in retirement comparable to living standards while working. It advocates changes to the Age Pension assets test that would loosen the assets test taper but include more of the value of owner-occupied housing. And it backs proposals to select “best in show” funds for default superannuation, to drive down costs and improve returns.

Major tax reform is needed to support economic development. The book recommends reducing income tax and modifying welfare tapers and childcare benefits to remove barriers and increase incentives for second income earners (usually women) to participate in the workforce. It also advocates an accelerated depreciation scheme for new investment by companies. To pay for these changes (and avoid other tax increases), the next government should cut the capital gains tax discount from 50 per cent to 25 per cent; wind back negative gearing; tighten superannuation tax concessions; and broaden or increase the GST. To increase workforce participation of older Australians, the government should ask the Productivity Commission to investigate the costs and benefits of raising the pension age to 70.

On energy, the book urges the incoming government to develop a clear, credible policy to tackle climate change. Our political leaders must be honest with voters: Australia needs to move to a low-emissions economy, and that transition will cost money. A raft of reforms to electricity generation, distribution and retailing are also required to push down energy costs.

On transport, the book calls for a more disciplined approach to assessing, selecting and reviewing major projects, to put brakes on spending billions of dollars in the wrong places for the wrong (often politically motivated) reasons.

On school education, it suggests that the government needs to finish off school funding reforms, and set up a national evidence institute, while strengthening incentives for universities to improve initial teacher education.

On higher education, it recommends a return to demand-driven funding of universities. Reforms to the HELP loan scheme are needed to help fund this change, and potential increases in funding for vocational education. The government should encourage more students into vocational education, although better funding arrangements for vocational education need careful thought and negotiations with the states.

On budgets, it suggests enshrining fiscal targets in legislation, giving the Parliamentary Budget Office responsibility for macroeconomic forecasts that underpin the budget and publishing an Intergenerational Report that includes long-term projections of both Commonwealth and state government revenues and spending.

The Orange Book identifies a crisis of trust in politics in Australia, with a growing sense that people in government look after their own interests and can’t be ‘trusted to do the right thing’. It calls for institutional changes to help restore faith in our democracy, including introducing a strong integrity commission, capping expenditure on political advertising during election campaigns, and new rules to ensure voters know who is donating to the political parties and who is lobbying our political leaders.

These are evidence-based policy recommendations designed to serve the interests of all Australians rather than sectional interests. Our next government should seize the opportunity to forge a happier, healthier, more prosperous Australia.

Read the media release

Listen to a podcast with the authors discussing the report

Filling the gap: A universal dental care scheme for Australia

Australia should introduce a Medicare-style universal insurance scheme for primary dental care, to ensure all Australians can go to the dentist when they need to.

A universal scheme would cost an extra $5.6 billion a year, could be paid for in part by a rise in the Medicare levy, and should be phased in over 10 years.

It’s needed because about 2 million Australians who required dental care in the past year either didn’t get it or delayed getting it because of the cost – and the poor and disadvantaged are most likely to miss out on care.

This is because most spending on dental care comes straight out of patients’ pockets.

When Australians need to see a GP, Medicare picks up all or most of the bill. But when they need to see a dentist, Australians are on their own.

The consequence is widespread poor oral health. About a quarter of Australian adults say they avoid some foods because of the condition of their teeth; for low-income people, it’s about a third. Low-income people are more likely to have periodontal disease, untreated tooth decay, or missing teeth.

Bad oral health has painful and costly consequences. Oral health conditions can contribute to other health problems, including diabetes and heart disease. Most oral health conditions are preventable, yet people often end up going to a GP or hospital emergency department to be treated for conditions that could have been arrested with earlier care.

Existing public dental schemes are inadequate, uncoordinated, and inequitable across states and territories. Most states have waiting lists of well over a year for public dental care – and if people need to wait a year for care, their conditions are only going to get worse.

The Commonwealth Government should announce that it will take responsibility for funding primary dental care – just as it takes responsibility for primary medical care.

There’s no compelling medical, economic, legal or logical reason to treat the mouth so differently from the rest of the body.

But it would be impractical to move to a universal scheme overnight. It would cost a lot of money – about $5.6 billion in extra spending each year – and more dentists and oral health professionals would need to be trained locally or recruited from overseas.

So, the Commonwealth should announce a roadmap to a universal scheme, including plans to expand the dental health workforce, followed by incremental steps towards a universal scheme.

First, the Commonwealth should take over funding of services for people eligible for existing public dental schemes, fund them properly, and enable private-sector providers to deliver publicly-funded care. Then the scheme should be expanded – first to people on Centrelink payments, then all children. Within a decade, the Commonwealth should take the final step to a universal scheme.

Universal dental care is a big idea whose time has come. All Australians should be able to get the care they need, when they need it, without financial barriers.

Read the media release

Listen to a podcast with the authors discussing the report

Keep calm and carry on: Managing electricity reliability

The popular perception that Australia’s electricity supply has become less reliable with more renewable energy, and that this is inevitably going to get worse, is wrong and dangerous.

It’s wrong because almost all outages are caused by problems in transporting electricity, and have nothing to do with whether the power was generated from new renewables or old coal or some other technology.

And it’s dangerous because if politicians over-react to public concern and rush to intervene in the market, electricity bills could rise even higher.

Political leaders and media commentators have linked the 2016 state-wide blackout in South Australia with that state’s high level of wind power. But they haven’t recognised that the electricity market operator has since changed management practices to better suit the changing shape of the energy system, and a combination of regulatory obligations and market mechanisms are being applied to support grid stability as the system continues to evolve.

Equipment failures, falling trees, inquisitive animals and crashing cars can all cause the power to go out in the local distribution network. Over the past 10 years, more than 97 per cent of outages across the National Electricity Market could be traced to the poles and wires that transport power to homes and businesses.

But it would be prohibitively expensive to try to prevent all these outages. The NSW and Queensland governments spent $16 billion more than was needed on distribution networks over a decade, while achieving only very small improvements in reliability – and households and businesses are still paying for this through their power bills.

Regulators and network businesses need to carefully balance cost and reliability as technology and consumer preferences change. Consumers will not be happy to pay for another round of network ‘gold-plating’.

Events in Victoria and SA in January highlighted the current tight balance between supply and demand. As old coal generators are closed and summer heatwaves become more severe, outages will increase unless investment in new supply follows. But a lack of generation capacity on hot days caused only 0.1 per cent of all outages over the past decade. To encourage investment and keep this problem rare, governments need to create a stable policy framework to reduce greenhouse gas emissions and ensure that retailers have enough supply.

What Australia needs now is not panic and politicking, but cool-headed policy responses to manage electricity reliability without unnecessarily adding to consumer bills.

Increased renewable generation does create challenges for managing the power system. But if we keep calm and carry on, these challenges can be met without more big price increases for households and businesses.

Read the media release

Listen to a podcast with Guy Dundas and Lucy Percival discussing the report

 

Summer Reading List for the Prime Minister 2018

Six books the PM should read over the holidays (and you might like them too)

It’s been an extraordinary year in politics – and no doubt many politicians are well and truly ready for a summer holiday. To help our leaders make the most of their time off, Grattan Institute has curated a list of this year’s must-reads – a curiosity-piquing platter of novels, think-pieces, memoirs and manifestos.

These books have three things in common: they’re thoroughly readable, they have something worth saying, and they’ll stick with you. We think they deserve a place on the bookshelf in Kirribilli House, as well in as your own office or beach-bag.

Here’s our Top Six for 2018, in no particular order:

Factfulness: Ten reasons we’re wrong about the world – and why things are better than you think Hans Rosling

The People vs Democracy: Why our freedom is in danger & how to save it Yascha Mounk

Rusted Off: Why country Australia is fed upGabrielle Chan

No Friend but the Mountains: Writing from Manus Prison – Behrouz Boochani

Women & Power: A ManifestoMary Beard

FlamesRobbie Arnott

See our reviews here:
Prime Minister’s Summer Reading List 2018

Register to attend the launch of this year’s list on Tuesday, 4 December to hear how we chose the books, and what messages the government might take away from them. Melbourne-based journalist Madeleine Morris will join Grattan Institute CEO John Daley in Melbourne to discuss how this year’s titles illuminate some of Australia’s most important debates.

                       
This year we are proud to publish our list in partnership with Readings – an Australian independent retailer. The books can be purchased at Readings’ table which will be set up at the event, at any of Readings seven shops in Melbourne, or via Readings online.

 

Two older people in a kitchen cooking food

Money in retirement: more than enough

The conventional wisdom that Australians don’t save enough for retirement is wrong. The vast majority of retirees today and in future are likely to be financially comfortable.

Retirees are less likely than working-age Australians to suffer financial stress such as not being able to pay a bill on time, and more likely to be able to afford optional extras such as annual holidays.

Grattan Institute modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income – well above the 70 per cent benchmark endorsed by the OECD, and more than enough to maintain pre-retirement living standards.

And many low-income Australians will get a pay rise when they retire, through a combination of the Age Pension and their compulsory superannuation savings.

Australians tend to spend less after they retire, and even less into old age. Their medical costs increase, but are largely covered by the taxpayer. Many retirees are net savers, and current retirees often leave a legacy almost as large as their nest egg on the day they retired.

But the retirement incomes system is not working for some low-income Australians who rent, particularly in Sydney and Melbourne. And this problem will get worse because on current trends home ownership for over-65s will decline from 76 per today to 57 per cent by 2056.

To boost retirement incomes for the poorest Australians, the maximum rate of Commonwealth Rent Assistance should be increased by 40 per cent – worth more than $1,400 a year for a single retiree.

Loosening the Age Pension assets test could boost retirement incomes for around 20 per cent of retirees today, rising to more than 70 per cent of retirees in future. It would also deal with anomalies in the system: some people who save $100 while working increase their total retirement income by less than $100 in real terms.

But because most Australians will be comfortable in retirement, there is no need to boost retirement incomes across the board. The legislated plan to increase compulsory superannuation contributions from 9.5 per cent to 12 per cent should be scrapped, saving the Budget about $2 billion a year.

And superannuation tax breaks and age-based tax breaks should be reduced, to ensure the retirement incomes system does not become an excessive burden on future budgets, and endanger funding for aged care and health.

Grattan Institute continues to update the retirement income projections contained in this report as new data becomes available. You can find the latest version of the projections here.

Read the media release

State Orange Book 2018: Policy priorities for states and territories

State and territory governments can do more to improve the lives of Australians. The State Orange Book 2018 shows that outcomes vary between states across a broad range of areas. In many cases, states are different because their governments adopted better policies.

State Orange Book Scorecard

Click here for the full scorecard for states and territories

For example, Victoria has relatively good health outcomes – and has improved more – on a range of measures such as mortality, cost and waiting times, whereas South Australia and the Northern Territory lag well behind. Other states and territories could learn from how Victoria has managed its hospitals.

Other policy areas require more difficult trade-offs. South Australia has more expensive electricity and more outages, but it has lower carbon emissions.

State and territory policy problems aren’t hard to find. Per capita income has been flat for five years as the mining boom subsided. State and territory governments continue to announce large infrastructure projects without doing enough homework beforehand. Home ownership is falling fast among the young and the poor, and homelessness is rising. Our schools are not keeping up with the best in the world. In most states, people are waiting longer for medical treatments. Wholesale electricity prices have increased significantly over the past few years.

Many worthwhile reforms have been implemented over the past decade. Victoria’s hospitals cost less per patient and contribute to better health outcomes than elsewhere. Queensland’s school students learn more in Years 3-5, and this has improved significantly in the past few years. The ACT has started to replace inefficient stamp duties with a much more efficient broad-based property tax. NSW has used the good times to improve its budget position. Victoria, South Australia and the ACT have all increased the transparency of political decision-making and tightened controls over money in politics.

But every state and territory could learn from the others and do better.

State governments – particularly NSW and Victoria – face population pressures. They should resist political pressure to wind back planning reforms that have helped to increase housing supply, and instead should go further to ensure enough housing is built, particularly in established suburbs, to accommodate rapidly growing populations. NSW and Victoria should commission work to enable the introduction of time-of-day road and public transport pricing to manage congestion in Melbourne and Sydney. All states should stop announcing transport projects before they have been analysed rigorously, and they should evaluate completed projects properly.

There are other important priorities for economic reform. All states should follow the lead of the ACT and replace stamp duties with broad-based property taxes. States should reform electricity markets to encourage reliability and reduce emissions – whether or not the Commonwealth Government cooperates.

States could deliver services better. Other states should follow Victoria’s lead and reduce the overall cost and the variation in cost between public hospitals. And they should develop more prevention programs to reduce the disparity between regional and urban health outcomes. States should lift progress for all students by identifying and spreading good teaching practices at the same time as strengthening the evidence base. They should also invest more in early learning for the most disadvantaged students.

Institutional reforms are needed as well. States need more visibility of their long-term budget positions. While institutional accountability is improving in many states, Western Australia, Tasmania and the Northern Territory need to limit election spending, and make political donations and lobbying more transparent.

Read the media release

State Orange Book 2018: Policy priorities for states and territories