Heads in the sand on real cost of Next Generation

by John Daley

Published in The Herald Sun, Thursday 12 March

The latest Intergenerational Report, released by Treasurer Joe Hockey last week, reveals an increasing gap between what Australia needs for a prosperous future and what governments are delivering. And it uses a lot of wishful thinking to paper over that gap.

The most obvious gap is in the bottom line. The four Intergenerational Reports published over the past 13 years show improving forecasts for the budget bottom line.

The first expected a deficit in 2040 of 5 per cent of gross domestic product — about $80 billion in today’s dollars.

The latest report hopes for a surplus in 2040 of more than 1 per cent of GDP.

In reality, the bottom line has gone backwards. When the 2002 Intergenerational Report was released, the Budget was in surplus. In 2015, it is likely to deliver a deficit of around $40 billion.

How does this magic happen? How does our future get painted as rosy, while the reality gets worse? It’s explained by the rise in wishful thinking.

First, the Government simply assumes that much less will be spent on health than in previous forecasts. The big difference is reduced payments by the Commonwealth to the states for hospitals. By 2055, they will pay about $22 billion less in today’s money.

The realities are that for more than 20 years, government health spending has risen quickly and consistently.

Ageing is not the prime cause. Spending per person has roughly doubled for all age groups over the past 20 years.

A 55-year-old today sees the doctor more often, takes more tests, has more operations, and takes more prescription drugs than a 55-year-old 20 years ago.

Lower Commonwealth payments to the states don’t solve the budgetary problem of rising health spending. It just transfers it to the states.

The Intergenerational Report provides no clues as to how state governments might respond. For a start, state taxes will probably have to rise, since voters are likely to reject increasing hospital waiting lists.

Second, our future looks rosier because of plans to spend less on age pensions. It seems strange that as the population ages, governments expect to spend a smaller share of their budgets on age pensions.

Unfortunately, it’s not a result of Australia reaching the promised land where superannuation replaces the pension. The age pension means test is so generous that most people will still qualify even in 40 years’ time.

Instead, the predicted fall in spending is mainly a result of the Government’s proposed but unlegislated plans to reduce indexation, and increase the age at which you can qualify.

By reducing the age pension relative to average wages, the indexation changes would hit hardest the most vulnerable retirees — people who don’t own their own home and whose only income is the pension.

That forecast looks wishful when compared to actual changes in the age pension over the past decade. It grew faster than average weekly earnings as three separate policy decisions increased the rate of the pension, and broadened eligibility.

The only ray of light is that the last Parliament agreed to lift the age at which people can qualify for the pension, but only from 65 to 67 by 2023.

Finally, this Intergenerational Report expects that the Commonwealth will spend much less on aged care than assumed in previous incarnations. In particular, the Commonwealth Government intends to limit how much it spends on supporting home care programs for seniors.

The catch, of course, is that these “savings” may well lead to more people moving into more expensive aged care facilities and hospitals, which governments will have to fund.

Published at least every five years, the Intergenerational Report is supposed to provide a long-term view of government budgets. But the forecast bottom line really just tells us what kind of guesses we’re prepared to make today.

And it seems that as budgets deteriorate, we’re going into denial about the size of the problem and the best ways to solve it.