If you follow a rule that when a politician cries “look over there!” you make sure you stay looking over here, there’s much to be deduced from Treasurer Josh Frydenberg’s Intergenerational Report, before we put it up on the shelf with its four predecessors.
That’s especially so with a federal election coming by May next year. Elections are times when politicians try to convince us they can do the arithmetically impossible: cut taxes while guaranteeing adequate spending on “essential services” and getting on top of “debt and deficit”.
Intergenerational reports always involve sleight of hand. They’re always about getting us to focus on a certain aspect of the problem and ignore other aspects.
As Frydenberg admits, the five-yearly intergenerational reports “always deliver sobering news. That’s their role. It is up to governments to respond.”
He’s given us little idea of what that response will involve. But there’s little doubt about his sobering news: the budget is projected to stay in deficit in each of the 40 years to 2060-61.
And we’re left in no doubt about the stated cause of those deficits and growing government debt: excessive growth in government spending.
As the report’s authors confess in an unguarded moment, “the emphasis of the [successive intergenerational] reports rested on pressures that demographic change [that is, the ageing of the population] was likely to impose on future government spending”.
We’re told that, even after you remove the effect of inflation, government spending per person is projected to “almost double”. (And I thought only journalists were prone to exaggeration. “Almost double” turns out to be an increase of 73 per cent.)
Why the huge growth in real terms? Mainly because of huge growth in spending on healthcare, but also because of big growth in spending on aged care and interest payments.
Get it? Government spending will grow like steam because of the ageing of the population. Except that when you read the report’s fine print you find that’s not the main reason. Only about half the projected growth in health spending is explained by population growth and ageing.
The other half is explained by advances in medical “technology, changing consumer preferences and rising incomes”. That is, as Australians’ real incomes rise over time, they want to spend a higher proportion of that income on preserving their good health and living longer.
And improved medicines and procedures almost always cost more than those they replace. But voters won’t tolerate government delay in making the latest drugs and operations available under Medicare.
As for the projected greatly increased spending on aged care, only part of it’s due to the Baby Boomers eventually reaching their 80s. The rest is explained by “changing community expectations”.
That’s a bureaucrat’s way of saying that “after the royal commission confirmed all we’ve been told about widespread mistreatment of people in aged care, governments will have no choice but to stop doing aged care on the cheap”. That is, it’s the higher cost of better-quality care.
Expressed as a percentage of national income, spending on the age pension is expected to fall as bigger superannuation payouts put more people on part-pensions. And, even though this saving is projected to be more than offset by the increased cost to revenue of super tax concessions, the combined effect is that the retired will have a lot more money to spend than their parents did.
Now get this: whereas total government spending is projected to grow, in real terms, at an average rate of 2.5 per cent a year in the coming 40 years, this compares with growth of 3.4 per cent a year over the past 40 years.
So it’s not just that ageing doesn’t adequately explain the expected growth in government spending, it’s also that the projected 40 years of budget deficits can’t be adequately explained by excessive spending.
The real reason the spending horse is expected to outrun the taxing horse is that the taxing horse has been nobbled. At a time when the coronacession led to a huge blowout in the budget deficit, the government used this year’s budget to bring forward the second stage of its tax cuts, and will proceed with the third-stage tax cut in July 2024 despite the continuing deficits and rising debt.
Worse, the projections assume that, because projected tax collections would otherwise exceed the government’s self-imposed limit on taxation as a proportion of national income after 2035-36, we’ll be getting new tax cuts in each of the last 15 years up to 2061. Yes, really.
No wonder interest payments are projected to account for three-quarters of the budget deficit in 2060-61.
We can be sure Scott Morrison will go into the election campaign claiming the Liberals are the party of lower taxes. But what voters will have to decide is whether a re-elected Morrison government would “respond” to the Intergenerational Report’s projection of its existing policies by letting taxes grow, slashing spending on “essential services” or letting debt and deficit just keep keeping on.
