Treasurer Joe Hockey’s fiddling with the Intergenerational Report numbers will make a substantial difference in what was once a non-political document meant to enable Australians to understand Australia’s long-term economic challenges. It is now merely an effort to restore Hockey’s and Tony Abbott’s policy credentials.
The Intergenerational Report is a Coalition creation from former treasurer Peter Costello: under the Charter of Budget Honesty legislation in 1998, one was to be prepared every five years “to assess the long-term sustainability of current government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change.” As the legislation suggests, it was to be a forward-looking document, focused on the politics of the day. None of the 2002, nor the 2007, nor the 2010 IGRs mention the then-opposition parties. The closest any of them get to politics is in the first report in 2002 — released at the same time as the budget — which noted in passing that a particular bill was blocked in the Senate.
All that will change this week after the government delayed the IGR a month beyond the five-year legislated period and decided it would become the centrepiece of a renewed attack on Labor over its fiscal credentials, complete with a taxpayer-funded advertising campaign. With the budget and the economy deteriorating and Hockey likely to have to announce yet more deficit increases in the May budget, the government’s fiscal message is in tatters. With the IGR, they hope to be able to “knock voters off their chair” (Hockey actually used that phrase) and then point to Labor and say “they did it”. As Phil Coorey reported yesterday, Hockey plans to devote an entire chapter to attacking Labor’s position at the 2013 election.
So much for a “forward-looking” document. Hockey’s IGR will be less focused on “the 40 years following the release of the report” than the eighteen months to the next election — and the four or so months he’s expected to last in the job, max.
But how can Hockey cook the books? As Treasury explained last week in Estimates, it is Hockey and his office that select the parameters for the key assumptions underpinning the report. Treasury Secretary John Fraser told Estimates, “it is the Treasurer’s document.” Labor senators particularly asked about the Net Overseas Migration assumption. A Treasury official replied “all of the key elements of the IGR are ultimately matters for the Treasurer. The NOM is just one of them.”
The NOM is crucial because the level of migration feeds directly into population growth assumptions. What Hockey will find on Thursday — just as the previous government found — is that the media and voters will focus on the population number in the report. Remember how Kevin Rudd waded into the “big Australia” debate, which ended up being a factor in his downfall in 2010? Julia Gillard never used the phrase, but she wanted everyone to know she was all about a “little Australia”, not the “big Australia” Rudd was keen on.
But the migration assumptions also have a big impact on all the numbers in the IGR — which is why, last week, Labor accused Hockey of understating migration growth.
The discussion sounds arcane until you consider the impact of different migration scenarios. Wayne Swan’s 2010 report details the kind of effects of altering assumptions. The difference in GDP growth to 2050 between a higher migration scenario and the base case used in the report is 5.23%; a lower migration scenario reduces GDP growth by another 5.23%. That is, Australia’s GDP in 2050 is around 10.5% lower under a low migration scenario compared to a high-migration scenario — or around $390 billion. With a government looking to obtain around 23% of GDP in tax, that’s around $90 billion in “lost revenue” using 2010 figures.
Lower migration also means, on average, an older population (migrants tend to be working age, often with children) and therefore more health, aged care and pension spending. According to the 2010 report, higher migration meant 0.16% lower health spending, lower migration meant 0.18% higher health spending. The numbers sound trivial until you realise the size of health spending, which by 2050 was estimated to be over 7% of GDP, or around $250 billion (remember it’s already our biggest employer). Aged care spending (forecast to be nearly 2% of GDP in 2050) falls by 0.08% under high migration, but rises 0.09% under low migration. The cost of the aged pension (forecast to be around 4% of GDP) changes by around the same amount as health spending.
All of which means, if your goal is to make voters “fall off their chairs” about how disastrous Australia’s debt and deficit situation is, you have plenty of scope to make the budgetary forecast much worse.
The irony of Hockey trying to lower migration assumptions in order to make the forecasts more gloomy is that some of Australia’s most serious economic challenges relate to quite the opposite phenomenon, of rapid population growth in Sydney and Melbourne, which is driving rapid house price inflation and putting huge pressure on infrastructure now, not in 2030 or 2050.
And if you read the first speech by Fraser, to CEDA last Friday, he emphasises the importance of realistic and believable data in the IGR, especially in the areas of immigration and productivity growth.
“The IGR will present sensitivity analysis showing the impact of changes in the economic assumptions on the fiscal projections, recognising that relatively small changes in important assumptions can have a major cumulative impact over a 40 year period … They all highlight the importance of placing our policy frameworks in the strongest possible position to meet whatever challenges the future may bring. Where we can be confident is projecting long term demographic drivers in the economy and here it is clear that the ageing of Australia’s population will weigh heavily on Australia’s potential growth rate and long-term fiscal position.”
Fraser went on to emphasise the other two “Ps” in what is the traditional Treasury IGR mantra — population, participation and productivity. He made this point on productivity:
“For Australia’s per capita national income to grow at the historical average of 2.2% per annum over the next decade, annual labour productivity growth would need to increase to around 2.7% to counteract the effects of population ageing and a falling terms of trade. This is well in excess of what has been achieved in the past 50 years — and almost double what was achieved in the past decade. These statistics really frame the challenges to our economy and need to be taken seriously.”
Indeed. But Hockey, in delaying the IGR for political reasons, turning it into an anti-Labor document and launching an advertising campaign to make sure voters get the right political message, appears to be doing his best to make sure it won’t be taken seriously.