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Mar 5, 2015

Hockey's IGR meaningless forecasts based on magical thinking

The intergenerational report is only as good as its assumptions -- and they're not particularly useful, writes executive director of The Australia Institute Richard Denniss.

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The 2015 intergenerational report provides the clearest possible example of the maxim “garbage in garbage out”. While the Treasurer is adamant that his first (and likely last) IGR shows what happens if you let Labor into government, what the report really shows is how meaningless economic forecasts are when they are based on dodgy modelling and meaningless assumptions.

Joe Hockey and his Treasury Department have forecast what would happen in 2055 under the most implausible of assumptions and scenarios, including, for example, that ALP or Coalition policies from 2013 remain unchanged for 40 years. While no reader could miss the “finding” that ALP policies would deliver enormous deficits and debts, few would probably realise that this would only occur if Labor didn’t reintroduce the carbon tax, which it has promised to restore. Treasury also assumes in its “previous policy” scenario that even as the deficit grows, the government of the day would cut income taxes each year. Garbage in, garbage out.

Leaving aside the partisan elements of what will probably be the last intergenerational report, the ideological assumptions and the framing of the report’s results are just as significant. We have all heard, for example, that population ageing is placing enormous pressure on our health system, but a close reading of the IGR reveals that ageing is not actually the main driver of rising health spending. Rich people’s desire to be healthy is.

As people get richer, as the IGR forecasts we all will, our tastes and preferences change. High-income earners spend both a larger amount and a larger proportion of their income on restaurant meals and overseas travel than low-income earners do.

As we get richer and richer we are likely to spend more money on coffee, clothes and travel. Treasury thinks that is fine. But if, as we get richer, on average we also choose to spend a lot more money on health. Treasury thinks this choice is a disaster. The only difference between rising expenditure on health and rising expenditure on coffee is that health services are typically provided by the government. And Treasury doesn’t like government spending, even if Australians like the services the government is providing. Treasury’s ideological slip is well and truly showing in the IGR.

But the most significant ideological assumption relates to tax. The only thing Treasury hates more than a budget deficit is collecting tax revenue. So in order to ensure that the “emphasis of the (IGR) report rested on pressures that demographic change was likely to impose on future government spending”, Treasury actually assumes that future Labor and Coalition governments would, regardless of the size of the budget deficit, cut income tax rates and increase income tax thresholds every year.

Seriously. In its projection of what the budget would look like under “previous policy scenarios”, Treasury assumes that in 2054, when the budget deficit is approaching 12% of GDP, the government will be cutting income tax rates and lifting thresholds. It’s meaningless.

And then there is the framing. The intergenerational report predicts Australia’s population will grow from 24 million today to 40 million people by 2055. That’s another four Sydney’s we will need to build.

Population growth and the need to build enormous amounts of new infrastructure will place far more pressure on the budget than the costs of ageing. But despite the need to fund enough schools, roads, hospitals and prisons to service 16 million new residents, the Treasurer, and the IGR, focus on the costs if ageing instead.

Over the last 40 years the Australian economy —  and budget — has changed radically. We invented mobile phones and the internet, we shut down most of the photo development labs. We opened and closed most of the video stores, and we decided to hand out tens of billions of dollars per year in tax concessions for super. Change is the only constant.

But while the last 40 years were dominated by change, according to the IGR the next 40 years will simply look like today, only richer, and a bit older.

Australia does face long-term problems and an ageing population is one of them, but ironically, we are using a fabricated fear campaign about the future to conceal the fact that the government isn’t investing heavily in new aged-care centres today.

Similarly, if we want to worry about something big in 2050, climate change would seem to be a far more likely candidate. Imagine the outcry if climate scientists relied on assumptions as silly as those used by Treasury.

Looking down the track is an important part of leadership, but using dodgy economic modelling to whip up fear will do little to help the government either plan for the future or to get the public to engage in a real conversation about where we are heading.

Australia is one of the lowest-taxed countries in the developed world. Treasury talks at length about the “pressures” that come from the desire of an increasingly wealthy population wanting to spend more on health. Sadly, they, and the Treasurer, are silent about the opportunity to easily fund those services by doing nothing more than closing the tax loopholes on super, reintroducing a carbon tax and not implementing annual tax cuts for high-income earners.

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