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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.

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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21 comments

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21 thoughts on “Hockey’s IGR meaningless forecasts based on magical thinking

  1. David Hand

    I accept that the IGR is partisan, though I have not read it but read about it.

    But as a method of forecasting, extrapolating today’s conditions out for 40 years is quite reasonable. Confidence in its reliability is low because of the time involved and the expectation of unforseen events. But with a forecast like this, we can then look at what changes are required to alter the projected outcome.

    The alternative is not to produce an IGR at all and just go forward without thinking about what 40 years’ time will look like.

  2. Scott

    Its a pretty standard method of dismissing economic modelling you don’t agree with…attack the assumptions.

    Yet I do find it a bit hypercritical that there was no Australian Institute attack on the 2010 Intergenerational report released under Labor (which was also an example of long range forecasting)…in fact, that report was referenced when TAI was advocating for a universal age pension in 2014.

    2010 report ok, but not 2015? Try to be consistent fellows..

  3. bushby jane

    There used to be a universal aged pension, if by that you mean for all aged Australians. I have read that it would be cheaper than the cost to the budget of all those super tax concessions. Perhaps the 2010 IGR was a lot better than the 2015 one, since Hockey is clearly a dud.

  4. Marilyn Shepherd

    It’s ridiculous, it allows for no changes to population, assumes everyone alive today will be alive in 2055, there will never be another boom and the world will stagnate in our pond with us.

    Seriously demented bullshit from people who can’t even negotiate a pay rise for the army.

  5. Chris Hartwell

    Attacking assumptions is perfectly valid – if the assumptions are well-founded, they will withstand such attack.

  6. MJPC

    If Uncle Joe and the treasury can forcaste to 2055, can they tell Crikey what the winning Lotto numbers are next Saturday, I think that should be an easier task this close?
    Economic boffins, they didn’t predict the GFC before it started, how can they forcast what is happening in 30 years time!

  7. Dogs breakfast

    “But as a method of forecasting, extrapolating today’s conditions out for 40 years is quite reasonable.”

    Oh dear! OK, point conceded, as long as you also concede that anything, anything at all, that forecasts anything, anything at all, out to 40 years, is a complete and utter waste of time.

    And that is for stable environments. The weather in 40 years’ time is more predictable than the political and economic environments in 40 years time. For chaotic systems, predicting climate and weather is a comparative doddle (and yes, I have argued that although climate change is a physical fact, the effects via modelling are unknowable, and therefore largely worthless).

    So, I wonder, did they also model just how much it is costing Australia out to 40 years for removing the indexing of tax on petrol, the outrageous superannuation concessions decided by the Howard/Costello govt, and the halving of capital gains tax, or substantial tax cuts for people earning over $180K per annum. (the battlers)

    I thought not!

  8. Kevin_T

    @ Scott,
    Tuesday’s article by Bernard Keane may give you an idea why this IGR is different to the 3 previous ones (2 under a Liberal Government, and 1 under a Labour government).
    http://www.crikey.com.au/?p=483100

    The document has been treated very differently this time, and far less independently, whether or not that justifies the response being different, I guess, is up to you.

  9. Neutral

    The letters “IGR” and the phrase “forecasts based on magical thinking” can be removed from the title to sum it all up to eleventy.

  10. Ian Douglas

    I wonder how many millions of taxpayers dollars were spent creating this pile of propoganda.