Intergenerational report must lay nation's challenges bare

Hot on the heels of the NSW Intergenerational Report, Federal Treasurer Josh Frydenberg is expected to release the Commonwealth Government’s fifth Intergenerational Report at a CEDA event on June 28. It will be the first to be launched in the shadow of a recession.

If it is done right – and without the unworkable policy fairy tales of the 2015 report, such as slower growth in funding for schools and hospitals – it will be sobering reading.

Net debt has more than doubled since 2015.  And the starting fiscal gap of two per cent of GDP in 2015 is now what persists across most of the medium term.

This shortfall shows the structural disconnect between the government services we expect and the taxes we pay, and the costs of those services are ratchetting up in ways the 2015 report failed to envisage.

But this is for future reckoning. The economic recovery and jobs growth will be undermined if we tighten the fiscal screws too soon.

On health, the COVID-19 pandemic has utterly exhausted state health systems. Emergency rooms and ambulances are overflowing due to a backlog of healthcare delayed by the pandemic.

Some want the Commonwealth to increase its share of public hospital funding and use the primary health system to reduce demands on hospitals. But the pressures extend well beyond emergency rooms. Demand for mental-health services is skyrocketing, even as many Australians still can’t get the help they need. This did not rate a mention in the 2015 Intergenerational Report.

Aged care did feature, but the landscape has changed drastically. Last month’s Federal Budget allocated $18 billion in new funding for aged care, yet experts warn this goes nowhere near meeting the expectations set out in the Royal Commission into Aged Care Quality and Safety.

These pressures are running headlong into a tax cap of 23.9 per cent of GDP – an enduring cornerstone of the government’s fiscal policy. The Federal Intergenerational Report will force us to reconcile our service expectations with the revenue reality. On present indications, our tax system will not be up to the task.

The fastest growing areas of Commonwealth spending – health and education – are shared with the states. The fiscal fates of the Commonwealth and the states are intertwined. But the fact that NSW and the Commonwealth are both releasing Intergenerational Reports in June underlines the glaring inefficiency of preparing separate reports. Injecting a combined whole-of-Federation intergenerational report into the National Cabinet process would improve cooperation on tax and budgets, and give us a more complete picture of the challenges and opportunities ahead.

Meanwhile, the headwinds of an ageing population are gathering pace. Australians are having fewer babies than a decade ago, and analysis by demographer Peter McDonald suggests fertility rates will not return to historical highs any time in the next decade and a half. We will also be playing catch-up on attracting young skilled migrants, with a return to net overseas migration of 235,000 looking more distant each day our international borders remain closed.

And despite continuing growth in female workforce participation, the overall participation rate will still fall by three percentage points by 2060, according to recent Federal Treasury analysis.

As important as population and participation are, almost all of Australia’s long-term growth in income and wages comes from the “third P” of economic growth – labour productivity.

Both the 2015 Intergenerational Report and the projections in this year’s Budget put the 30-year average of 1.5 per cent annual productivity growth as the lucky number. But we have not been that consistently lucky since the 90s and early 2000s.

For all the backslapping over our rapid digital uptake during COVID-19, this was largely due to adopting technologies that were widely available before COVID, such as videoconferencing and cloud, rather than transformational technologies such as artificial intelligence. Labour productivity is procyclical, so let’s hope strong demand combined with skills shortages and supply pressures sees business get more innovative to meet demand.

Finally, gains in productivity are meaningless without advances to grow sustainably over the longer term. The last intergenerational report was awkwardly muted on climate change. Left unchecked, climate change will not only be an environmental disaster but also an economic and fiscal disaster for future generations, as the NSW Intergenerational Report rightly points out. It should not be ignored this time.

The word “unsustainable” will appear a lot after the report’s release – in this case, in relation to debt and deficit. What is unsustainable is failing to act now to leave Australia in a better state for future generations. The Intergenerational Report will be right there waiting for politicians of either side who are willing to take that challenge.

Treasurer Josh Frydenberg will launch the intergenerational report at a CEDA event on June 28. You can register to watch the interactive livestream here.