Intergenerational Equity – Intergenerational Report 2015

The real purpose of the Intergenerational Report 2015 was to try to justify the 2014 Budget cuts to pensions, education and health. The report made numerous misleading claims to try to convince us that we could not afford our present levels of commitment to older and younger people.

The first misleading claim is that labour force participation is going to fall and reduce per capita economic growth. The second misleading claim is that the costs of providing for an older population will increase significantly as a percentage of GDP over the next forty years. The third misleading claim is that in order to deal with these costs Australia must maintain high immigration, on the grounds that migrants tend to be younger than the average resident. The Intergenerational Report assumes Australia's population will rise from 23.8 as of mid-2015 to 40 million in 2055, a massive two-thirds increase in just 40 years. The Report is completely inadequate in dealing with the numerous economic, social, and environmental consequences of such an increase.

In fact an analysis of the Report by Bob Birrell and Katherine Betts shows there is NO net change in per capita economic growth over the next 40 years. There is a slight fall in real per capita economic growth from declining labour force participation of 0.1 percentage points a year. But this is totally offset by an increase of 0.1 percentage points a year because the proportion of the population who are children will fall relative to those aged 15 plus. Any decline in labour force participation of those aged 15 plus is offset by the rising share of the population in this broad age group. ("The 2015 intergenerational Report: Misleading findings and hidden agendas", Bob Birrell and Katherine Betts, The Australian Population Research Institute, Research Report, July 2015). It is regularly the case that the people who want to use a scare campaign about population and workforce ageing to attack social security "accidentally" forget to take into account the ways in which population ageing makes life easier for governments and communities.

The Report is also misleading about rising medical and hospital costs. It is true that health expenditure is rising and will continue to do so. But the vast majority of this extra cost is due to the higher costs of providing health care for everyone, including the implementation of new technology. While Commonwealth spending per person is projected to increase by $3700 by 2054-55, $3100, or 84 per cent of this, can be ascribed to non-demographic causes. Ageing is only a minor factor. (Ibid). I don't accept that our spending on health, welfare and pensions is unsustainable. We spend a lower proportion of GDP on government funded age pensions than most OECD countries.

And what of the third claim that we need high migration to slow down population ageing? Bob Birrell and Katherine Betts have calculated from the data in the report that every extra 70,000 migrants up to the year 2055 only increases economic growth by a mere 0.06 per cent. And yet an extra 70,000 net overseas migration adds over four million people, and the Report says nothing about the extra costs on the community that this imposes. Indeed the Report works on the basis of population growth between 2015 and 2055 of nearly 16 million!

The infrastructure costs of such an increase are glossed over with the claim, which Bob Birrell and Katherine Betts describe as bizarre, that infrastructure costs "are not linked explicitly to demographic factors".

The Report also is misleading about the issue of productivity. It says high levels of migration MIGHT increase productivity because migrants may, on average, be better educated than the average Australian. No evidence is advanced to support this optimism, and given the extent of the rorting of migrant worker and overseas student programs it seems to me to be doubtful. In any event Ross Gittins has reached the opposite conclusion - that high migration lowers national productivity. Rapid population growth, through its effects on congestion and land and housing prices, acts as a drag on productivity.

The Report also papers over the impacts of rapid population growth on the environment, saying the 'level of government spending on the environment is not directly linked with demographic factors". This is amateur hour. Population growth is a direct and indirect cause of environmental damage and should not be glossed over in this way. The fact that State and local governments have to do much of the heavy lifting in terms of maintaining water quality, and environmental repair, does not make these costs any less real.

The IGR finds that per capita income will be higher in real terms than it is today. Its modelling shows an increase, in constant dollars, from $64,400 to $117,300 by 2054-55. Bob Birrell and Katharine Betts say our descendants should he selves be able to comfortably deal with any extra costs that arise from providing for a larger cohort of older persons (Ibid, p.6). They say the IGR's own data show that the supposed ill-effects of ageing are trivial, and should be easily managed by future generations themselves. The IGR's lukewarm endorsement of massive immigration-driven population growth just about completely overlooks and fails to take into account the massive costs of such growth. (Ibid, p.v).

The problems which the Intergenerational Report 2015 says are looming are looming due to the policy failure of neo-classical economics, which has dominated economic policy-making since the 1970s. Its signature policies of economic growth, rapid population growth, globalisation, free trade, privatisation, and deregulation have progressively generated deficit and debt, de-industrialisation and unemployment, and a declining capacity to care for older Australians, younger Australians, and the environment.

After the war the Marshall Plan of 1947 paved the way for the re-industrialisation of Europe and a long period of economic prosperity. Lessons learned from the 1929 financial crash and the Great Depression saw an essentially tripartite political setting, with business, labour and government roughly in balance.

The free trade theory of comparative advantage espoused by David Ricardo in the 19th Century and the Washington Consensus in the 20th was not actually applied in western countries. Countries which actually applied the theory, for example Somalia with its comparative advantage in agriculture, continued to specialise in agriculture and remained poor. By contrast, Korea, through very heavy- handed industry policy, broke away from its comparative advantage in agriculture, and it's GDP per capita skyrocketed, whereas Somalia's remained static.

Other Asian nations which industrialised were also successful. As Eric Reinert says a nation with an inefficient manufacturing sector is much better off than a nation without any manufacturing sector at all.

But from the mid 1970s neo-liberal economic policies started de-industrialising countries both in the developed world and in the developing one. Free trade has undermined the manufacturing base of many western countries, including Australia. Neo-classical economics has failed to distinguish between the financial sector and real wealth creation. Where Roosevelt's New Deal reigned in the financial sector to become the servant rather than the master of capitalist development. Countries which did better during this period, such as Brazil, India, and China, did not embrace or implement neo-classical economics.

We need to return to the middle ground represented by initiatives such as the New Deal. Otherwise we will continue to de-industrialise, with the financial sector destroying value in the real economy, and business, labour and governments out of balance. Our debt and deficit will continue to grow, and we will be unable to meet the needs of older Australians and younger Australians, and we will continue to trash the environment in a futile quest for economic growth in the mistaken belief that this will solve our problems.