A report and the spin - now read on
Ross Gittins Sydney Morning Herald April 4, 2007
Peter Costello's latest campaigning on the ageing of the population, with his newly updated Intergenerational Report, is a strange mixture of information and disinformation. The information comes mainly from the report itself; the disinformation comes from what he says about it.
Since few people read the report, but we can't help hearing what the Treasurer has to say, most of what you think you know about the subject is probably wrong.
For a start, the man who coined the catchphrase Demography is Destiny, claimed that "the ageing of the population and the changes it will bring remains the biggest economic challenge for Australia over the medium and long term". That's true only if you've never heard of global warming - or you're hoping that if you ignore it, it'll go away.
Just why we can't get away with ignoring climate change is explained deep in the bowels of the report. Even so, ignoring climate change is exactly what it proceeds to do. It purports to tell us something useful about the state of the economy and the federal budget over the next 40 years while assuming away any effect of climate change on the economy or of measures to limit that change.
But let's be like the economists and proceed with our analysis on the basis of a quite unrealistic assumption. Costello's next piece of disinformation is his implication that the most significant effect of population ageing will be on his budget.
Only someone wearing the blinkers of a Treasurer could claim something so silly. Government budgets are important, but they're not the economy and the state of the economy matters infinitely more than the state of the Commonwealth's budget.
As the report makes clear, ageing's greatest effect will be on the state of the jobs market and, through that, the projected growth of the economy.
It projects that the overall population (a rough measure of the demand for labour) will grow by 38 per cent over the next 40 years, whereas the population of working age (a measure of the supply of labour) will grow by only about 20 per cent.
In other words, the demand for labour is expected to outstrip its supply. This suggests young people will have little trouble finding jobs, older workers will have little trouble retaining a job and all workers can expect to enjoy big real increases in their wages.
Does that sound like bad news? It's not. Not for workers.
Even so, slower growth in the population of working age, combined with the likelihood that more of the workforce will be in an older age group that's less inclined to still be working, mean the average rate of growth in the economy (measured as real gross domestic product per person) is projected to slow to 1.6 per cent a year over the next 40 years, compared with 2.1 per cent a year over the past 40.
In other words, it's expected that as a community we'll go on getting more prosperous each year, but at a slower rate.
But, since the Treasurer's more interested in his budget than in our economy, let's switch to that. Whereas the first Intergenerational Report five years ago projected a "fiscal gap" (the extent to which government spending exceeds government revenue) rising to 5 per cent of GDP by 2042, the updated report has slashed the projection to 3.5 per cent of GDP by 2047.
So that's good news. Remarkable progress in just five years. But what's brought it about? If you listen to Costello, it's happened because of improvement in the demographic variables.
The fertility rate has risen a fraction rather than continuing to fall. The rate at which older men participate in the labour force has risen rather than fallen. And the level of immigration is higher than originally projected.
Naturally, Costello isn't too modest to claim the credit for these improvements in the ageing outlook. The baby bonus, his "have one for the country" campaign, changes to tax and super, etcetera.
You can believe a few minor measures can redirect demographic change if you're silly enough. But read the report and it's made plain that in total, demographic factors (including one Costello hasn't claimed credit for, greater than originally projected longevity) have had a negligible effect on the size of the fiscal gap.
Just two factors explain most of its now-projected decline of almost a third to 3.5 per cent of GDP. The first is the China-led resources boom, which has significantly raised projected nominal GDP.
The second is "new data and refinements to modelling methodologies". Translation: we got our sums wrong the first time. This is particularly true of the (literally) unbelievable projection of the rising cost of the Pharmaceutical Benefits Scheme, which has been "refined" from laughable to merely implausible. This item alone explains 1 percentage point of the decline in the fiscal gap.
The Treasurer's next piece of disinformation is his implication the projected hole in his budget - the fiscal gap - is largely the product of ageing: cost of the age pension, aged care and so forth.
Not true. Read the report and you find that the greatest single factor by far in the expected growth is federal spending on health. And three-quarters of the projected growth in health spending is "non-demographic", such as expensive advances in medical technology.
Turns out that "roughly two-thirds of the projected increase in real [government] spending per person is driven by factors other than ageing". Oh.
But how worried should we be about that projected 3.5 per cent - or, in today's dollars, $35 billion a year - hole in the budget?
Not nearly as much as Costello wants us to be. The report makes clear it's based on the amazing assumption that, though by 2047 our material standard of living will be 90 per cent higher than it is today, the proportion of our income we devote to federal taxation won't change a jot.
Don't be silly. As people get wealthier they want to devote a higher proportion of their income to staving off death and staying healthy. We, like everyone else bar the Yanks, run most of our health spending through the government and pay for it through general taxation.
So more health spending equals higher taxation. Problem solved.