A comparison of key assumptions and outcomes over four intergenerational reports

Posted 05/03/2015 by Kai Swoboda

The 2015 intergenerational report (IGR), released more than one month after the legislated timeframe in the Charter of Budget Honesty Act 1998, is the fourth such report. Previous IGRs have been published in May 2002, April 2007 and January 2010.
The basis for conducting such an analysis is the principle of intergenerational equity—that actions benefiting current generations should not compromise future generations.
The purpose of the IGR is to examine the impact of population ageing on the Commonwealth’s financial position while holding the expenditure policy settings unchanged over a 40-year timeframe. All of the analysis is largely on the expenditure side, with this IGR—as well as previous IGRs—assuming that revenue as a share of GDP remains constant over the period extending beyond the most recent budget forward estimates period.

Assumptions comparison
There are a number of important assumptions that form the basis for the modelled expenditure. The choice of appropriate values for these assumptions is an important part of the IGR. Each IGR has adopted different values for some of the key assumptions (table 1).

Table 1: Key assumptions included in each IGR

IGR 1 (2002) IGR 2 (2007) IGR 3 (2010) IGR 4 (2015)

Period covered
2001-02 to
2041-42
2006-07 to
2046-47
2009-10 to
2049-50
2014-15 to
2054-55

Net migration (persons per year)
90,000
110,000
180,000
215,000

Fertility rate (births per woman)
1.6
1.7
1.9
1.9

Life expectancy at birth at end of period covered (years)

- Males
82.5
86.0
87.7
87.5

- Females
87.5
89.8
90.5
90.1

Participation rate

- Persons aged 15 to 64 at end of period (%)
75%
78.1%
79.7%
79.3%

- Persons aged 15+ at end of period (%)
55.5%
57.1%
60.6%
62.4%

Average annual growth in labour productivity (%)
1.75%
1.75%
1.60%
1.50%

Unemployment rate (%)
5%
5%
5%
5%

Source: Intergenerational reports 2002, 2007, 2010 and 2015.

Each IGR has made a similar assumption on the revenue side that over the medium to long term revenue (or tax revenue) is fixed as a share of GDP. However, the headline numbers quoted for this assumption in each report vary in their composition. The 2002 IGR used a fixed revenue to GDP share of 22.4%, the 2007 IGR used a fixed revenue (excluding interest receipts) to GDP share of 22.1% and the 2010 IGR used a fixed tax to GDP share of 23.5%. The 2015 IGR assumes a fixed tax to GDP share of 23.9%.

Outcomes comparison

Each of the IGRs includes projections for a range of key demographic and economic indicators. The outcomes of each IGR have generally been similar, with each projecting considerable population growth and increasing expenditure as a share of GDP in certain areas and a significant negative budget position (‘fiscal gap’) at the end of the period covered (table 1).
The financial outcomes for the 2015 IGR included three separate scenarios—a ‘previous’ policy scenario based on estimates prior to the 2014 15 Budget, a ‘currently legislated’ scenario based on 2014 15 Budget measures that have been passed by the Parliament and a ‘proposed’ scenario that is based on the 2014 15 Budget measures being implemented in full. The financial outcomes included in Table 2 for the 2015 IGR relate to the ‘proposed’ policy scenario.

Table 2: Key outcome meausres included in each IGR

	IGR 1 (2002)	IGR 2 (2007)	IGR 3 (2010)	IGR 4 (2015)
Period covered	2001-02 to 2041-42	2006-07 to 2046-47	2009-10 to 2049-50	2014-15 to 2054-55
Population at end of period (million)	25.3	28.5	35.9	39.7
Change in spending as % of GDP over period covered (percentage points)
- Health	+4.2	+3.5	+3.1	+1.3
- Aged care	+1.1	+1.2	+1.0	+0.8
- Social security payments	+0.5	+0.4	+0.4	-1.5
- Education	-0.2	-0.1	-0.7	-0.7
Fiscal gap at end of period covered (% GDP)	-5.0	-3.5	-2.7	0.0

Source: Intergenerational reports 2002, 2007, 2010 and 2015.

Fiscal gap

The ‘fiscal gap’ has been a key measure for each IGR—although the 2015 IGR does not use this term. The 2010 IGR notes that the fiscal gap (also referred to as the ‘primary balance’) is a measure of the difference between total Australian government receipts and total Australian government payments (excluding interest). In general, the fiscal gap, for the first three IGRs, expressed as a share of GDP, has tended to show an increasing gap over time for each IGR projection, although the size of the gap has narrowed with each IGR (figure 1). In contrast, under the ‘proposed’ policy scenario revenue exceeds expenditure for most of the projection period.

Figure 1: Projected fiscal gap (share of GDP)

Percent of GDP

Source: Intergenerational reports 2002, 2007, 2010 and 2015.

Focus on policy areas

While some elements of analysis are comparable across each IGR, each report has also included analysis that has not been replicated in later IGRs or has provided a basis for analysis in a later IGR. For example:

The 2015 IGR includes, for the first time, an analysis of three separate policy scenarios (‘previous’, ‘currently legislated’ and ‘proposed’). The headline figure cited for the budget outcome in IGR 2015 uses the ‘proposed’ policy scenario and focuses on the ‘underlying cash balance’ rather than the ‘primary balance’ (also referred to as the ‘fiscal gap’).
A summary of issues related to the impact of climate change, included for the first time in the 2010 report, has been retained in the 2015 report. However, these issues are included in the broad chapter of change (chapter 2) in the 2015 IGR whereas the discussion of climate change and sustainability were included in separate chapters in the 2010 IGR (chapters 5 and 6).
A broad sensitivity analysis to allow for an understanding of changed assumptions for key variables, included in the 2002 report, has been retained in all reports.

Links to additional resources