Kai Swoboda, Economics
Key issue
It is likely that the 4th intergenerational report (IGR)—a modelling analysis that examines the fiscal impact on the Australian Government Budget position over the next 40 years assuming no policy change—will be conducted during the 44th Parliament. This brief discusses the lessons from the three previous IGRs (2002, 2007 and 2010). |
Under the Charter of Budget Honesty Act 1998, the Treasurer is required to publish an ‘intergenerational report’ (IGR) every five years that assesses the long term sustainability of current Government policies over the next 40 years, taking account of the financial implications of demographic change.
The basis for conducting such an analysis is the principle of intergenerational equity—that actions benefiting current generations should not compromise future generations.
To date, three such IGRs have been published (May 2002, April 2007 and January 2010). The next such report is required to be published by January 2015, which is likely to fall within the term of the 44th Parliament.
Outcomes of previous IGRs
Each IGR requires assumptions to be made for a range of key demographic and economic indicators. These are then used to determine the impact on the revenues and expenditures of the Australian Government Budget under the assumption that current policies remain unchanged over the relevant 40-year forward period.
The outcomes of each IGR have generally been similar, with each projecting increasing expenditure as a share of GDP in certain areas, resulting in a significant negative budget position (‘fiscal gap’) at the end of the period covered (Figure 1).
Following the delivery of each IGR, successive governments have implemented policies that have been explicitly linked to the relevant IGR. For example:
- The 2002–03 Budget included measures such as a rise in co-payments for medicines supplied under the Pharmaceutical Benefits Scheme (PBS) and the introduction of the superannuation co-contribution.
- The 2007–08 Budget emphasised measures aimed at enhancing productivity and participation.
- The 2010–11 Budget referred to the IGR as a basis for superannuation changes such as the phased increase in the superannuation guarantee from 9% to 12%.
Figure 1: Projected fiscal gap for each IGR
Source: IGR (2002, 2007, 2010).
The difference between the outcomes of each IGR partly reflects these and other policy changes. The results of each exercise are nevertheless subject to a range of economic and demographic assumptions.
Some of these assumptions are able to be directly influenced by government, such as migration levels. Others, however, such as fertility and productivity growth, can only be influenced indirectly.
Any analysis of the outcomes of such modelling therefore needs to be mindful of the extent that the values assumed for key inputs to the modelling can be achieved. Important too in assessing different policy responses to the 4th IGR will be views about the role of government, priorities for government expenditure and the extent and mix of taxation.
Key assumptions of previous IGRs
In general, each IGR has assumed higher life expectancies, net migration and labour participation; but key economic assumptions have remained largely unchanged.
Also important in the outcomes of each IGR are assumptions and models used for the key drivers of certain government expenditures that are not directly related to ageing, such as technology change and behavioural changes. The models also incorporate the impact of policy changes, such as the moderating effect on expenditure by raising the age to access the age pension.
Importantly, the 2nd and 3rd IGRs included an analysis of how selected economic indicators are affected by changes to key assumptions. However such a sensitivity analysis did not include the impact of different scenarios on the fiscal balance and was not the subject of much discussion within each IGR.
Criticisms of the IGR exercise and outcomes
Various criticisms of previous IGRs have been made. At a high level, one criticism is that such an exercise is merely an exercise in scaremongering, scape-goating older people for the rising costs of government. Another is that the IGR, by focussing on the impact on the Australian Government Budget, does not consider the impact of cost shifting or pressures facing state and territory governments.
More fundamentally, the value of such a long-term modelling exercise is questionable, given the negative fiscal outcomes following the 2008 global financial crisis. Significant differences in assumptions across IGRs that should improve IGR outcomes, such as the doubling of annual net migration and a sharp increase in fertility from the 1st IGR to the 3rd IGR, can also lead to the perception that the outcomes can be distorted.
Critics also claim that some assumptions about future terms of trade and productivity have been optimistic and that some assumptions on the expenditure side (particularly health) do not adequately take into account rising incomes.
The response to each IGR has arguably been piecemeal and ad hoc. While the Government in the 2010 IGR noted the broad range of policies it was undertaking to respond to long-term challenges, there has been no framework to assess the impact of individual policy changes or provide a basis for assessing progress in achieving assumed future levels of economic performance.
Key inputs into the 4th IGR
The 4th IGR will be required to incorporate a range of significant policy changes since the last report in 2010. These include the establishment of a paid parental leave scheme in 2011, the early stages of the phased implementation of a national disability insurance scheme and recent changes to superannuation tax concessions.
Important also in determining the outcomes of the 4th IGR will also be assumptions made on the key variables such as migration, life expectancy, fertility, labour force participation and productivity. While more recent evidence suggests that assumptions about life expectancy will be higher again, the choice for other assumptions is less clear.
Further reading
R Guest, The economics of a sustainable population, Population Papers series, Parliamentary Library, Canberra, 23 November 2010.
Australian Government, Australia to 2050: future challenges, Attorney-General’s Department, Canberra, 2010.
D Gruen and D Spender, ‘A decade of Intergenerational Reports: contributing to long-term fiscal sustainability’, The Australian Economic Review, 45(3), 2012, pp. 327–34.
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