Treasurer Josh Frydenberg released a Treasury forecast this week that said the budget will still be in deficit when he turns 89 and the Prime Minister Scott Morrison is 93.
In fact, in 40 years’ time the deficit will still be expanding.
This Coalition government now has the distinction of being the first to declare the budget will never be in surplus while they’re alive.
That seems a big moment to me, and might have got more attention if Sydney hadn’t been going into a lockdown due to failures of quarantine and vaccination, but that’s another big moment story.
The Intergenerational Reports – this is the fifth edition – are a chance for Treasury’s Excel jockeys to flex their spreadsheets and make 40-year forecasts of the economy, demographics and the budget.
Of course, it’s impossible to predict what’s going to happen next year let alone in 2061, so it’s all faintly ridiculous.
But the point of these IGRs is for the bureaucrats to warn the politicians what will happen if they keep going as they are and things don’t change. It is, in effect, the wagging finger of Treasury.
And that’s what the first three were all about, in 2002, 2007 and 2010: They were warnings that budgets that started in surplus would drift into ever-widening deficits because of the ageing of the population and escalating health costs unless something was done.
Then Joe Hockey and Tony Abbott grabbed control of the fourth IGR and used it to justify the spending cuts of the 2014 budget.
As a result, the Hockey/Abbott IGR in 2015 had surpluses going forever, no deficits at all, and we’ll never know whether it would have happened because the pandemic came along before the fifth IGR had to be prepared.
This time we seem to be back with Treasury in charge, although the Treasurer presented it and therefore owned it, and for the first time there is no surplus at all, now or ever.
What’s more, in his speech, Josh Frydenberg embraced the forever deficits and basically said they’ll be fine because interest rates will stay low and the debt will be affordable.
“We are committed to funding … essential services while maintaining a sustainable tax burden. Taxes are capped at 23.9 per cent of GDP.”
Only a few years ago the idea of permanent deficits would have had the Liberal and National parties running around with their hair on fire and declaring a national emergency.
Is it hypocrisy or just dealing with a new reality?
Well, it’s hypocrisy of course, but that’s just politics, and isn’t new.
And the ageing population causing health costs to rise exponentially is not new either, and the government, like previous ones, is not dealing with it, or at least not in the way that economics would say is prudent – which is to increase taxes.
Failing that, we’re talking the heresy of Modern Monetary Theory – that is, the idea that deficits don’t matter and government debt is not really debt, but a form of currency that can be swapped for the other form of currency called money, which is printed by the Reserve Bank.
Which is already happening, by the way, although they’re pretending it’s not.
The non-heretical way to deal with structural deficits that doesn’t involve cutting spending and/or raising taxes is to grow the economy by increasing productivity – a lot.
“That’s my focus”, said the Treasurer in his speech, before noting the “big bang reforms” are one-offs and can’t be repeated, and listing a series of smaller reforms the government has done.
It is all about incremental gains now, as Mr Frydenberg says, as well as focusing on per capita GDP, not total GDP, which has largely been a function of population growth.
Productivity explains two-thirds of the growth in Australia’s GDP per capita since Federation, according to the Productivity Commission.
But in recent years it has been slowing down, as in the rest of the world, from 2 per cent a year in the 1990s to 1.2 per cent.
In the latest IGR, Treasury assumes that productivity growth goes back to 1.5 per cent a year – the 30-year average – but that’s just an assumption.
And by the way, there’s a sensitivity analysis in the report showing that if productivity growth stays at 1.2 per cent, the budget deficit in 40 years is twice what it would be if it goes back up to 1.5 per cent.
But even 1.5 per cent is not enough, as the endless budget deficit suggests, so something more is needed and that won’t happen on its own.
The government will have to do some hard reform work – NOT tax reform, but things like building infrastructure where it’s actually needed rather than in seats they’re trying to win, really reducing congestion on the roads, and working constructively with the states to reduce duplication.
What emerges clearly from this IGR is that whoever wins the next election will have to immediately call a national reform summit and get some consensus for doing what’s needed.
It’s what the Hawke government did in 1983, and it worked.
That would be a novel experience for today’s destructively combative political classes – but one that’s very much overdue.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news