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Intergenerational Report a farcical proposition

Intergenerational Report
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Economists working on the 2015 Intergenerational Report probably hid their cars in their garages over the past few months to create the illusion they were somewhere else, and not working on this report’s farcical forecasts.

Here’s one such forecast: “The annual growth in real GDP is projected to average 2.8 per cent over the next 40 years, compared with 3.1 per cent over the past 40 years.”

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Here’s another: “Real GNI per person is projected to grow at 1.4 per cent over the next 40 years, compared with 1.9 per cent over the past 40 years. If this level of growth is achieved over the next 40 years, the annual average Australian income will increase from $66,400 today to $117,300 in 2054-55 in today’s dollars.”

Hooray! If I ever have grandchildren, they’ll be 77 per cent richer.

If such forecasts had a scrap of statistical validity about them, they’d be exciting – for one thing, they’d present a wonderful case for raising the nation’s tax-to-GDP ratio slightly to help pay for the health, education and welfare funding shortfalls the Coalition has been warning us for the past two years.

But they have none. Levels of confidence around such forecasts fall dramatically even a few years out. History alone shows why even a 10 year horizon is hard to predict.

As The Australia Institute’s Richard Denniss has pointed out, such forecasts made in 1980 or 1990 would have failed to account for developments such as the mobile phone and internet. You could also throw in the end of the Cold War, and the ‘black swan event’ we now call the GFC.

So is there no use at all in producing such a report?

Actually, there is, but you have to go looking for it.

The trap the government has predictably fallen into with this report is to focus far too heavily on ‘debt and deficit’ projections – which look terrifying (see, for instance, the chart below showing how the federal budget deficit would blow out over time) – without focusing on just how easy such problems will become to solve if the report’s own forecasts are correct.

 

Graph-2

Put another way, the report contradicts itself by effectively arguing: ‘We’re all going to be a lot richer, but we can’t afford to pay for health, education and welfare – if we try, we’ll be crushed by debt.’

This report’s greatest success is in reminding the nation that economic growth should be the government’s first priority, rather than running scare campaigns about ‘debt and deficit’.

As explained in a previous article, Australia still has a low tax-to-GDP ratio, even when state and local governments are included.

The Intergenerational Report is based on the austere position that “tax receipts are assumed to remain capped at a constant 23.9 per cent of GDP. This ratio of tax-to-GDP reflects the average of the period 2000-01 to 2007-08”.

The problem with this ideologically motivated position is that it tries to tell the electorate what they want – nobody wants to pay more tax, but the majority also value services the government tried to cut with its disastrous first budget.

A less ideological document would concede that in a richer Australia, another point or two added to the 23.9 per cent tax cap would neither create a drag on the economy, nor be noticed by most households.

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