Gen Next gaining the upper hand in arm wrestle between young and old

There are two unavoidably dodgy assumptions in every Intergenerational Report, regardless of the policy ambition of the treasurer of the day, or the party they serve. The first is that the tax system will remain unchanged for the next 40 years. The second is that the world we are living in will suddenly be free of shocks.

The Treasury Department understands that both assumptions defy logic. Every government fiddles with the revenue side of the budget, even the risk-averse ones. And shocks are an inevitable part of the economic cycle – in both directions. History tells us that we get a big one at least once a decade, and recent experience suggests we should start preparing for rolling shocks from the three Cs of climate change, coronaviruses and China.

Illustration: Simon LetchCredit:

Obviously Treasury, and the Albanese government, are thinking about these very things. But the Intergenerational Report was not designed to predict the direction of tax reform, or forecast the next recession, or resources boom, or global financial crisis, or pandemic, or war. The document would lose its credibility if it attempted that degree of future-gazing.

But assumptions of a static tax policy and a benign regional and global order have affected the way the political class has received each IGR since Peter Costello launched his noble venture in 2002. The message that we should prepare for the future has been easily lost without a plausible catastrophic scenario – or even a coming opportunity – to galvanise the debate.

And so the government of the day tries to encourage some long-term thinking while immediately ruling out anything remotely controversial; the media recites the budget deficit projections; and the opposition bangs on about secret tax hikes or spending cuts.

The political class carries its own assumption that the future can’t be shaped because the electorate is fixed for all time in favour of older voters. It has been the IGR’s catch-22 for the past two decades. The most credible part of the exercise – identifying the costs and consequences of an ageing population – is the one that has been ignored because there apparently was no constituency in favour of easing the tax and caring burdens on the next generation. Older Australians, in this framing, became a problem without a solution.

But there is a strong reason to believe that the arm wrestle between young and old Australia is finally leaning towards the next generation.

The IGR that Treasurer Jim Chalmers released on Thursday notes that the cities have been growing faster than the regions since 1994, and that will inevitably increase the cities’ – and therefore younger Australians’ – share of the federal parliament through the redistribution of electoral boundaries. In fact, the cities are projected to grow at almost twice the rate of the regions for the remainder of this decade.

The familiar story that the IGR presents on population ageing is of fewer workers supporting more retirees. To the untrained political eye, that suggests older Australia will continue to pull rank as more voters move into the retirement camp, with a direct interest in the politics of eternal entitlement.

But electorates, like economies, are dynamic organisms. Australian society has been polarising by age since the mid-1990s, between the younger capitals and the rest of the country. The cities have slowed the ageing process through overseas and internal migration, while the regions have become much older than the national average because they can’t attract or retain young people. The capitals claim a double advantage by luring young people from the regions and sending retirees in the other direction. And the regions can’t fill the gap with overseas migrants because they prefer to settle in the cities as well.

As younger Australians in cities increasingly decide who governs, they will earn the right politically to also decide what taxes they pay and what services they fund. In that world, it is imperative that young and old compromise – and learn the art of trade-off.

The IGR offers a number of ways to measure the ageing crunch but leans towards the worker-to-retiree and taxpayer-to-retiree ratios. Politicians have trouble translating these figures into policy action because they don’t seem all that scary in the short-to-medium term.

A better way to understand the policy challenges of ageing is to compare the number of people aged 65 and over with the number of children aged 0-14. The IGR shows the nation at large will reach a tipping point early in the next decade when retirees outnumber children. I call this the grey zone. It is some consolation that Australia is one of the last rich nations to face this reckoning.

What the national projection conceals are the key differences between the capitals and the regions today. Regional NSW and Victoria, and all of South Australia and Tasmania, are already in the grey zone. They have more retirees than children. Here’s the catch-22 for the regions. As the career paths they offer their workers are narrowed by rising demand for aged care and other services, the incentives for young people to leave town for the city increase. The big four capitals of Sydney, Melbourne, Brisbane and Perth, as well as Canberra and Darwin, won’t reach the grey zone until the middle of the century, based on present trends.

Remember that the Coalition lost power in a landslide at the last federal election because it was evicted from the cities. All parties should be well aware of the implications. The future of Australia depends on how we handle the booming populations in Melbourne’s west and north, Sydney’s west, Brisbane’s south and west, and the Sunshine Coast. Not just the politics of it all, but the very viability of our urban settlements – questions that range from the impact of climate change to affordability of housing and provision of infrastructure.

Tilting the policy scales towards the young will not be without pain. Buried in the IGR is the startling detail that governments on both sides have actively reduced the share of households that pay income tax, ensuring an even greater load on the next generation than if governments had done nothing.

“In the absence of policy change, projections show increasing reliance on personal income tax,” the IGR says.

“However, taxpayers have declined as a share of the total population since peaking in 2005–06 despite a similar employment-to-population ratio. This is the result of an increase in the effective tax-free threshold, driven by policy decisions to raise the threshold itself and associated increases to low-income and age-related tax offsets, coupled with population ageing over the period. As the population ages, the personal income tax base is projected to continue to narrow in line with the projected decline in workforce participation.”

This includes the Howard government’s largesse for self-funded retirees and families with mum at home raising children, and the Gillard government’s lifting of the tax-free threshold for all workers as compensation for the carbon pricing mechanism.

The prospects for genuine reform will remain grim if the major parties dig in on behalf of their respective bases – Labor’s in the cities, and the Coalition’s in the regions. Nevertheless, it is hard to see how the status quo favouring older Australia can hold for much longer in an electorate where the taxpayers are increasingly concentrated in the cities, and the recipients of their support are in the regions.

George Megalogenis is a journalist, political commentator and author.

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