Intergenerational Report should be a call to arms against a national decline

The Intergenerational Report paints an alarming picture of a nation headed for economic decline. It should be should be a call to arms.

Treasurer Jim Chalmers. Picture: Steve Pohlner

The city of Buenos Aires is full of monuments to a bygone era. The abundance of grand buildings in the Belle Epoque style bears witness to another century, when Argentina was one of the wealthiest nations in the world and seemed destined to remain that way.

Argentina has experienced a lost century. But its experience is not so unique. Japan has had its lost decades: its GDP per capita is close to the level it was 30 years ago. Britain has had a lost decade and a half, its GDP per capita barely above the pre-financial crisis levels of 2007.

Even China, for the past three decades one of the engines of the global economy, is seeing its growth stutter as an ageing population, more interventionist government and a property sector burdened with debt catch up to it.

Though we have become accustomed to it in the post-war era, and longer in Australia, an inexorable rise in living standards from one generation to the next is not the natural state of affairs. Instead, it is highly dependent on the quality of government, institutions and policy. China’s GDP per capita barely budged during the first three decades of rule by the Chinese Communist Party. But when market-oriented reforms were unleashed by Deng Xiaoping in 1978, China’s income per person roughly doubled every decade up until 2018.

Argentina’s economic success was derailed by military takeovers and then the rise of populism under Juan Peron, a disease Argentina has since failed to shake.

As one economic journal describes it, the economic order in Argentina shifted to “government-backed favouritism of dominant interest groups and encouraged pervasive rent-seeking instead of productive economic activity”.

In Australia, we have things such as the Intergenerational Report to keep us on track. And the Intergenerational Report handed down last week should have served as a wake-up call.

Treasurer Jim Chalmers described the IGR as depicting “a future we can be optimistic about”. It’s quite the reverse. The picture the IGR paints of the future is alarming.

In 40 years, our population will be older. The workforce participation rate will be lower. Productivity growth will be an anaemic 1.2 per cent. Spending on health, aged care, the National Disability Insurance Scheme, defence and interest on debt will consume fully half of all government expenditure.

The only conclusion from the IGR is a stark one: left unchecked, Australia is headed for national decline. And unless we reverse the course of this decline, then something will have to give.

Australia will have to give up a credible defence force as the countries in our neighbourhood grow more powerful and our region becomes more dangerous. We will be forced to raise marginal income tax rates to well north of 50 per cent, on the shrinking share of the population that still works. Or abolish welfare programs entirely. Or raid the Future Fund or nationalise superannuation. These are the sorts of stark choices we will face.

Already we have dominant interest groups, particularly the trade unions, driving much of the Labor government’s agenda, notably in industrial relations. Their agenda is antithetical to productivity.

Meanwhile, many of Australia’s largest corporations spend much of their time in rent-seeking behaviour. Rather than innovate, compete on price, deliver better service than their competitors or expand offshore, they seek government favour to preserve or erect high barriers to entry for outside competition and keep their cosy oligopolies. Just witness the recent Labor decision to deny Qatar Airways additional landing slots in Australia, to protect the profits of Qantas at the expense of Australian travellers and the tourist industry. This is Peron-style state corporatism in action.

Rather than innovate, compete on price, deliver better service than their competitors or expand offshore, many of Australia’s largest corporations – such as Qantas – seek government favour to preserve or erect high barriers to entry for outside competition and keep their cosy oligopolies. Picture: NCA NewsWire/David Geraghty

Contemporary economic debate in Australia has become a discussion about dividing the spoils of government largesse and allocating the burden of taxation rather than growing the economic pie.

Even those advocating for tax reform – shifting the tax burden away from income and towards consumption – are fiddling at the margins, missing the forest for the trees. If we are to get to grips with the real challenge laid down by the IGR, we must tackle demography, productivity and welfare.

To support a larger elderly population in a sustainable way, we need a larger working-age population, and for this we need to bend our demographic profile.

The IGR forecasts that in 40 years, 75 per cent of our population growth will come from people moving to Australia and only 25 per cent from births in Australia.

Reversing the steady decline in our birthrate would lower Australia’s median age, help ensure we have a larger working-age population in 40 years, and deliver a more sustainable balance between immigration and Australian-born citizens.

The last sustained effort to increase our birthrate was in the early 2000s, with the Howard-Costello government’s baby bonus scheme. It worked: there was a baby bump.

Policies that increase support for families having children later in life, that make our education system more accommodating for the modern family unit, that tax the household rather than the individual as the unit, and that make housing more affordable could all help improve our birthrate.

Reversing the steady decline in our birthrate would lower Australia’s median age, help ensure we have a larger working-age population in 40 years, and deliver a more sustainable balance between immigration and Australian-born citizens. Picture: iStock

Our woeful productivity performance also needs to be addressed. Though low productivity growth is a global phenomenon, in Australia it is exacerbated by a lack of competition.

Competitive pressures drive innovation and productivity, but the Australian economy in key sectors – from banks to utilities, supermarkets to telecommunications, aviation to transport – has too little competition. Concentrated domestic industries with only a few dominant players have as their main objective the preservation of their cosy market structure, with reduced incentive to improve productivity or compete on price. This is highly profitable for shareholders, but it comes at the expense of consumers and Australia’s ultimate economic performance.

Finally, as the blowout in costs of the NDIS illustrates, demand-driven welfare schemes without strict eligibility criteria and caps on payments can quickly balloon out of control. Such an approach to welfare is simply not sustainable.

The IGR should be a call to arms. Instead, the Labor government is engaged in a conversation about how to manage national decline. If we do not wake up, Australia risks becoming this century’s Argentina.

Dave Sharma is the former Liberal member for Wentworth.