Labor’s great gamble: get ready for more change and upheaval
As Australia faces its rich nation dilemma, Jim Chalmers has put his ambition up in lights and in the process increased expectations about the delivery. The gap between the challenge and the response cannot be missed.
This is a huge gamble. This week’s Intergenerational Report – projecting Australia’s future out to 2063 – shows real incomes 50 per cent higher. But don’t be fooled. Economic growth will be slower, growth in incomes per person will be dismal, government spending will increase, taxes will need to rise, the budget will be in deficit for 40 years, Australia will remain a debtor nation, the China income gift will die and productivity will be dramatically diminished from earlier generations.
This is the outlook Labor faces – as documented by Labor. The 21st century will challenge us at every level. Get ready for more change and upheaval. The impact of an ageing population will be pervasive. The IGR story projects comfortable decline in a world that also offers new opportunities. Australians will be better off but our country will slip down the table of global influence. The risk is that a mood of dissatisfied under-performance will take hold and trigger community unhappiness, division and grievance.
This week Australia was presented with its future. There is no escape in saying “we weren’t told”. There were two defining documents – the Labor government’s Intergenerational Report and the Business Council of Australia’s Seize the Moment report with its agenda for Australia to become a state-of-the-art 21st-century nation. There is some overlap, but the differences are sharp.
The Chalmers IGR really requires a foundational agreement – that Australia cannot accept this as the norm and must engage in ambitious reform to do better. Yet the paradox of the Albanese government is on display: Chalmers is brilliant at sketching the challenge, identifying the conceptual response, but cautious in actual decisions. The gap between the challenge and the response cannot be missed.
The IGR constitutes a blueprint, what Chalmers called a “new productivity frontier” – his conception is that Australia must marshall and own the 21st-century economic transformations – digitisation, technological change, the path to net zero and demographic change.
“At a time of change, one goal is clear, pressing and foundational,” Chalmers said. “To make Australia the biggest beneficiary of the shifts under way in our economy in ways that create more opportunities for more people. This is how we own the future.” He couldn’t be more upfront: “We have built this whole Intergenerational Report on five transformative forces, shaping the future of our economy and society.”
Chalmers wants a productivity agenda that wins political support, is people-friendly, harnesses technology and creates new investment via the path to net zero. He wants to ditch or play down what he sees as yesterday’s productivity agenda – the high-risk, “big bang” sweeping tax reforms, surgical spending cuts, workplace reforms and market-driven deregulation. He has seen the political wreckage of too many former prime ministers to repeat more of the same. He knows Labor has a re-election to win. The burning question, however, is: will this new concept of productivity actually work? Will it deliver for the Australian people?
This is the great gamble of the Albanese government.
The IGR’s projections on tax, spending and productivity underline the need for urgent action.
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the trajectory was “bleak with little indication that the government intends to attempt to raise the productivity of our economy”. He warned about a “sleepwalk into mediocrity”.
Outgoing BCA chief executive Jennifer Westacott, having issued the council’s report, said of the Chalmers IGR: “This document shows that growth in living standards will slow unless we take urgent decisive action to achieve higher economic growth. We cannot have short-term, ad hoc responses; we need a comprehensive and aligned economic strategy. We need to lock in higher productivity, stronger economic growth than the IGR forecasts because that will drive stronger revenues and higher living standards.”
In a predictable response, the opposition’s economic spokespeople, Angus Taylor and Jane Hume, said the report “paints a picture of Labor’s bleak future” – higher taxes, higher spending and deficits for the next 40 years. But at some point the Coalition must show its own credentials: how will it meet the challenge?
The political divide the IGR bequeaths Australia is stark. It is whether the response should be a bold, tough-minded reform agenda to incentivise investment reflecting the belief that Australia must do better or the more calibrated Chalmers method of maximising gains from the economic transformations already under way.
Here’s the snapshot of your future. In the IGR vision of sullen prosperity real GDP is projected to grow at an average annual pace of 2.2 per cent – 0.9 percentage points lower than the average of the past 40 years. It reflects slower population growth and also population ageing. The average growth rate in real gross national income per person – the average amount earned by each Australian – is projected to increase by 1 per cent annually compared with 2.1 per cent across the past 40 years, a big reduction in living standards and wages growth. There are two main reasons – the decline in export prices for key commodities and the decline in our productivity.
Since Federation about 80 per cent of wage rises have come from productivity. Yet the IGR productivity growth assumption has been reduced to 1.2 per cent, down from the 2021 IGR that used the 1.5 per cent assumption. This is our lowest productivity for 60 years.
The worse news is there is no certainty Australian productivity will even reach the scaled-down 1.2 per cent figure – that would mean further attrition in living standards growth. “We’re going to have to work our tails off even to hit the 1.2,” Chalmers said.
Chalmers rejects the “all options on the table” tax debate the BCA champions. His tax reform agenda, so far, is politically safe – multinational tax, lifting the petroleum resource rent tax, cutting super concessions at the top, action on compliance and cigarettes, standing by stage three personal income tax cuts. The journey, of course, “is not finished yet”. He dodged a question about a road-use charge, saying that’s for some time “in the next few years”.
“Big bang” tax reform is not in the Albanese government kitbag.
Yet the IGR sketches an alarming fiscal future – big government is entrenched and taxes will keep heading north. There are multiple big trends.
Without massive offsetting actions, personal income tax revenue will grow from 50.5 per cent of total tax at present to 58.4 per cent at 2062-63. That’s a smaller proportion of workers paying a higher proportion of tax. How’s that for productivity? Why can’t we have that discussion?
The National Disability Insurance Scheme is revealed as the worse fiscal nightmare in Australia’s history, with no certainty the problem can be resolved. Strategic analysts will be appalled at the inadequate level of defence spending, sitting at only 2.3 per cent of GDP from the 2030s to the ’60s. Labor’s talk about this country facing its most dangerous strategic circumstances since World War II cannot be taken seriously.
Labor is betting the entire house on climate change and the clean-energy transition. The IGR makes clear the climate agenda is not just to reduce emissions. The IGR highlights the conundrum – global warming has the potential to wreck industries and shatter productivity levels by 2063 at “a significant economic cost” – yet the transition to renewables is filled with potential productivity gains for Australia because “it can generate renewable energy more cheaply than many countries and on a greater scale”.
While this requires significant decarbonisation investment, an estimated $225bn by 2050, renewable energy will create new industry and export opportunities. In short, the path to net zero is the means to boost productivity and lift national income. The complexity and uncertainties in such projections is mammoth – but Labor is tied to this economic vision. It could make or break the Albanese government.
The IGR suggests bigger government is irresistible. The five big spending pressures are health, aged care, NDIS, defence and interest payments on debt. These elements rise from one-third of total spending today to about half in 40 years. Total government spending will march relentlessly to 28.6 per cent of GDP at 2062-63, a significant increase of 3.8 percentage points from 24.8 per cent today.
Population ageing alone is estimated to account for 40 per cent of the increase in government spending, notably in health and aged care. That is unsurprising. The number of Australians aged 65 and older will more than double. The number aged 85 and older will more than triple.
Government will look after us as never before. Real government spending per person will explode from about $25,000 a person today to $40,000 a person in 2062-63.
The report assumes the NDIS reaches program maturity in 2043-44 with federal government spending at 2.1 per cent of GDP and stabilises at that level. But as a demand-driven scheme, costs are on an escalation path. There were 610,502 participants at June this year, 49 per cent more than envisaged by the Productivity Commission in its originating report. The number of children joining the scheme is pivotal to the problem, totalling 313,476 in June. Average support package costs are increasing at 6 per cent annually.
Accepting Albanese government policy to limit growth to no more than 8 per cent by 2026, the IGR warns, however, that “the timing of maturity is uncertain” – decoded, there is no guarantee when NDIS costs will stabilise. It depends on policy settings, the take-up rate and costs of package support.
Significantly, the report includes alternative scenarios – including a “later maturity” scenario in which costs do not stabilise until just beyond the 2062-63 period. In this almost beyond belief scenario federal government NDIS spending would reach 2.8 per cent of GDP and government debt would be around two-fifths higher at 2062-63. That such a scenario has been included must be noteworthy.
On defence, spending will increase from around 2 per cent of GDP in 2022-23 to around 2.3 per cent of GDP in 2032-33, its highest share since around the end of the Cold War. Significantly, spending “is then assumed to remain steady” until the end of the projection period in the 2060s. This is a guaranteed source of contention.
Chalmers draws attention to the extraordinary fact spending on aged and service pensions will fall from 2.3 per cent of GDP at present to 2 per cent of GDP in 2062-63, despite the almost doubling of the number of people over the pension age. This reverses the trend in most OECD nations and reflects the rise of superannuation as a retirement income mechanism.
While the budget is in surplus for 2022-23, this is a false dawn. The report shows budget deficits each year for the next 40 years, declining during the 2020s but widening from the 2040s due to spending pressures. Gross debt will be at 32.1 per cent of GDP at 2062-63.
The IGR makes clear major tax changes will be essential – but that job is left to future governments. It says the tax to GDP ratio in 2023-24 is expected to be 23.9 per cent and rise to 24.4 per cent by 2033-34. This tax level is assumed for the remainder of the period but, in practice, successive governments will make their own tax changes.
Central to this debate will be the need to return bracket creep and restrain personal income tax from assuming an even greater proportion of the overall tax take. In this sense, much of the stage three tax debate about abolishing or limiting the legislated tax cuts has been misguided.
The report warns the revenue base will come under pressure as the fuel and tobacco excise bases are eroded. Only 12 per cent of Australians aged 70 and older pay income tax and this age group will expand to 18 per cent of the population in 2062-63.
Chalmers rejects the major tax reform project advanced by business groups and many economists: shifting the tax base towards indirect taxes and the GST away from income tax and company tax. He agrees, however, there is a major challenge for the revenue base.
A smaller share of working-age people will need to support a larger share of people in retirement in the 2060s. Population growth will slow to 1.1 per cent annually across the next 40 years compared with 1.4 per cent over the past 40 years. Net migration is expected to contribute 0.7 percentage points to this growth, a falling share. The population at 2063 is assumed to be 40.5 million.
Launching the IGR, Chalmers rejected media criticism that his reform agenda was too modest. Obviously stung, he said stacked up against the first 15 months of “any other government since Federation” Labor had “a hefty list of economic reform”. He spelt out the eight areas of reform priority.
They are: easing the cost of living via the inflation fight; consolidating the budget outlook; transforming energy on the path to net zero; a bigger and better trained workforce; deepening the industrial base; lifting investment through government support; designing more efficient markets; and reforming the economic institutions.
A senior government source described the agenda in this way: it seeks to transform the energy market completely in five to 10 years; it’s working through the biggest supply shocks since the 1970s; it faces reform of a critical scheme, the NDIS; it is tackling the aged care and health challenges so vital to the budget; it is embarking on childcare and competition policy reform; and is working to deliver a sustained lower level of unemployment.
“We feel like that’s a pretty full dance card at the moment,” the source said. The real point is that the reform and productivity agenda has changed. That reflects Chalmers’ vision, Labor values and the government’s essential political needs.
Exposing his emotional side Chalmers said the real value of the IGR lay in the willingness of the country to think about its own future. That’s true. But government must get the balance right between documenting the long-run problem and producing some decisive solutions.
The future, as Chalmers said, is not preordained. It lies in the agency of government and decision-makers. “If you don’t have that pilot light of purpose in you,” he said, “then you’ve got no business being here in our line of work.”
That’s also true. Chalmers has put his ambition as Treasurer up in lights – in the process he has only increased expectations about the delivery.
More Coverage
Australia faces the rich nation dilemma: relative decline amid prosperity. But Jim Chalmers’ vision is for Australians to live longer, healthier and more rewarding lives. The Treasurer sees Labor as the party of the future – the party of decarbonisation, technological change and the caring economy. He aspires to reinvent the Labor Party economic model for a new generation.