Enough optimism: it’s really going to be worse

THE government’s Intergenerational Report’s highly optimistic economic assumptions mean the outcomes are likely to be worse.

HOWEVER sobering the debt and deficit projections in the government’s Intergenerational Report, its highly optimistic eco-nomic assumptions mean the outcomes are likely to be worse.

Despite flagging a dramatic ageing of the population that will almost certainly increase the tax burden, the government has assumed only a “slightly slower” average economic growth rate of 2.8 per cent per annum over the next 40 years.

Australians’ average annual incomes will rise from $66,400 to $117,300 over this period almost entirely as a result of productivity growth — a notoriously difficult factor to model — of 1.5 per cent a year, slightly lower than the result over the past 40 years.

“1.5 per cent is the best we can hope for from a ‘business as usual’ scenario,” said Saul Eslake, chief economist of Bank of America Merrill Lynch, who stressed the importance of reform to sustain productivity growth.

INTERACTIVE: The InterGenerational Report

The IGR itself noted that the pace of significant reform had slowed down since 2000. “The increase in productivity growth rates seen in the 1990s is widely attributed to significant policy reforms of that decade and the 1980s,” it said.

Despite the resources boom, the economy grew at 2.5 per cent last year. Wage growth is at an 18-year low while the Treasury’s analysis assumes average annual wage growth of 4 per cent.

The IGR assumes the unemployment rate will fall from its current level of 6.4 per cent to 5 per cent in coming years and stay there for the next 40 years (which is standard Treasury practice).

It also assumes the country’s terms of trade — the ratio of Australia’s export to import prices, a crucial determinant of national income — remains around 50 per cent above its long-run average over the entire period.

“That’s probably not an assumption I would have made: there won’t be any more Chinas and Indias after China and India,” Mr Eslake said.