Tweaks and a far-out time frame test credulity

FORGET about falling off chairs, I fell out of bed when I heard opposition treasury spokesman Chris Bowen accuse Joe Hockey of politicising the Intergenerational Report process. Was he kidding?

When it comes to politicising a government document, Wayne Swan’s 2010 IGR will always hold the gold medal. And Bowen knows this.

In the 2007 IGR, we were told the combination of demographic and likely economic trends meant the fiscal gap — the difference between government spending and revenue — would be 4¾ per cent in 2047.

Just three years later — and two years before the next IGR was really due — that figure had shrunk to 2¾ per cent in 2050. Now two percentage points may not sound a lot, but believe me, it is a massive difference between the two reports.

In Swan’s fantasy land, his “world’s best practice” budget policies would painlessly return us to budget surpluses in the early part of this decade, a situation that would then last for years — until the end of the 2020s, in fact.

And what was all that rubbish about a low-carbon economy and national-building investments such as the NBN causing productivity to rise? None of that stuff was actually built into any of the figures.

So how should we judge the 2015 IGR? The idea of producing scenarios sounded good, but the basis of these scenarios in the report is very curious.

The base case — the bad scenario inherited from Labor — has us going to hell in a handbasket in 40 years’ time. At that time, the fiscal gap is projected to be 12 per cent and net government debt will be 122 per cent of gross domestic product.

The actual policy scenario uses the government’s savings measures that have been passed by the Senate, in which case the fiscal gap reduces to 6 per cent in 2054-55 — still very substantial.

But if all the government’s proposed policies are put in place (the third scenario), we will enjoy 35 years of continuous budget surpluses and there will be no net debt from the beginning of the fourth decade of this century. Pull the other one, I say.

In the meantime, a number of states may have gone broke as the burden of the additional costs of health, in particular, are foisted on them because of the CPI-plus- population formula for hospital funding.

This IGR also takes a remarkably optimistic view of future movements in labour force participation. The proportion of women aged 15 to 64 years who are employed is expected to increase from 66 per cent now to 70 per cent in 40 years’ time, notwithstanding the fact all recent indicators show female labour force participation is flatlining.

More generally, the overall participation rate is expected to fall to 62.4 per cent in 2054-55 from the current 64.6 per cent because of the impact of ageing. This forecast figure is considerably higher than the one in the 2010 IGR — the figure there was 61 per cent.

There might be some additional workers associated with raising the pension entitlement age but it really is a leap of faith to think age-specific participation rates will rise to the degree assumed in this IGR.

Of course, no one can predict 40 years out; tweaks to the assumptions on population, participation and productivity all have large impacts as the time frame extends.

To test the sensitivity of the analysis, the report reworks the figures using different combinations of assumptions. But these combinations are very strange — high labour force participation and high unemployment, for instance.

I wonder whether someone worked backwards from the conclusion that “the results show that the proposed policy results are robust to variations in underlying assumptions”.

It’s hard to escape the conclusion that after 13 years, the value of the IGR process is now almost zero, in particular because this report does so little to emphasise the fiscal costs associated with an ageing population.

If the Parliamentary Budget Office took over this task and perhaps confined its analysis to the next 20 years, the results would be much more believable and salutary.

We could then have both governments and oppositions working from the same page.