How time flies when you’re busy spending other people’s money. A decade and a half has slipped by since Peter Costello presented Treasury’s first Intergenerational Report, confronting us with the fiscal consequences of growing old.
The proportion of the population who work and pay tax is shrinking while the number of retirees claiming pensions is growing. The day would come, the report predicted, when the government would have to pay for hospitals, care homes and pensions on credit.
When would that day arrive? “After about 15 years,” the report said. In other words, right now.
Unusually for a long-term Treasury forecast, this one stood the test of time.
The Shepherd Review released yesterday confirms that government is already borrowing to pay its daily bills. The time for self-delusion is over; seven consecutive budget deficits and an eighth around the corner cannot be explained away as a mere fluctuation in the cycle.
In fact, the future is probably bleaker than Treasury’s present forecasts would have us believe, according to Tony Shepherd. The forecast that the commonwealth will return to surplus in the next few years assumes Australia extends its world-beating 25-year stretch of economic growth, the Senate passes all the government’s savings measures, and the economic outlook remains positive. Shepherd and his panel describe these as “somewhat heroic assumptions”.
When Shepherd delivered the National Commission of Audit report three years ago, Tony Abbott was derided for talking about a debt crisis. A panel of earnest economists, assembled by The Sydney Morning Herald, dismissed the claim as absurd, ridiculous and an abuse of the English language.
Yet the dictionary definition of a crisis — a decisive turning point, from the Greek word krisis — accurately describes Australia’s fiscal position. We are running out of time to make the hard choices, the ones we’ve been putting off through wilful blindness or because of populist political headwinds that so far have proved impossible to overcome.
It all looked so easy in 2002 when Kevin Rudd was just another irritating Queenslander on the backbench, Wayne Swan had yet to release his inner Keynesian, and Julia Gillard was not yet a hostage of the service unions.
The true cost of Labor’s six years of irresponsibility may never be known.
But it is clear we will be paying for its policy indiscretions long after the covered outdoor learning areas have crumbled.
The past decade should have been a period of transition, a time for long-term adjustments to health, welfare and education spending, a chance to remove impediments to growth and to lower expectations of what citizens could reasonably expect from government.
Instead, Swan responded to the fiscal crisis like a panicked marsupial caught in the headlights awaiting the mercy of an oncoming truck.
Folly was heaped upon folly; extravagant spending commitments were locked in for a decade and a half.
The National Broadband Network was embarked upon, a $49 billion investment running years behind schedule on which the government has already lost at least $8.3bn of our dough.
Rudd’s vanity renewable energy targets more than doubled the price of electricity and eroded reliability, causing pain to households and driving businesses to the wall.
By the time Abbott came to power in 2013, the window for structural repairs was rapidly closing. Shepherd’s audit commission offered the Abbott government a choice: act on the evidence or wait for the tooth fairy.
The commission’s 86 recommendations to put the budget back into shape and future-proof the economy became casualties of an inexperienced government and a fierce campaign by the united forces of economic boneheadedness. Labor played the mean-Tory card while the smug commentators flaunted their innocence by calling for higher taxes.
Meanwhile, the demographic trends, adverse to the budget, forecast in the 2002 Intergenerational Report, have proved frighteningly accurate. The number of Australians over retirement age has increased by about 400,000. Life expectancy continues its upward trend. A boy born today can expect to live three years longer than one born in 2002; a girl can expect to live two years longer.
Those additional years of life won’t come cheap. The largest number of scripts subsidised by the Pharmaceutical Benefits Scheme, 16.5 million, is for statins, costing the government $240 million last year. Commonwealth health expenditure is forecast to increase from 4.1 per cent to 7 per cent of gross domestic product by the middle of the century and from 2.4 per cent to 3.8 per cent for states and territories.
It doesn’t stop there. Age-related pension costs are projected to rise from 2.7 per cent in 2011-12 to 3.7 per cent by 2059-60 as compulsory superannuation savings prove inadequate for most. Aged-care costs are projected to increase from 0.8 per cent of GDP in 2011-12 to 2.6 per cent by the time the millennial generation begins retiring.
And so, having spent the kids’ inheritance, the baby boomers are set to fleece them in their retirement by living off borrowed public funds they cannot possibly repay.
Annual real spending growth is expected to rise to 3 per cent by 2020, an increase that cannot credibly be borne by our narrow, employment-focused tax base. The reckoning is coming and, one way or another, it will be ordinary working Australians who pay. The Business Council of Australia says taxes would need to rise by an average of more than $5000 a household just to plug a gap of that size, and even higher taxes would be needed to start paying off debt.
Or we could slash government services by $50bn, the equivalent of one-third of today’s social security budget or almost the entire education and defence budgets combined.
Or we can carry on as we are, brushing past the facts, chipping away at the sources of our prosperity, immersed in fashionable delusions and raiding the teapot.