Treasurer Jim Chalmers will unveil Australia’s seventh Intergenerational Report on Monday, offering a portrait of the nation in 2066, 40 years from now.
These reports aren’t crystal balls. In fact, they have a mixed record when it comes to making long-term predictions.
That said, they are a useful tool to force politicians to think about how their short-term decision-making can have long term consequences for the country.
The key metric is Treasury’s productivity assumption. Without productivity growth, meaning producing more value for each hour worked, almost every political promise becomes a mirage that quickly fades away.
Peter Costello’s 2002 report offered a stark warning. The 20-year projection for the economy’s total size was almost exactly right, but only because net overseas migration has been roughly double what was forecast and workforce participation surged. Productivity growth was dramatically weaker than expected.
Australia became larger by adding bodies and hours, not by getting better at producing things. Consequently, GDP per person fell roughly 10 per cent short of Costello’s projections.
The latest national accounts show the same pattern is happening again. The economy grew by 0.4 per cent in the June quarter, but GDP per person flatlined, real disposable income per person fell by 0.4 per cent, and output per hour was lower than a year earlier.
This is why people’s lived experiences are very different to the numbers politicians use to claim all is well. It isn’t.
Treasurer Jim Chalmers will unveil Australia’s seventh Intergenerational Report on Monday
According to the Productivity Commission, Australia’s productivity is barely one per cent above its 2015-19 average. In the non-market sector, it has fallen below 2007 levels.
Three years ago, Treasury cut its long-run productivity assumption from 1.5 to 1.2 per cent, a seemingly small shift, but it wiped 9.5 per cent off the projected size of the economy for 2063.
Now, Chalmers faces an uncomfortable choice: Retain the 1.2 per cent assumption, and the projections rely on a sharp productivity recovery Labor hasn’t delivered.
Lower it, and he admits future incomes and government finances will be weaker than forecast.
Chalmers recently warned Labor MPs that the Coalition would weaponise the report, which they no doubt will. But he’s worrying about the wrong political opponent.
With the Coalition polling at just 19 per cent and One Nation surging to 30 per cent, Labor’s real danger is that Pauline Hanson’s team uses more bad news to build (or consolidate) support. The politics of grievance is alive and well.
Internal anxiety is mounting amongst Labor MPs over the plight of falling living standards, struggling small businesses and looming interest rate hikes expected before the end of this year.
When Labor royalty such as Bill Kelty and Kevin Rudd warn of falling real wages and a slide into second rate status as a nation, their concerns can’t be dismissed as Coalition talking points.
The 2002 report by then-Treasurer Peter Costello was almost exactly right with its 20-year projection for the Australian economy’s total size
External shocks such as the Middle East conflict are real, we know that. But they don’t excuse domestic policy failures.
Chalmers boasts that Australia’s public debt is lower than many other major advanced economies around the world. So, what? The upward trajectory of Australia’s debt since our net zero debt position in 2007 has been rapid.
We also currently have a $31.5billion deficit, more than $1trillion of gross debt which we have to pay interest on, and there are no signs of a return to surplus for a decade or more.
Chalmers will use the report to claim that gross debt in the early 2060s will be hundreds of billions of dollars lower than previously forecast.
But this is not money Labor has banked. It is the difference between two Treasury projections stretching almost four decades into the future.
The fact that the estimate has shifted by more than $500billion in just three years reveals how sensitive these forecasts are to changes in assumptions, not how certain the improvement is.
The more optimistic number depends on future governments maintaining spending restraint, delivering difficult NDIS savings and producing economic growth strong enough to prevent continuing deficits from driving debt higher as a share of GDP.
History suggests some humility is required.
But Australia has endured several significant global events since the last report, including the Covid pandemic. Pictured people wearing masks line up in Melbourne during a lockdown
Since Costello released the first report in 2002, Australia has endured a global financial crisis, a pandemic and repeated spending blowouts that no 40-year model anticipated.
Gross debt has now passed $1trillion. Presenting a favourable projection for 2062 as an achievement today is wishful accounting masquerading as fiscal repair.
It’s just political spin that’s unlikely to ever happen, but Chalmers and others will be long gone by then, so they won’t be held accountable for the failure.
Chalmers argues that modern productivity requires many small reforms rather than another Hawke-Keating style reforming revolution. But small changes only work if they move in the right direction.
Labor’s promised regulatory savings are swallowed up by complex workplace laws, higher government spending and expanding subsidies that make it harder to invest and employ in this country.
As UNSW professor of economics Richard Holden, who is also my co-author on our forthcoming book The Lost Decade, puts it: ‘The government has thrown sand in the gears of the industrial relations system’.
Labor inherited a productivity problem but its decisions have compounded the issue. The Coalition, having spent nine years avoiding serious reform when it was last in power, is in no position to gloat.
However, there is one bright spot: the burden of the age pension is projected to fall significantly by 2066.
Peter van Onselen says forecasting the future is one thing but governing well enough to improve it is the test both major parties keep failing
Compulsory superannuation is doing exactly what it was designed to do, which is why Paul Keating was right to introduce it and Labor was right to insist on lifting the rate when the Coalition wouldn’t.
Chalmers will inevitably use the pro-super finding within the report to attack One Nation’s proposal to let workers voluntarily redirect three percentage points of their super contributions into wages for up to three years.
But it’s a limited measure of individual choice intended to help people confront immediate cost of living and housing pressures, not some sort of attempt to dismantle compulsory super.
Whether the trade-off is wise is debatable, but Labor shouldn’t pretend it outweighs the report’s far more serious warnings about major party economic failures.
The same logic applies to immigration. Skilled migration lifts capacity, but treating total GDP growth as proof of success while housing, transport and hospitals buckle is a political failure.
One Nation’s zero net migration policy would create serious economic and fiscal problems, but its appeal is rooted in a legitimate grievance: governments expanded the population without building the country up to be able to cope with it.
Voters abandoning the major parties for teals, Greens and One Nation are delivering a unified verdict from different ideological perspectives: living standards are bleeding away, and the major parties are dodging the hard choices required to address the problem.
Australia needs a serious economic bargain: shift taxes away from work and investment, match migration to infrastructure, restore competition, simplify workplace rules and impose spending discipline.
But Labor won’t go there and the Coalition missed its chance when it was in office.
Forecasting the future is one thing. Governing well enough to improve it is the test both major parties keep failing.
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