Everyone's wrong about the Intergenerational Report

Remember the 2010 Intergenerational Report? If you don’t, it’s not because you’re forgetful: a quick Google reveals that, apart from on the website of the Treasury itself, almost nothing was published about it at the time of its release. This year, it’s all over the news, and the reason is no mystery: Joe Hockey and Tony Abbott think that this report might be the start of a solution to the intense unpopularity of last year’s budget.

So, how big really are the differences between this year’s report and the last one? One of the biggest changes is in the presentation. Take the Forewords, written by the Treasurer of the day: Wayne Swan in 2010 noted that the report presents challenges which are “substantial, but … not beyond a nation like ours”, and briefly mentioned some of the government’s recent changes. Hockey, this year, repeatedly highlights the importance of reducing the debt burden, criticises the previous government, and praises the government’s economic plan for enabling Australia to “once again live within our means”. Or the chart of debt comparisons, ominously showing that if it continued with ‘previous policy’ Australia’s debt level would approach – in 2055 – Greece’s.

If that doesn’t convince you, consider this: this year’s report is structured around a budgetary comparison of the government’s ‘proposed policy’ – including all the rejected elements of last year’s budget – with current legislation, and with a ‘previous policy’ scenario (which doesn’t actually represent anyone’s previous policy.) In 2010, the report only made projections based on the law as it stood then – no comparison to anyone else’s policy, or projection of the benefits of legislation the government was struggling to push through. There could hardly be a clearer indicator of how the government is trying to use this report to build support for its budget policy.

But apart from all that framing, not all that much is different about the projections in this year’s report. Projections of population growth, productivity growth, workforce participation and the ageing nature of Australia’s population are all basically the same in the 2010 report as the 2015 one.

Still, interesting though they are, those figures aren’t what grabs everyone’s attention. Hasn’t the 2015 report shone new light on the unsustainability of the federal budget? Well, not really. Let’s compare this year’s projections of how things will be in 2055, under the ‘current legislation’ scenario where nothing changes, with the last report’s projections for 2050. In 2010, federal education spending was expected to grow to 1.9% of GDP by 2050; now, it’s projected to be 2% by 2055. On old age pensions, things have actually improved: previously, Treasury thought it would spend 3.9% of GDP on them by 2050, but now it only predicts spending 3.6% in 2055. Aged care? Last report, 1.8% of GDP in 2050; this time, 1.7% by 2055. On healthcare, the fairest comparison is with the ‘previous policy’ projection, before the hospital cuts of last year’s budget: that measure says health spending would have grown to 7.1% of GDP, while the 2010 report predicted it would rise to 7%. Other income support, including unemployment benefits and disability pensions, is similarly predicted to fall to around 3% in both reports.

There’s not much here that’s new. Whatever argument Hockey and Abbott think they can make for their policy on the basis of this report, it’s an argument they could have been making for years, using the last Intergenerational Report and the budget figures released regularly since.

And in fact, a closer look at this year’s report reveals that it really does make the same argument the Coalition has been making since 2010. The only big differences between this report and the previous concern the deficit and total expenditure. The 2010 report said total government expenditure would reach 27.1% of GDP by 2050. The 2015 report predicts that, without any policy change, it will reach 31.2% in 2055. That’s quite a big change – especially since none of the predictions about individual components of that spending, like health and education, have changed very much. Where does it come from? The 27.1% figure excludes interest payments on the national debt, which the 2010 report says is “consistent with the methodology used in earlier IGRs (and international practice)”, whilst the 2015 report’s 31.2% includes interest payments. (Nothing in the report reveals what spending excluding interest would be, and Treasury wouldn't tell me when I asked, so we can’t make a better comparison.) Similarly, when the 2015 report projects a deficit of 5.8% of GDP in forty years’ time, that seems much worse than the 3.75% deficit the 2010 report expected. But subtract interest payments and the 2015 report predicts a 2.4% ‘primary’ deficit, compared to a 2.75% deficit expected by the last report – that is, ignore interest, and the budget has actually improved.

The worse fiscal expectations contained in this year’s report can be almost entirely explained by the fact that in 2015, the government is expecting to pay more interest than it did in 2010. That’s because deficits between 2010 and 2014 have been bigger than expected, the federal government has built up a bigger stock of debt than expected, and as a result the interest it has to pay on that debt will be higher over the next 40 years.

That is to say, the only thing new in this Intergenerational Report’s budget predictions isn’t a story about the future: it’s a story about the recent past. If it shows anything, it’s that deficits in the last five years or so have been too big. It might not even show that – wiser heads than mine can decide – but even if it does, that’s not a new argument for the Coalition. It’s the same one they’ve been using for the last five years, and Joe Hockey’s attempt to claim this report as new evidence in support of his unpopular budget policy is nothing but spin.

But the flipside is that a lot of the commentary critical of this report is missing the mark as well. This piece is fairly typical of the genre: some assumptions of the report are picked out and criticised, the absence of any serious discussion of climate change is noted, the report is called out as basically partisan. In some ways this is true: the inclusion of the 'previous policy' projections for comparison is a bizarre and purely political move, and there are various points of framing that are similar. But the projections themselves essentially follow the same method they always have. 40-year projections are hard. (In some ways, they're absurd.) Assuming that there are no changes to spending policy is what you have to do to make the task tractable: making predictions about what policy decisions governments over the next four decades will make would obviously be a ridiculous exercise. Assuming a constant tax level is a similarly required assumption - not a political choice aimed at ensuring support for spending cuts over tax rises, nor based on an ideological belief that higher taxes would be bad. In fact, the 2010 report released under an ALP government assumed a lower constant tax rate for the next 40 years (23.5%, rather than 23.9%, of GDP).

The 2015 Intergenerational Report is not that exciting. It's very similar to the 2010 report, and like all reports that make predictions for a 40 year time period, it's a strange beast that has to make some odd assumptions to get off the ground. It doesn't reveal anything dramatic that bolsters the case for budgetary austerity, but it also doesn't betray any shocking partisan intrusion on the modelling and projection process. This is a not-that-interesting report, produced in a very level-headed and technical way by Treasury public servants, which will almost certainly be proved false in the long run. That makes it just like previous Intergenerational Reports, which the media and public have always ignored, and that's probably what we should continue to do.