Beware governments bearing projections

Beware governments bearing projections! Somewhat overlooked — in the cascading national lockdown frenzy — was the release of the 2021 Intergenerational Report (IGR). Produced every five years, give or take, the IGR “projects an outlook for the economy and the Australian Government’s budget over the next 40 years.”

Since the first IGR in 2002, IGRs have traditionally been sombre reading. The sole exception to this trend was the 2015 IGR, which was deployed to convince the public that the Coalition’s budget repair strategy had not in fact been blown apart by the response to the 2014 budget but was, somewhat implausibly, well on track.

The 2021 IGR, while not able to be as positive as the 2015 because of the appalling situation the budget is currently in as a result of the pandemic, remains relatively upbeat. The fiscal balance improves substantially and then begins a gentle descent, rather than the precipitous declines predicted in 2002, 2007 and 2010.

Of course, in many respects, publicising that sharp fiscal deterioration was the main point of the early IGRs: they were a tool to convince a spend-happy public that fiscal restraint was necessary to meet the challenges of the future.

The effectiveness of this strategy was, at best, mixed. Post 2009-10 government spending as a percentage of GDP bounced around 24% to 26% of GDP, well above the 23% Costello and Howard achieved in 2006-07 and 2007-08.

The heavy lifting of budget repair was not achieved with fiscal restraint, but by waiting for revenue to catch up with spending. The government achieved effective budget balance in 2017-18 and 2018-19, but only because revenue in those years was 2.9% and 3.6% of GDP higher than in 2010.

If there has been a success in response to the IGRs, it’s been that the negative predictions have largely been pushed out by about five years for each IGR. That is to say, while the portents are only slightly less dire, they remain as far into the future in 2021 as they did in 2002.

Yet there are good reasons to question some of the rosy spending predictions underpinning the 2021 IGR. Particularly those around education, childcare and big-spending social programs like the NDIS.

Ever since it was announced, predictions of the NDIS cost have come in well below actual spending. As pointed out back in 2012 by my then colleague, Andrew Baker, not only were the initial estimates of the NDIS costs at least $7 billion below their likely true cost, political pressures to expand eligibility and support will drive future cost increases.

Baker looked at similar schemes overseas and in Australia and predicted the NDIS would grow at a nominal rate of around 6% per year. The 2021 budget suggests the NDIS will see 12.1% real growth this year and 10.5% real growth between 2021-22 and 2024-25. Both Baker’s predictions and the 2021 budget figures significantly outstrip growth in GDP over the same period.

Yet the IGR predicts that this increasing rate of growth will slow out to 2030 and then very slightly decline as a percentage of GDP. This suggests an annual growth rate of less than 5% nominal, due mostly to population forecasts with costs increasing by “a combination of CPI and Average Weekly Earnings.”

This prediction may be reasonable, but it’s highly likely to be an underestimate. At a minimum, it seems incongruous that health spending will increase by almost 2% of GDP but NDIS spending will very slightly decline over the same period.

While NDIS spending is predicted to remain stable as a percentage of GDP, education and childcare are set to reverse decades of ever-increasing spending by declining as a percentage of GDP.

To be clear, the report acknowledges that real spending per person will increase in these areas — the decline is a function of the population ageing — but it seems incredibly unlikely from a political perspective.

As pointed out in a number of previous pieces, the problems in the childcare sector stem largely from the conflicting goals of the regulatory framework (which is based around the delivery of ‘quality’ early childhood education) and the funding mechanisms (which are intended to increase female workforce participation).

As the quality framework continues to drive up costs, this harms female workforce participation, and increases pressure for additional funding.

Many in the sector are clearly pushing towards a universal childhood education program, staffed by professionally accredited educators, who are paid accordingly. Whether this is desirable is an open question; but it looks increasingly likely to occur and would be very costly to implement.

Also decreasing the likelihood of spending reducing over time is that the government is assessed not on the effectiveness of these schemes, but instead on how much they spend in these areas.

So too in education. The evidence that additional spending will deliver any educational outcomes at all is pretty poor — certainly historically. Australia’s rising education spending has been accompanied by falling outcomes.

Yet the IGR predicts education spending will decline as a percentage of GDP by almost 1%. That is to say, it will almost halve as a percentage of GDP, despite increasing slightly on a real, per-person basis.

Given the public opprobrium directed at the Coalition in 2016 for its education ‘cuts’ (really just slowing the rate of increase in future spending) it is impossible to imagine a future government tolerating this decline — demographics or not.

Taken together, it is easy to see how these areas could contribute to an overall spending level significantly higher as a percentage of GDP. That is before you start to consider the growing political power of older generations and its impact on aged care and age pension spending or defence.

What then should be made of IGR 2021? Some credit is due for thinking of longer-term challenges, despite the current circumstances.

Yet it is not at all clear that the either the government or the public are interested in making sacrifices for the future in any way other than the superficial.

In effect, we are left relying on the triumph of hope over experience — or at least the hope that future generations might be better at managing these issues than we are.