IGR – garbage in, garbage out

I’ve borrowed the title from The Australia Institute because it reflects how I feel about the Intergenerational Report.

IGR_1425344117771_220

Hockey told a business briefing “When people see some of the graphs in the intergenerational report they are going to fall off their chairs.” Richard Denniss said, yes, “we’re rolling around on the floor laughing”. He finds it “a deeply flawed document based on deeply flawed assumptions.”

Peter Martin warned us that when governments lose their authority, they try to scare us. Michelle Grattan warned that the government wanted the public to take several political messages out of the IGR:

Stated crudely, these are: first, that Labor’s policy settings would have taken us to hell in a hand basket; second, that but for the pesky Senate, the budget would have been in good shape relatively soon; and third, that despite the obstacles, the government is making progress towards bringing us to fiscal health.

She was right.

The Intergenerational Report is accessible here. See also the ABC article and The Conversation’s panel of experts.

Three scenarios

The Report paints three scenarios. The first dubbed “Proposed Policy” is the Abbott Government’s 2014 Budget. It would bring a surplus within five years. That is, if the revenue stream holds up as predicted, which we know it hasn’t. Also some ‘saves’ of the budget have been abandoned. That’s the first bit of fiction.

The second scenario is termed “Currently Legislated Policy”. That’s what the Opposition, the Greens and crossbench senators have passed. That will lead to a deficit of 6% of GDP in 2055.

The shock horror is in the third scenario, called “Previous Policy”. We are meant to believe that this is what the LNP inherited from Labor. In 2055 on this scenario the annual deficit would be a whopping 11.7% of GDP, with net debt at 122% of GDP.

The deception here is that the Report has not used Labor’s legacy as reflected in the Pre-Election Fiscal Outlook (PEFO) prepared independently by Treasury and Finance and published under the charter of budget honesty in August 2013 before the last election, which had the budget coming into surplus in 2015-16. It has used Hockey’s first Budget Update, after he had added billions of dollars of debt.

The IGR is a document compiled by the Treasurer, not the Treasury. Chris Bowen says that Labor would legislate to have it compiled by the Parliamentary Budget Office to take out the politics.

Affordability

The Report has put in some scary figures like number of centenarians will grow from 5,000 or so now to almost 40,000 in 2055, spending on aged care and pensions will from from 2.9% of GDP to 3.6%. That’s an increase of 24% when our average income is forecast to lift from $66,400 today to $117,300, or 76%. If that is true (I have my doubts) then we can live very decently and still afford welfare.

Dependency ratio

A really scary figure given is the dependency ratio, which is the number of people of working age (15-65 year-olds) to aged people (65+). The dependency ratio is 4.5 now and will reduce to 2.7.

Again I say, why should we worry that the number of workers is reduced by 45% when each worker will be earning 76% more.

John Quiggin reckons it’s a weird trick that proves the IGR is nonsense. The concept assumes:

* Children aged 14 and under cost nothing to raise and required no public expenditure on schools, daycare etc
* Children leave school at 15. After this, they not only support themselves, but contribute to the support of those over 65
* People retire become eligible for age pensions at 65.

All three are wrong.

Climate change, the environment and population growth

Richard Denniss says the Report is unrealistic because it “barely talks about the threats of climate change or the enormous cost of building the new infrastructure that rapid population growth will require.”

Ian Lowe says:

There is no sign the government even recognises the most serious threats to future generations: liquid fuel security, climate change, water shortages, loss of productive land and loss of biodiversity. These issues require planning and commitment of resources now.

Rapid population growth to reach 39.7 million is taken as a given, not something we have a choice about.

On climate change Ben Eltham says:

Climate change is the dominant geopolitical fact of the future. It will shape the future more surely than tax takes or pension liabilities. It will reshape the global economy, threaten food yields, increase natural disasters, lay waste to Australia’s region and generate hundreds of millions of refugees.

Such blunt realities are absent everywhere from the 2015 IGR. It’s denial writ large, pure and simple. A larger blind spot – a more willful inapprehension of reality – is hard to envisage.

I’d have to agree with his bottom line:

You don’t have to take such shoddy work seriously, and as a busy citizen, you shouldn’t. The Intergenerational Report is not a serious attempt to make projections about government policy. It is an ornament, a prop in a policy theatre, a bell-and-whistle for the next Treasury lockup.

Like most such reports, the IGR will be quickly forgotten.

Update: The Parliamentary Library site Flagpost has a useful comparison of the four IGR reports so far.

31 thoughts on “IGR – garbage in, garbage out”

  1. We know that Abbott and Hockey are useless with their Arithmetic, Ideology and Honesty. Nothing good can come out of that union.

    I am pleased that you have referenced

    “It has used Hockey’s first Budget Update, after he had added billions of dollars of debt.”

    …..which as I understand it amounted to some $18 billion of borrowed money that Hockey’s hand. This is a typical LNP tactic coming into and out of government. I believe that Howard dispersed some $60 billion in a variety of forms including reducing the top interest rate, this loss of revenue being hand to Labour to manage. I’ve just learned that all of this originates from the $340 billion balloon of income from 2003 that Howard/Costello received into their budgets as a result of the mining boom which then tailed off through the Rudd years and which he had to cope with, which Rudd an then Gillard coped with quite well.

    The scale of the dishonesty of Abbott and Hockey is staggering.

  2. A report that looks forty years into the future should not be a product of the government of the day any more than it should be based on data and assumptions that the treasurer of the day sets The scenarios, assumptions and criteria it considers should include ones that at least the opposition of the day insists on. (The Greens should also be added to the list because of their differing view of the world.)
    It is also worth keeping in mind that 40 years ago Frazer became prime minister. Worth asking how good the predictions made then have turned out to be.
    It is also important that reports like this identify potential game changers, both ones we can see coming and outside possibilities that may happen if we put in the necessary research or become more sensible.
    All Hockey has done is give long term planning a bad name.

  3. We need to ask three things here:
    1. What are we doing now that are going to affect the lives of people born today? (The people turning 85 in 2100) The answer has to consider climate change and how well we prepare these people for their adult lives.
    2. What are we doing to the younger generation right now? We are screwing them like champions. We have a Hockey who protested against the introduction of the HECS scheme supporting changes to tertiary education that will make things harder for the young, and….
    3. What could we achieve if all the people who want to work right now were actually doing something worthwhile right now? That is an awful lot of people if you include the extra hours people would like to work, hours worked on jobs that add nothing to our way of life and people doing courses that only make sense to those who love education as a business.
    Making life harder for the current crop of young people so that the rich can avoid paying more tax doesn’t seem like good long term policy to me.

  4. John

    What could we achieve if all the people who want to work right now were actually doing something worthwhile right now?

    It’s called volunteering and a wonderful way to gain skills and show self motivation to prospective employers. And higher self worth, positive social network, a kind of wisdom and moral osmosis

    Unfortunately too many young unemployed couldn’t be bothered.

    According to Volunteering Australia;

    Labour force status

    Employed people (whether full time 38% or part time or 44%) had a higher volunteering rate than those who were unemployed or not in the labour force.

    Their age ?

    People aged 45-54 years reported the highest rate of volunteering.

    I can’t find the stats but I’m guessing incarceration rates and suicide rates are lower for people that choose to work for zero money occasionally as opposed to those that won’t.

  5. Jumpy: You are changing the subject. The issue raised by the intergeneration report is whether we will have the human resources to handle expected demographic changes. Take the people who would like more work and people in jobs that contribute not much to making Aus a good place to live + expected tech advances and it looks to me as though there is plenty of spare capacity to handle the demographic changes.
    I enjoy volunteering because it is an opportunity to work with pleasant people and get things done I approve of. However, keep in mind that volunteering does cost money. For example, there is the cost of getting there and the cost of having the clothing needed to do the job.
    It also takes time to find the volunteering jobs. For example, it took quite some time between registering with Volunteers Qld and someone asking me to do things.

  6. Some sensible comments from Tim Colebatch

    The latest Intergenerational Report is two reports in one. It is partly a serious exercise in trying to anticipate future pressures on the Federal budget. And it is partly a political stunt that tries to blame the budget’s problems on Labor and the Senate.

    Launching it on Thursday in avuncular mood, treasurer Joe Hockey declared the report “a call to arms in relation to reform… We need a conversation with the Australian people, and this is a conversation that the nation wants to have.”

    Well, maybe; I for one hope we do have it. But, Joe, if you put a politically partisan message and an economically responsible message in the same document, you know which is going to get more airplay.

    We would have a more fruitful conversation had the report stuck solely to its serious message, because it raises real issues that the partisan side of the report will swamp in the usual bickering. Instead of getting unity behind a common purpose of reform, we will get nowhere.

    There is more good stuff in the article.

  7. John

    Beg pardon, I just picked part of your excellent comment that has been on my mind for quite a while.
    Living next to 5 public housing residences may have contributed to that.

    I haven’t seen a comparison of this report to the other 2 ( ??Costello 07 and Swan 13 ) but the flavour change would be interesting.

    It’s hard nowadays to find evaluation in the media that is impartial, one way or the other, and I don’t have the time ( nor economic savvy ) to do it my self.

    Has anyone ?

  8. From Tim Colebatch’s article:

    In 1974–75, Commonwealth taxes made up 19.9 per cent of GDP. This report’s goal is for them to raise about 23.9 per cent of GDP. In 2055, as an ageing population increases demands on the budget, it is plausible that voters would rather have taxes at 27.9 per cent of GDP than to do without the health, pensions and aged care services that older people need.

  9. I did not fully appreciate this until the other day when my friend Bill K reminded me that during the 60’s the top tax rate was 66%. During the noughties the Howard government during a period of massive excess fiscal surplus (iron ore mining boom) reduced the top tax rate to 45% while at the same time applying a 10% GST. This was a regressive taxation change flattening the tax gradient by a huge degree. That was done during a period when the government had a fiscal windfall of some 300 billion dollars over a very short period and due predominately due to China’s property development boom, a boom that has now ground to a halt. Howard had the audacity to claim great financial management skills when he in fact just rode the crest of a wave of circumstantial fiscal surplus.

    The consequence of that tax reduction for the higher incomed was an Australian property boom which pushed property prices above the average half million dollar over 9.5 million dwellings.

    Since Howard’s demise the US property bubble burst leading to the Global Financial Crisis which Labour had to cope with as the strength of the mining boom began to ebb away. Labour applied a minor adjustment to the taxation gradient by raising the taxation entry level to $16,000.

    Abbott gained government with a hail storm of promises, lies and sleazy tactics, from his first day in office his every action has been to cripple the government’s fiscal position (refer to Brian’s previous post where this trail of incompetence is laid bare), while writing off whole industry sectors (the automotive industry, the ship building industry, the grid level renewable energy industry, the national high speed broad band to be replaced with a patchy low speed broad band). Now with this joke of a report has attempted to blame Labour and the lower incomed for the government’s position, and extract balanced budget from those who can least afford to, in the name of future generations.

    Abbott and Hockey’s brilliant plan is to shed the costs of health and education, go to war, then flatten taxation further by bumping up the GST level by 5%.

    Jumpy thinks that I am up tight and should relax. What do you think?

  10. BilB, I think that’s about right, except that the tax-free threshold is $18,200. Labor lifted it from $6000 with part of the takings of the carbon tax. Nixing the carbon price and keeping the tax-free threshold is one way Hockey has added to his debt and deficit mess.

    I heard today that we have $2 trillion invested in super. GDP is currently about $1.5 trillion, with the aged pension costing about 2.9% of that.

    There is enough in the super kitty now to pay the aged pension forever. All the government has to do is appropriate it from the rich!

  11. I heard today that we have $2 trillion invested in super. GDP is currently about $1.5 trillion, with the aged pension costing about 2.9% of that.

    There is enough in the super kitty now to pay the aged pension forever. All the government has to do is appropriate it from the rich!

    A mear whiff of that by Shorten and the run, away from union funds, to overseas funds would be enormous.

    Most people don’t like getting their money stolen. ( any more than is stolen now )

  12. The trouble with super is that most of this enormous amount of money is being used to buy shares and play other speculative games. It is not being used to build the stronger future needed to support us in our dotage and give younger Australians a good life. If anything this growing speculative blob increases the risk of another GFC.
    Part of the problem is that people don’t realize that we can’t collectively save money and that somehow saving money reduces the burden on the younger generation. The younger generation will still have to do the work no matter who owns the money.

  13. In my best of all possible worlds I think I’d have compulsory super paid into a sovereign wealth fund which would pay super to all at a rate related to a percentage of finishing salary. Rich people could invest extra in shares or buy houses or whatever they do now, without the tax breaks offered by super.

    John, I’m a share owner and don’t regard it as speculative activity, or a game. Share investing creates a capital market for productive enterprise.

    A fair bit of any sovereign wealth fund would end up invested in shares, or the purchase of whole companies, as Warren Buffet does.

  14. How about scratch super and give workers a %10 pay rise.
    let them spend ( stimulate the economy ) or save and invest ( stimulate the economy) as they wish ?

    About %25 of working age people die before 70, why are they shafted all their working life ?

  15. I have long argued that compulsory super should be available to people to contribute to their personal dwelling mortgage. The point is well made that this should not be done in a way that causes house prices to rise, and there are simple techniques to ensure that this does not happen.

    Some simple rules would be a property ownership qualifying period of perhaps 3 years before super can be utilised, and the property mortgage establishment must not take the super into consideration. Where property is “cashed up” the super content must be lodged into a super fund until retirement is reached (this one feature would tend to have a stabilising effect against acrimonious family property breakups).

    The advantage is that it aids a young couple through their toughest cash flow period after they gain a house to live in, ie when their children arrive. It should also shorten mortgage periods giving a couple the opportunity to energetically load their super once the mortgage payments have finished leading to a property and cash based retirement solution.

    I do not support the first home buyer incentive argument. That is certain to inflate property values by an amount, and I suspect that this line has been pushed by the property developer sector.

  16. Because Jumpy, compulsory super is a payment made by an employer over and above the agreed pay level. It is effectively a de facto tax on industry to separate the burden of the pension away from the government. If the compulsory super was removed, it would not go into the hands of the employer. It would ether go to the government as a tax for them to invest on the public’s or it would stay in the hands of the employer and they would reduce prices across the board (as if) and the public would benefit in the form of lower living costs.

  17. BilB

    Wage rates are set by government.
    Simply raise it by %10 and axe super.
    Money goes directly to employee.
    Axe all associated government portfolios, ministers, departments, bureaus, think tanks, advisors…….. associated with super. ( save, save, save, save )
    Employer could care as their ” cost to employ ” isn’t altered but compliance cost falls.

    All those on above award that don’t get a %10 increase from their ” greedy” employer ( sounds strange a greedy employer paying above award ay? ) move on to a smart employer that will pay it. Smart employers cherry pick the best talent and grow.

    By the way BilB, [remark removed – ed.]
    I’m glad to see the brave, intelligent, answers finder is back in control.
    It’s a better day.

  18. Jumpy: Tend to agree with

    scratch super and give workers a %10 pay rise

    as long as we pay the tax increases (or death duties) required to give every one over whatever a liveable pension. (Some commentators say that universal pensions could be paid for by removal of the super tax concessions.)
    Universal pensions that are not affected by income have a number of attractions:
    1 It would encourage the people on part pensions to keep working if they want to.
    2. It discourages the practice of spending up big at the start of retirement in order to qualify for the pension.
    3. It saves a lot of the admin charges required to run our complex pension and super systems.
    If you are worried about the rich getting a pension make it taxable income.

  19. Brian @17: I am appalled by the unfairness of schemes that pay on the basis of final salary. The relationship between average over the years and final salary is pretty tenuous with many people scaling back towards the end of their working lives. Also appalled by the idea the unfairness in the way people are paid during their working life continuing during their retirement.
    Agree that the share market may help raise funds for tangible investment and provide an investor with a mechanism for withdrawing funds for other uses. However, I think it would be fair to say that most of the transactions are speculative and that the role of the super funds is significantly speculative. (Have you any data to support a contrary argument?)
    The growth of the super funds has also been a serious contributing factor to “short termism” in business. The problem is firstly, that super fund performance is measured by short term changes in the value of the shares they hold and, secondly the super funds have acquired enough shares to give them real influence over what happens within a company.
    As a result CEO’s are pressured to do things that will raise the perceived value of the shares. This can mean risking the company or reducing costs by cutting back on research, exploration and other activities that may increase the long term health of the company.

  20. John, personally I’m happy with all being paid the same. I said possible worlds. We live in a meritocracy which isn’t, I think. going to change. I’m not sure that it is politically possible to have wealth transfer as part of the super system.

    I’m not sure about your thesis that super funds cause short termism in company management. All listed companies are under pressure from all investors to produce growth or yield or both. Share price performance is going to be a factor by virtue of the market, IMO.

  21. Brian: Interesting one on the negative effect of CEO bonuses

    new research out today warns that excessive CEO pay and performance bonuses – especially when a company’s bottom line is under pressure – is out of kilter with the best interests of shareholders.

    Rather than encouraging bosses to make a company more profitable in the long term, the research says the lure of a fat bonus can often tempt a CEO to pursue poor strategies.

    To put it another way, the growth in the cult of the CEO bonuses can

    “But the trouble with performance bonuses is that they encourage the CEO to engage in strategies which lead to measurable outcomes in the short to medium term, and they encourage the board to hide behind the performance measures, rather than develop a deep understanding of what’s going on in the company.”

    What this research says is that story that we’ve been told to justify their salaries may not be true.
    Dr Peter Cebon, Melbourne Business School
    Dr Cebon said that, rather than focusing on the long-term benefit of a company, the potential for bonuses can really make a CEO blinkered and he or she might come up with poor strategies – or even strategies that are doomed to fail.

    The first job I had when I left school was trainee geologist. Part of what I was doing was working on “where BHP steel was going to get its coking coal from in 25 yrs time.” Two things to note: Effort being put into what was going to happen in 25 yrs and a traineeship scheme aimed at providing the educated people that BHP would need in the longer term. The move to a shorter term vision much later saw the end of the traineeship scheme as a cost saving measure.
    In terms of salaries I remember hearing a comment much later that “BHP salaries tended to be a bit low because Ian McClennan (CEO 1967-70) kept knocking back pay increases. This is the CEO that championed BHP’s decicion to explore for oil in Bass Straight. He was more interested in making things happen and the long term health of the company.
    You might also be interested in Long Run Trends in Australian Executive Remuneration: BHP 1887-2012.
    My own view is that a CEO who is obsessed with remuneration is a very poor choice. and that bonus’s divert CEO’s from their real job – long term health of the company. Super funds and others who need short term gains divert attention.

  22. John, I’d been thinking about this and I’d been thinking that CEO remuneration packages, including shares and share options, had more to do with short-termism than the influence of super funds.

    The linked story (thanks muchly) tends to support this.

  23. Brian: Haven’t got any links but I think it suits super funds and other investors with a short term vision to have bonus schemes that reward short term results.

  24. John, I think we both have subjective views that differ. I would have thought that most super funds would go for steady growth with a decent and reliable yield. Boring shit, like the big banks. Good management with no nasty surprises if you can get it.

    BTW Ardent Leisure today announced a new CEO. The old one was there for a long time and was a good one – traded through the GFC without a hitch. The share price tanked 19%. It’s a case of the market recognising the quality of management. It’s almost certain that super funds reacted by reducing their exposure.

  25. Brian: I don’t know anything about Ardent but sudden changes in share value seem to me to be more about the cult of the CEO. Good companies have good management, culture and systems. It is not all about the CEO.
    Rapid change systems like share markets will see the share value change on the basis of what shareholders think other shareholders will do.

  26. To change the topic, John Quiggin has taken a look at the forecast life expectancy of 95 years mentioned in the report.

    Turns out the forecast is that babies born in 2050 will live to 95 on average. The relevant figure for the IGR should be how many people will be alive and retired who were born in 1983 or earlier.

  27. As was previously mentioned, it is ridiculous for the Abbott government to suggest that there will be anyone alive in 2145 when they have done their absolute best to ensure the worst possible climate outcome for the next century after this one. The right wing routinely fail to account for externalities of their energy policies unless subject is Nuclear power, in which case externalities such as SO2 and CO2 from the burning of coal becomes centrally relevant. Naturally it is only “Tea Part” approved externalities that are worthy of consideration. Nuclear waste and background leakage radiation are irrelevant.

Comments are closed.