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Truthy untruths: behind the facade of the Intergenerational Report

Despite the Intergenerational Report’s assertion about ageing’s negative impact on labour force participation, the effect turns out to be minimal. Image sourced from www.shutterstock.com

Truthy untruths: behind the facade of the Intergenerational Report

Despite the Intergenerational Report’s assertion about ageing’s negative impact on labour force participation, the effect turns out to be minimal. Image sourced from www.shutterstock.com

The ostensible purpose of the 2015 Intergenerational Report is to ensure Australia’s future prosperity in the face of demographic ageing over the next 40 years. Its real purpose is different.

The Coalition won the 2013 election as the party of economic management, a party that would balance the books after years of Labor profligacy, hence the 2014-15 budget cuts. The report uses the alleged ageing crisis to legitimate these budget cuts, as well as a high rate of immigration-fuelled population growth.

Thus it focuses on the costs of ageing. But our new research shows it makes three claims which are overstated to the point of being deliberately misleading. This is important as the IGR is being used as a basis for far-reaching policy decisions.

First, on page 1, the IGR says labour force participation will fall because the number of people aged 15-64 for every person 65 plus will drop from 4.5 today to just 2.7 in 2055. This fall will reduce per capita economic growth.

Second, the cost of providing health care, pensions and aged care for an older population will balloon.

Third, because migrants tend to be young, Australia must maintain high immigration. The authors project annual net overseas migration (NOM) of 215,000 from 2018-19 to 2054-55. This is a large number; from 1990-91 to 2005-06 the annual average was 95,000.

Together with natural increase, it will inflate the population from 23.8 million today to 39.7 million, an increase of 15.9 million, or 66.8%.

Claim 1: ageing and Australians’ future prosperity

Per capita economic growth is the product of the population, participation and productivity. The report’s calculations of their respective contribution are set out in in Figure 1. The main driver is productivity, projected to contribute 1.5 percentage points each year.

Source: ABS cat. no. 5206.0, 6202.0 and Treasury projections

The chart shows a slight fall in per capita economic growth from declining labour force participation of 0.1 percentage points a year. This is a big surprise. Despite the up-front assertion about ageing’s negative impact on participation, the effect turns out to be minimal.

An even bigger surprise is that the chart shows a 0.1 percentage point annual increase in per capita economic growth from population. This is because the proportion who are children will fall relative to all those aged 15 plus.

This positive effect is astonishing. Treasury’s own modelling shows that the ‘population’ effect cancels out the small labour-force participation effect.

Claim 2: budget costs

The report projects a substantial increase in health expenditure. But most of this is due to rising costs in providing health care for everyone. The online chart data for chart 2.11 makes this clear; only 16% of the projected increase is due to ageing.

Scares about pension costs and aged-care funding are similarly exaggerated. Pension payments currently equal 2.9% of GDP. Depending on policies, this percentage may fall to 2.7 by 2054-55 or rise to 3.6 (p. 69). And government expenditure on aged care may rise from 0.9% of GDP in 2014-15 to just 1.7% in 2054-55 (p. 71).

These two sets of figures are hardly startling. Indeed Australia spends a much lower proportion of GDP on age pensions than most OECD countries; in 2007 the OECD average was 7% of GDP.

Claim 3: the economic gains from high net migration

The report asserts that high migration results in a younger population than would be the case without it (p. 11). To bolster this claim it presents an arresting bar chart.

Source: ABS cat. no. 3101.0 and 3412.0.

But oddly the authors don’t quantify the difference and its long-term effects.

To fill this gap we used two ABS projections (with slightly different assumptions to those of the report) and estimated the difference that a NOM of 200,000 p.a. makes to the median age in 2055. We found that it produces a median age of 41.4. By comparison, no net migration over the next 40 years results in a median age of 46.1.

(The two projection series used here are series 38 (NOM 200,000 p.a, TFR 2.0, high life expectancy) and series 56 (Nom 0, TFR 2.0, high life expectancy). See data published online with Population Projections, Australia, 2012.

This minor “younging” effect is assumed to increase participation (page 20). But our research (p. 6) shows the report’s own data shows that this has a negligible impact on per capita economic growth. For example, an extra 70,000 net migrants per year until 2055 adds four million people but only increases per capita economic growth by 0.06%.

But the report’s goal is an extra 15.9 million, not four million. What about the infrastructure costs? Here it makes the bizarre claim that infrastructure costs “are not linked explicitly to demographic factors” (page 57).

Two hidden agendas

Demographic ageing does not impose heavy costs. Rather, the phony scare campaign has been used to justify the Coalition’s budget cuts, while the high NOM assumptions help justify its current immigration policy.

The government is desperate to find a short-term solution to the problem of lower economic activity post the resources boom. Population growth boosts the housing and city-building industries and this may help, not with per capita economic growth but with aggregate economic growth.

The latter is the key driver of tax revenue and, in the case of business, of growth in sales. The report does not say much about it, except to provide the results of its modelling. Here aggregate GDP is projected to grow by 2.8% per annum to 2054-55. (Page 27.) The IGR’s data shows that, while gains in productivity will make a substantial contribution to this, crude population growth accounts for nearly half.

Why worry?

The IGR does devote a few pages (See page 38) to the environmental implications of its population growth, conceding that careful management will be required. But it finds no serious costs for the Commonwealth as the “level of Commonwealth Government spending on the environment is not directly linked with demographic factors” (page 40).

So Treasury is off the hook. But all Australians will suffer from the impact of massive population growth on the environment and the alienation of agricultural land. (See contributions from Rhondda Dickson, Michael Jeffrey and Gary Jones in Sustainable Futures: Linking population, resources and the environment].

The other pressing concern for voters is jobs and the economy. What are the newly arrived migrants going to do, apart from build houses for each other?

The supposed economic ill-effects of ageing are trivial. They should be easily managed by future generations themselves, provided they are not overwhelmed by the costs of bloated cities and environmental decay.