Opinion: producing reliable demographic projections out 40 years will be challenging, this time

By David Kalisch

Monday June 15, 2020

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The Australian government is expected to deliver an Intergenerational Report (IGR) in 2020. The timing couldn’t be better, setting the scene for why we need to markedly improve productivity and confront difficult fiscal choices over coming decades.

An IGR is required every five years, with the Charter of Budget Honesty Act 1998. To date, four IGRs have been produced in 2002, 2007, 2010 and 2015.

The purpose of the IGR is “to assess the long-term sustainability of current government policies over 40 years following the release of the report, including by taking account of the financial implications of demographic change.” (CoBH Act 1998).

Every IGR to date has taken broadly the same approach to this task, producing projections using the three P’s framework of population, participation and productivity. More recent IGRs have also included attention to the environment. Each IGR has included projections of major Australian government spending and revenues, again out 40 years.

Considering the reliability of past IGR projections, now spanning four reports, Australia has overachieved on the employment and participation front, but underachieved on the productivity side.

Producing another IGR in 2020 provides the opportunity for the government to consider possible long-term effects on population growth, employment, participation and productivity as the nation responds to and beyond COVID-19. The last IGR projections produced in 2015 reflected a much more benign economic and demographic environment.

Using past recessions as a guide, we should expect significant economic fallout from COVID-19 to persevere for some time, even after taking account of the very substantial government responses. Massive economic and personal disruption is being experienced in Australia and across our major trading partners.

The next IGR should have more realistic productivity projections. Past IGRs have used a central projection that productivity over the next 40 years would be the average productivity outcome of the past 30 years. Unfortunately, we haven’t come close to this over the last 15-20 years. Over the past five years, Australia has not even achieved the low productivity scenario included in the 2015 IGR.

Credible long-term productivity assumptions are required for the IGR to properly assess whether Australia is on a path towards long term fiscal sustainability, given the importance of productivity in shaping the long run GDP projections. This would also help demonstrate why we need a concerted and persistent effort to boost productivity across many fronts, building upon the innovation and creativity seen from organisations and employees responding to the COVID-19 environment over recent months.

Australia now has a larger population around 2020 than was projected in the original 2002 IGR, largely due to the expansive migration policies of respective governments since the mid-2000s. We do have more older people now, but we also now have more young and middle aged people compared to what was expected in the population projections prepared for the first IGR in 2002.

This has bought Australia a bit more time to further prepare for the challenges of an ageing population, compared to many other countries, but it has also introduced greater focus on the needs of a larger cohort of younger and middle-aged people over coming years.

Producing reliable demographic projections out 40 years will be challenging at this time, and in particular the dimension of selecting reasonable net migration scenarios for the next 5-10 years. Having diverse low and high migration scenarios would be useful in this current uncertain environment.

The 2020 IGR provides an opportunity for the Australian government to re-baseline the potential long-term dimensions of its fiscal strategy, especially given the major changes to spending and revenues from the COVID-19 response and the economic shock Australia and the rest of the world are experiencing.

The 2020 IGR will include updated numbers on the National Disability Insurance Scheme, able to draw upon the recent implementation experience rather than the previous Productivity Commission assumptions.

Consideration should be given to including states and territories in projections of future government spending and revenues. Past IGRs have only considered what the Australian government is likely to spend over the next 40 years.

In major areas of education and health, for example, this largely ignores the key responsibilities and own-source spending of the states and territories. The community does not get the total picture of potential government spending pressures and taxation revenues over the next forty years across the nation by only focusing on the national government.

Canvassing the long-term picture for all governments would require commonwealth-state collaboration and continue the pragmatic cooperative federalism we have seen in the COVID-19 response, taking advantage of the continuing national cabinet and associated forums of first ministers and treasurers from all governments.

Each Intergenerational Report should inform government decisions and build community understanding of some of the future challenges and choices facing the nation. The 2020 IGR should be a valuable input for many future public policy debates, and its considered preparation over coming months will enhance its usefulness.

David Kalisch is the former Australian Statistician.

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