Intergenerational blame game an old chestnut that ignores the real problem

Healthcare, not ageing populace, is the challenge for 2050.

THE intergenerational report is essentially a propaganda exercise and, like most such exercises, relies heavily on exaggeration. Fortunately, however, the bureaucrats have slipped enough into the fine print to allow a glimpse beyond the spin.

The report attempts to convince us we have a major problem with the ageing population and its effect on the budget and economic growth. But its arguments are unpersuasive.

We're told that, thanks to ageing, by 2050 the budget will suffer a ''fiscal gap'' of 2.75 per cent of gross domestic product as growth in government spending exceeds growth in revenue.

But it achieves this gap by lumping in with the rising cost of the age pension, aged care and age-related healthcare spending, the projected growth in healthcare spending arising from a larger population and the entire populace's predicted ever-greater demand for more and better healthcare.

When you examine the figures you see the budgetary cost of ageing is modest and quite manageable, but we do have a big question about how to finance the expected strong growth in the quantity and quality of healthcare.

If we've got a healthcare funding question, why not just say so? Why pretend it is caused by ageing?

The report underplays the truth that the fiscal gap is simply the result of an arbitrary decision to cap the growth in tax collections at 23.5 per cent of GDP. And it fails to highlight that they keep lowering the cap: from 23.9 per cent in 2002 to 23.8 per cent in 2007 and now 23.5 per cent.

Turning to economic growth, the report blames ageing for its projection that the material standard of living - real GDP per person - is projected to rise by an average of only 1.5 per cent a year over the next 40 years, compared with 1.9 per cent over the past 40.

But it turns out that only half this 0.4 percentage point slowdown is attributable to demographic factors. The other half is the product of a Treasury assumption that average annual productivity improvement will slow from 1.8 per cent of GDP to 1.6 per cent.

The assumption is that productivity will improve over the coming 40 years at the same rate it improved over the past 30. But just three years ago, in 2007, that 30-year average was 1.8 per cent.

Huh? Apparently, Treasury has only now discovered that productivity improvement was weak during the noughties - and hasn't heard of the Productivity Commission's finding that the slowdown was mostly due to temporary factors.

In the 2007 version, the projected decline in real income growth from 2.1 per cent to 1.6 per cent a year was wholly explained by demographic factors (ageing). So the now-projected higher birth rate and immigration intake have cut the average annual demographic deficit, so to speak, from 0.5 percentage points to 0.2 points.

Thus had productivity improvement not suddenly sprung a leak, the projected growth slowdown would have shrunk to just 0.2 per cent a year. Hmmm.

So what's it all about? Why do successive governments issue intergenerational reports exaggerating our ageing problem and glossing over our need to get serious about healthcare funding?

It's the Treasurer and Treasury doing what they think they're paid to do: preach sermons about the need for More Micro-Reform (to boost flagging productivity improvement) and, above all, bang the drum about the eternal need for restraint of government spending.

As part of this obsession with spending restraint - and as a reflection of the libertarian bias against government intervention built into economic orthodoxy - the role that higher taxes (or fewer tax cuts) could play in closing the ''fiscal gap'' is glossed over.

The report fails to acknowledge the role that the government's deficit-exit strategy of ''allowing the level of tax receipts to recover naturally'' (that is, avoid further tax cuts) until the budget is back in balance will play in reducing the fiscal gap.

And it plays down its projection that real incomes are projected to grow by 80 per cent over the next 40 years, lest anyone think that raising taxes to pay for better healthcare is the obvious solution.