Budgets and Intergenerational Inequity

This article was first published in the American Society for Public Administration’s PATIMES on 14 April, 2019.

The views expressed are those of the author and do not necessarily reflect the views of ASPA [or IPAA] as an organization.

At 7:30 P.M., April 2, 2019, Josh Frydenberg, Treasurer of the Commonwealth of Australia, delivered his first Budget speech. He introduced the Australian Government’s budget for the 2019–2020 financial year.

As a father of four teenage children, one line in the Treasurer’s speech was of interest to me: “Our commitment to fairness means the next generation not having to pick up the tab for the last.”

Background to Intergenerational Reporting

Reporting on intergenerational equity has been a feature of Australian public finances since the Charter of Budget Honesty Act 1998 (the Charter) became law. The Charter legislates that the Treasurer must deliver an intergenerational report at least once every 5 years.

The intergenerational report presents the long term sustainability of current Government policies. It shows the financial impact of current policies applied over the next 40 years, including the financial implications of demographic change.

The first intergenerational report was presented by Treasurer Peter Costello in May 2002. Costello famously encouraged Australians to increase the natural birth rate by having one child, “For mum, one for dad and one for the country.”

That first intergenerational report presented some stark effects of the aging of the Australian population on the government’s fiscal position. The 2002–2003 financial year surplus was estimated to be 0.3 percent of GDP. By 2041–2042, this surplus had developed into a fiscal deficit projected to be around 5 percent of GDP.

The second, third and fourth intergenerational reports were produced in April 2007, January 2010 and March 2015 respectively. The second intergenerational report showed a modest improvement in the long term fiscal deficit, predominantly due to improving access to and affordability of child care. This enabled caregivers, mostly women, to re-enter the labour market and grow the productive capacity of the economy. The third and fourth intergenerational reports include the short term impacts of and policy responses to the global financial crisis. In each of these reports the 40-year view ahead continues to project a significant fiscal gap. So, the problem is not going away.

The fiscal effects of the aging population over the 40 years ahead are two fold:

There is a reduction in personal income tax revenue to the government as people move from being in work to being in retirement.

There are increases in a range of health, aged care and income-support expenditures as an aging population accesses a range of services.

One week ago the Parliamentary Budget Office, and independent provider of confidential costing and budget analysis services to all parliamentarians, released a new report: Australia’s Aging Population: Understanding the Fiscal Impacts Over the Next Decade. This report quantifies the increasing fiscal gap over the next decade as being $36 billion caused by:

Decreases of $20 billion in real terms from revenue in 2028–2029, primarily personal income tax revenue.

Increases of $16 billion in real terms from expenditures in 2028–2029, primarily the aged pension, aged care and health care costs.

Public Policy Responses to Reports on Intergenerational Inequity

Public policy options to address the underlying reasons for inequity include consideration of the following:

Continuing to grow the economy. Australia has had 28 years of continued economic growth. This is the very best prescription for removing inequity. Opening our economy to more trade, exposing Australian industry to competition and investing in education provides opportunity for individuals, families and businesses.

Maintaining a balanced budget over the economic cycle. This will require revenue earned in good economic times to be used to strengthen the Government’s balance sheet. For example, the Future Fund in Australia is accumulating assets to meet the Government’s liabilities to Australian public servants.

Increasing the age of eligibility for access to the pension. The current Australian policy will see the age of eligibility for the pension moving from 65 to 67 years of age over the period to July 1, 2023. Continuing to increase eligibility to 70 years of age is an important recognition of the changing nature of population demographics.

Overcoming outdated approaches to the taxation of capital gains. Currently capital gains receive a 50 percent tax holiday—or are not taxed at all. Reverting to taxing the “real” capital gains on assets will improve vertical, horizontal and intergenerational equity of the taxation system.

Better targeting the concessional taxation of superannuation savings. Through the application of limits to deductions, or by linking the superannuation tax concession with the individual taxpayer’s marginal taxation rate we can improve the sustainability of the superannuation savings policy as well as intergenerational equity.

Broadening rather than shrinking net migration into Australia. Our history of migration over the last two decades has been the basis for broadening the skills base and reducing the average age of the Australian population. Recent contractions to the net migration rate will adversely affect intergenerational inequity.

If fairness means the next generation not having to pick up the tab for the last, then that means my generation and I will need to pick up our tab for the public services we have consumed. While none of us will like it, how else do we teach our children about fairness?

Author: Kevin P Riley is the Managing Partner of GPA Partners, a Canberra based firm advising on governance, performance and accountability matters. Kevin was born in Warwick, R.I. and continues to follow U.S. governance arrangements closely. Kevin is a Fellow with both CAANZ and CPA Australia and is a Qualified Accountant with the UK based CIPFA. Kevin is the National Treasurer for the Institute of Public Administration Australia Inc. Kevin can be contacted by email at kevin.riley@gpa.partners.