Former Secretary to the Australian Treasury, Dr Ken Henry, has come out swinging today attacking both major political parties for peddling a “fiscal fairytail” by promising to maintain or expand government services without increasing taxes. This approach, according to Henry, is impossible in light of Australia’s ageing population, and he is seeking a frank and honest assessment of the issue from both parties.
From the Age:
Australia faces an “immense challenge” in paying for its needs and both political parties are failing to deal with it, says Henry.
The key problem is an ageing population and rising health costs…
“Older people are more expensive than younger people,” Henry summarises. Not only will there be fewer workers paying taxes to meet the costs of pensions, the health care bill will soar…
“We see an inexorable increase in health costs and I don’t see any party saying we have to find ways to cut health spending.
“So then the question: Are there areas of government spending that can be addressed to offset these effects?” He answers his own question: “Maybe, but are they enough to offset 5 per cent of GDP? That’s $70 billion in today’s dollars.” That’s the Treasury estimate of the extra annual cost of our ageing society 30 years from now.
“I don’t think so,” says Henry. “I really don’t think so”…
Henry goes on to explain that there are only three ways to pay for the costs of an ageing population: 1) increase productivity; 2) increase labour force participation; and/or 3) increase taxes. But since Australia has failed on the first two fronts, tax rises are now the only realistic option.
“We have shown ourselves as a nation to be incapable of producing sufficiently ambitious reforms in productivity and participation”…
The first Intergenerational Report was “11 years ago and we are not close to where we need to be”…
“We can’t rely on luck. In my view, this leaves us having to increase tax revenue as a share of GDP. It has to increase and it will increase.”
In the current budget it’s pencilled to come in at 22.2 per cent. A decade ago it was around 25 per cent and the Intergenerational Report said it would need to rise to 30. But as we enter the election campaign, no political party is acknowledging any need to seriously increase the tax take.
As articulated by Henry, the crux of the conundrum facing Australia is the ageing population. As shown in the next chart, Australia’s dependency ratio – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working aged population – is projected to rise over coming decades as the large baby boomer cohort enters retirement:
Accordingly, the number of workers per dependent is projected to fall:
As is the ratio of employment-to-population:
Looking ahead, the Government will have a much smaller pool of workers with whom to collect taxes from, making it much more difficult for the Government to raise the required amount of tax revenue. At the same time, the higher proportion of retirees and older aged Australians will increase the amount of health and aged-care expenditure, significantly increasing overall Budget outlays.
In short, without radical reforms to the way taxes are collected and fiscal expenditures, the ageing of Australia’s population will likely ensure that the Federal Budget remains in deficit for years to come, irrespective of which party is in office.
Unlike most other areas of economics/finance, demographic shifts are easy to predict and next to impossible to turn around. As such, it is an indictment that neither side of politics has engaged seriously on this issue or commenced a frank and honest discussion on society’s expectations of government and the costs of meeting those expectations.
