Intergenerational Report will reveal massive cost growth: Hockey

Political Correspondent
Budget blues

A MASSIVE spending burden threatens to tip the nation into decades of deficits, according to new government findings that will be released early next year to jolt parliament — and the public — into accepting another wave of budget reform.

Setting a new strategy in the political fight over difficult ­savings, Joe Hockey has decided to hold back the official analysis to maximise its impact on national debate when parliament sits in February.

The findings will set off a debate over the nation’s long-term challenges by feeding into the tax reform white paper, which will consider the GST, and influencing the federation white paper on key issues such as the mounting cost of healthcare.

Mr Hockey considered publishing the long-range Intergenerational Report this year but rejected the option in favour of timing the new Treasury analysis to prepare the ground for further savings in the May budget.

The Treasurer, who is in New York and Washington this week for a series of meetings with business leaders and fellow finance ministers, warned of a “massive growth” in costs to be revealed in the IGR as the population ages and the commonwealth struggles to keep paying for the services Australians have come to expect.

“The IGR will come out early next year — not late this year but early next year,” Mr Hockey told The Australian. “That will create a framework that will help define the destiny of the federation white paper, the tax white paper and the budget next year.

“So it is a document that will begin the national discussion about where our economy must go — which is to focus on growth and jobs, and to reduce the complexity and red tape of government.”

Highlighting the cost of inaction on major savings, the report is likely to contrast the long-term improvements from the Coal­ition’s budget measures with the steady increase in government spending if Labor, the Greens and others succeed in permanently scuttling the reforms.

Bill Shorten has vowed to destroy the government’s budget reforms in the parliament and at the ballot box, branding the savings unfair because those on low incomes feel the biggest cuts as a proportion of their income.

“Why is it that this is a government who always asks the most vulnerable to do the hardest and heaviest lifting?” the Opposition Leader said in parliament last week.

The government appears set to use the IGR to shift focus away from the immediate losers from each measure and pay more attention to the risks to future generations from continuing deficits.

The new document is expected to influence some of the government’s most fundamental tasks in the rest of this parliamentary term, including the federation white paper, as it examines the long-term savings from cutting duplication between commonwealth and state spending in areas such as health and education.

It will also have a direct impact on the tax white paper, which will examine incendiary ideas such as an increase in the rate and base of the GST, as well as the wider search for new savings for the May budget next year.

Mandated under federal law to show the nation’s fortunes over 40 years, the IGR was last issued in January 2010 and sparked a furious debate about an estimate that the population would rise to 36 million by 2040.

Labor initially aimed to produce another report three years later but chose not to as the 2013 election loomed, leading Mr Hockey to consider releasing the sensitive forecasts sometime this year. But a Senate blockade has contributed to another delay as the government tries to secure some of its budget savings in the upper house against the objections of Labor, the Greens, the Palmer United Party and others. The savings being stymied are worth about $30 billion over four years but would have a far greater impact on the long-term projections by cutting outlays on Medicare benefits, universities, family tax benefits and pensions.

Mr Hockey said he would not speculate on whether the next report would show any improvement in the deep deficits projected in the last report, which warned of a “fiscal gap” from the strain of paying for services as the population ages.

The January 2010 report found that federal government spending would exceed revenue by 2.75 per cent of GDP in 2040 on existing trends, as relatively fewer taxpayers had to carry the burden for a growing number of pensioners. Labor acted on the problem by legislating a future increase in the pension age to 67 and applying stricter tests on family tax benefits, but those reforms are not enough to fix the gap. “What the IGR will do is illustrate that the massive growth in costs associated with an ageing population have simply become more urgent for Australia to address,” Mr Hockey said.

The Coalition is seeking to extend some of the Labor reforms by making further cuts to family tax benefits — saving $7.4bn over four years from benefits worth $70bn over the same period — and trying to increase the pension age to 70.

While the pension age reform delivers no saving in the budget forward estimates, it starts to take effect from 2034 and would make a significant difference to the IGR projections. Mr Hockey confirmed to The Australian that the government was thinking of using contrasting projections in the next IGR to show the impact of its budget reforms when compared with “business as usual” if the Senate continues to stymie the changes.

“That’s certainly under consideration,” he said in an interview ahead of his visit to the US this week.

“There are some people who need to be reminded how important the structural reforms in the last budget were, and how essential they are for Australia to be able to live within its means in the future.”

A spending gap of 2.75 per cent of GDP would produce a deficit of about $50bn a year in today’s dollars. Last year’s deficit was 2.8 per cent of GDP but the government wants to cut this to 1.6 per cent in 2014-15.

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