Intergenerational Report: Article by Jennifer Westacott

This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia, was published in The Australian on 7 March 2015 under the title ‘Commitment and courage needed to meet future economic challenges’.

The Intergenerational Report released this week is both a confronting document and an optimistic document. It confronts us to do nothing less than rethink our social contract, but gives us great optimism that if Australia makes the right decisions now we are in a position to lock in living standards that are the envy of the world.

Rethinking the social contract will require us to make choices about what government — that is, Australian taxpayers — can be expected to pay for. It requires us to rethink how government services are provided, and the contributions individuals should make to their own education, healthcare and retirement. And yes, many of us will need to work longer.

Getting this right is all about how we manage the transition and protect the most vulnerable people in our community. The nature of this reality is reinforced by IGR data which projects that, without fundamental policy change, by 2055:

• Commonwealth government net debt will be almost 60 per cent of GDP or $2.6 trillion in today’s dollars.

• Commonwealth government spending will reach 31 per cent or almost one-third of GDP.

• Health spending will be 5.7 per cent of GDP by 2055 or around $6600 per person, compared with $2800 today.

• Aged pension spending will reach 3.6 per cent of GDP.

Facing up to our intergenerational challenges should be a binding obligation for every Australian and every government, now and for the next 20 years. They show there is no escape from the reality of what we need to do as a nation.

There is no escaping the fact that our starting point is weak and getting weaker: a $245 billion debt, a $40bn deficit, an economy growing at just 2.5 per cent, and an unemployment rate at 6.4 per cent. There is no escaping the fact that what brought the budget to this point is over — spending.

What will get us through is reducing the runaway growth in spending, spending more wisely and cutting waste.

Can we afford for a third of the nation’s revenue to be spent on welfare? Are we confident that the $67bn of funding from the federal government on health this year is money well spent?

And can we justify to the taxpayer that $11bn of their money is needed to pay this year’s interest bill on federal government debt?

There is no escaping the fact that while the budget is already under pressure, even greater cost pressures from the National ­Disability Insurance Scheme and the demands of an ageing population on the health and retirement income system have not yet kicked in.

There is also no escaping the fact that over the next 10 to 20 years Australia will have changes of government.

That means both of the major political parties must put forward a compelling vision and a practical plan of action for how to manage this enormous transformation of our society and lock in our quality of life.

There is no escaping the fact that while we have to take careful and incremental steps to rein in spending, we have to act right now.

As the Business Council said in its pre-budget submission this week, we need bipartisan commitment to a 10-year plan to lock in a lower spending trajectory. So where do we start to do to reduce the rate of spending growth and improve the effectiveness of government spending?

1. We start by not spending more money that we don’t have.

2. Let’s embark on the process of redesigning our big spending programs. We should start to incrementally implement key aspects of Patrick McClure’s report on the welfare system. This report recommended a staged transition to a simpler, more coherent system for welfare payments.

3. We need to do a proper piece of work this year on our age pension and retirement income system, where we need an alignment of tax and superannuation incentives, and to make decisions that send signals now but impact in future so people can adjust over the next decade.

This process has to be fair. People in their 70s and 80s cannot make adjustments in time. People in their late 60s have limited scope. People in their 40s and 50s have time but need policy clarity and consistency from government, with no policy reversals.

4. We need to undertake an informed review and national discussion about who pays for what in the health system, how we increase productivity and efficiency. That requires very careful but necessary policy work.

A 5 per cent productivity improvement in health could reduce fiscal pressures by 0.5 per cent of GDP in 2060, equivalent to $8bn in today’s terms. We have to subject government services to greater levels of contestability and competition, so they can be delivered more efficiently and with greater value.

5. Along with all of these processes, we must grow the economy. It’s never been truer that a strong economy is the best way to grow revenue, create jobs and provide resilience to economic shocks. We need to get our heads around the fact that average annual real economic growth is projected to be 2.8 per cent over the next 40 years, lower than the 3.1 per cent we’ve enjoyed over the past 40 years. Over the same time frame, real spending is projected to grow at an average rate of 3.1 per cent each year.

This requires a purposeful, deliberate policy response that includes avoiding random policy changes that could further undermine competitiveness.

This week’s IGR demands that we plot the long course as a nation. The long-term and serious nature of the challenge also requires the current federal government and opposition to embrace the opportunity to collectively and genuinely inform and consult the community on the choices we will all have to make. This is no time for political opportunism.

Australia’s intergenerational challenge requires a diversity of opinions and a contest of ideas on the detail.