Intergenerational Report 2021: Three things can brighten the fiscal outlook – The Australian Financial Review

The inflated expectations of the unexpected resources boom were also built into the spending monuments of the Rudd-Gillard government. However worthy in intent, the billions of dollars ploughed into secondary schools and disability services have not generated any financial return and, as a result, have helped to drag down Australias productivity performance.

Our school performance has actually declined in absolute terms even as schools have been given more taxpayers money to play with.

This is a sub-par outlook for a prosperous, resource-based frontier economy at the foot of Asia.

As IGR 2021 shows, labour productivity basically stalled from about 2015, in turn delivering the slowdown in wages growth that attracts so many complaints. But at the time this was disguised in the afterglow of the resources development boom.

So IGR 2015 projected four decades of budget surpluses that would pay off all the net public debt by the 2020s.

Six years later, the global pandemic has smashed that rosy outlook, returning it to a further four decades of budget deficits and net debt at 35 per cent of GDP in 2060-61.

The cost of the failed 2014 Abbott-Hockey budget attempt to properly repair the fiscal excesses of the Labor years is now being revealed. The closing of the international border to migrants has led to the first downgrading of population growth since IGR 2002.

The flow-on effects of a less expanded economy, slower growth, an older population and smaller workforce will sharpen the fiscal challenge of growing our way out of the deficit and debt blowout.

Yet even this sobering outlook is propped up by the wildly optimistic assumption that Australias productivity performance will recover over the next decade to a 30-year trend rate that was pushed up by the huge gains made during the 1980s and 1990s reform era.

So the actual outlook has deteriorated more than IGR 2021 admits.

The capacity of the political system to deal with this has been undermined further by both the shock of COVID-19 and Australias surprisingly rapid economic and jobs rebound.

Amid freakishly low interest rates, this has further disoriented the public debate over debt and deficits and what needs to be done to drive the assumed recovery in productivity growth.

But the Morrison government dare not seriously prepare the ground for genuine budget repair before the next election. Treasurer Josh Frydenberg insists there will be no fiscal austerity.

The government has pushed modestly on policy reforms, including to superannuation, insolvency laws and the personal income tax structure. But even its proposed tinkering with our antiquated industrial relations regulation was blocked by Labor and the crossbench in the Senate. Any further tax reform has been pushed off to the states.

But as the boost to demand from borrowed money wears off, even the official budget numbers forecast that Australias economic growth will settle closer to 2 per cent before the hoped-for resumption of immigration kicks in.

This is a sub-par outlook for a prosperous, resource-based frontier economy at the foot of Asia.

After the pandemic is over, Australias national debate inevitably will be gripped by the disappointing future that IGR 2021 projects.

Unfortunately, just not now.

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Intergenerational Report 2021: Three things can brighten the fiscal outlook - The Australian Financial Review