A wake-up call for the spendthrift political class - The Australian -  March 27, 2017

Why Australians are struggling to get ahead is the apt title of a new report prepared for the Menzies Research Centre. Regardless of their political affiliations, voters and the political class cannot afford to ignore its pertinent warnings. The report, prepared by a panel headed by the former head of the National Commission of Audit, Tony Shepherd, is packed with inconvenient truths. While Australians are enjoying living standards bolstered by years of strong economic growth and wealth generation, economic storm clouds are accumulating. We are, as the report notes, borrowing to meet growing recurrent spending, especially on welfare and aged care, while the tax base shrinks as the population ages.

Successive governments have been warned of the problem by Treasury in the Intergenerational reports, initiated by Peter Costello. As David Uren writes today, the Shepherd report sets out the looming consequences, citing the example of Japan, which went from having 5.9 workers for every person eligible for the pension in 1995 to 2.5 workers in 2013. Pension costs blew out by 67 per cent, just as the tax base contracted. A similar, crippling equation is under way in Australia.

Average Australians, as Mr Shepherd points out, are unaware of the problems. Such ignorance stems from a failure of political leadership on all sides to explain the issue. That needs to change now, in the lead-up to the budget. Malcolm Turnbull, Scott Morrison and Mathias Cormann must take voters into their confidence, explaining that without fiscal repair, it is the most vulnerable Australians who will suffer in the long run. As the report notes: “If Australia’s structural deficit continues to grow, it will compound the nation’s fiscal deterioration and ultimately limit the government’s options with respect to its discretionary spending. Australians most in need will suffer most.’’

The report’s insights, presented clearly and concisely, should be used by government leaders to counter the populist rhetoric that has seen many voters, especially in the regions, turn to fringe parties such as One Nation. If the Opposition, which has specialised in blocking necessary spending cuts since the 2014 budget considered the report objectively, Labor might recover the taste for reform that characterised the Hawke-Keating years.

The demographic reality facing Australia is clear. In 2055, 2.7 working people for every Australian aged 65 or older will need to contribute as much as, if not more, than 4.5 working people do today to support the health and welfare of those aged 65 or older. Already the balance has deteriorated. In 1975, each elderly Australian was supported by 7.5 working people. Our changing demographic profile also underlines the importance of maintaining skilled immigration among people of working age. Without it, the imbalance will deteriorate faster.

The Shepherd review is also relevant to current political debate over the government’s plan to cut Australia’s uncompetitive 30 per cent corporate tax rate. Sweden’s prosperity over recent decades, it notes, has been assisted by a 22 per cent corporate rate.

After repeatedly ignoring warnings in the Intergenerational reports about preparing for the economic costs of an ageing population, politicians on all sides must accept that current government spending is unsustainable. Ahead of the May budget, that reality needs to be central to the national political conversation if expectations of what governments can provide are to be reduced. As Australia enters its eighth consecutive year of deficits, with net debt more than doubling from $152 billion in 2013 to $317.2bn in 2016-17, crunch time has arrived. The longer remedial action is postponed the more painful it will be.

Menzies Research Centre, Tony Shepherd spendthrift political class