Commentary 23rd May 2014

Deficit reduction is an ageing problem

As was broadly expected before the Treasurer's speech on May 13, the key theme of the 2014 budget was the deficit and how to tackle it. But many economists are asking if the problem of the budget deficit and public debt was not altogether made up.

For example, James Morley, Professor of Economics at the Australian School of Business, recalled the Canadian budget crisis in the mid-1990s (The Conversation, 6 May 2014).

Canada's public debt reached 68 per cent of GDP and the government of the day undertook extraordinary savings measures to overcome the problem.

Australia is enjoying the highest possible credit rating and its public debt has not yet exceeded 20 per cent of GDP. In the short-term this does not look like a budget crisis. In the long-term, a budget deficit might be not a bad thing either, provided the increase in public debt is slower than GDP growth, and that borrowing ultimately serves accelerating economic growth, especially in the sectors where the country might enjoy comparative advantage in the future.

However, those macroeconomists who think there is no budget crisis and suggest we not worry about the deficit, are looking only at the short-term situation.

According to the National Commission of Audit, because of our ageing population, if nothing is changed, some areas of public expenditure such as aged care and health within the next 10 years will increase public debt beyond GDP growth. The age pension bill will be increasing by 6.2 per cent a year; Medicare by 7.2 per cent; expenditure on hospitals by 10.4 per cent; and prescription medicine subsidies by 5.4 per cent a year. All will be inevitable, while the projected GDP growth will not exceed 3.5 per cent a year.

Therefore, the debate should be not about whether the reduction in deficit is needed, but how it can be achieved in the most efficient, expedient way, and as harmlessly as possible.

In the new budget, the government has proposed savings measures that are as radical as they are debatable, and that concern the entire population.

The most radical changes, to the aged pension and Medicare, will affect the very people who most need support.

Let us begin with the proposal to gradually increase the pension age from 65 to 70 years. This will concern those who where born after 1965, and the implementation will take until 2035.

Never before has the government of the day proposed a policy that would be finalised beyond six terms of parliament and outside the political life of most currently serving MPs.

It is also a policy that has caused immediate criticism. It is one thing to continue performing office work until 70 years of age but what about those at physically demanding jobs such as construction or mining, or jobs requiring quick reactions and precision, such as piloting aircraft? And what about people who lose their jobs in their 50s but are never able to find another one?

The most radical changes, to the aged pension and Medicare, will affect the very people who most need support.

Dr Gennadi Kazakevitch

Deputy Head, Department of Economics

For those who find themselves unemployed after age 50, the government proposes subsidising their job placement for up to four years and a maximum of $10,000. But will such a cash subsidy make a difference to employers? Would they rather hire workers 15-20 years younger with reasonable experience, but at a lower wage?

On the medical front, the proposed $7 co-payment is perhaps the most surprising change. For working people on a reasonable income, this is affordable. But it will mainly affect those most in need – low-income parents and seniors on the age pension. Even if the co-payment is channelled to medical research, as promised, this won't help pay their doctor bills and they may think twice before going to see their GP.

The public service has also been targeted for substantial cuts, as agencies are abolished or reorganised and thousands of jobs lost. Is it possible to avoid a decline in the quality of service? The loss of so many jobs will also lead to more people needing government assistance.

Although, in the case of public-sector jobs, their salaries from the public purse would be replaced by much lower unemployment benefits, also from the public purse, there would be no immediate savings because most retrenchments would be accompanied by entitlement payments.

People under 25 will need to get by on the Youth Allowance, rather than on a higher Newstart Allowance. Furthermore, payments for claimants younger than 30 will start six months after submitting an application.

These measures are expected to encourage unemployed youth to engage in further studies or vocational training. Therefore, a constructive complementary initiative is to extend Commonwealth support from universities to TAFEs and private colleges that can help reduce unemployment.

This will not be much help to young people from low-income families in remote areas without ready access to schools and who need to support themselves away from home on the Youth Allowance.

If all the measures proposed in the budget are implemented, Australia will be radically changed. We will need to be more self-reliant for our entire lives, and live without benefits from the public purse. Meanwhile, the government still needs to get its budget through the Senate.

Dr Gennadi Kazakevitch is deputy head of the Department of Economics at Monash University.

This article has appeared in the Sydney Morning Herald.

By Gennadi Kazakevitch

  • gennadi-kazakevitch

    Dr Gennadi Kazakevitch

    Department of Economics Monash Business School

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