ADDRESS

TO THE
QUEENSLAND PRESS FORUM LUNCH

CARLTON CREST HOTEL, KING GEORGE SQUARE, BRISBANE

FRIDAY, 12 SEPTEMBER 2003

Thank you for the opportunity to speak to you today.

It is now almost 18 months since I released the inaugural

Intergenerational Report with the 2002-03 Budget. Today I would

like to take a step back from the day to day business of politics

and short-term policy work and return to the theme of demographic

change discussed in that report and some of the policy challenges

and choices it presents.

The Intergenerational Report is an important requirement

of the Charter of Budget Honesty Act. The Australian government was

a world leader in promoting fiscal transparency and accountability

when it introduced the Charter in 1998. Since then other governments

around the world have introduced similar legislation and the IMF has

welcomed the Charter of Budget Honesty as setting ‘a high standard

for fiscal transparency and accountability’.

Under the Charter, the Government is required to release

an Intergenerational Report every five years. The 2002-03 Intergenerational

Report was the first report of its kind, and the first time any attempt

had been made to look across the generations and identify the challenges

which lie ahead for our society and our governments. It asked some

tough questions: What challenges might our children and their children

have to confront in forty years time? What shape will Australia’s

finances be in in 2042 based on current policies? And what should

we do now to prepare for the generations ahead? It also showed that

Australia’s strong Budget position, put in place over the past seven

years by the coalition Government, means we are better placed than

most other advanced societies to cope with these changes.

The Intergenerational Report spells out the consequences

of current trends. It is designed to provide long-term warning of

any problems and, because a new report must be published every five

years, benchmark our progress to meeting those problems.

The fact that this government had the courage and foresight

to publish projections out for forty years enables us as a society

to start to think about the sort of policy challenges and choices

that we will need to consider for future generations.

And make no mistake – the report raises issues that all

of us will need to consider. We are not facing a crisis – not yet

– but some difficult choices will need to be made sooner or later

if we are to maintain, and indeed continue to improve, living standards

and wellbeing for all in our society. And the sooner we make the right

choices, the better placed we will be to overcome these problems.

Australia’s population is expected to age significantly

over the next forty years. The number of Australians aged 65 and over

is expected to increase rapidly, from around 2.5 million in 2002 to

6.2 million in 2042. At the same time, growth in the potential

labour force (that is, people of workforce age) is expected to fall

from around 1.2 per cent per annum over the last decade to zero in

forty years’ time. As a result, the aged to working-age population

ratio (that is, the proportion of people aged over 65 to people of

traditional labour force age, 15 to 64) is expected to increase from

around 19 per cent in 2002 to almost 41 per cent in 2042. Let me put

it another way. In 2002 there were more than five people of working

age to support every person aged over 65. By 2042, there will only

be 2.5.

An increasing aged population implies higher government

expenditures. More than half of Commonwealth government spending is

directed to health and aged care, social safety net payments to individuals,

and to education. Over the next forty years Commonwealth expenditure

on aged care and pensions will rise by around 2.7 per cent of GDP,

slightly offset by a fall in education expenditure of around 0.2 per

cent of GDP. But increasing health costs will represent the major

component of the projected increase in expenditures, rising from 4

per cent of GDP in 2001-02 to over 8 per cent of GDP in

2041-42.

While health costs increase as people get older, technological

change and advances in medicine will have an even greater impact on

the budget. More sophisticated treatments and diagnostic techniques

have enhanced the quality of life for people, particularly the elderly,

but are expensive and add to cost pressures. We should acknowledge

that greater emphasis on preventative health technology might reduce

some longer term cost pressures, through its potential to enable people

to lead healthier lives during their working years. This might enhance

labour force participation and productivity.

But where these two significant developments intersect

– the ageing of the population and the medical advances to treat an

increasing number of illnesses, is where the cost pressures are rising

fastest. The IGR identified the Pharmaceutical Benefits Scheme (PBS)

as the most significant area of future spending pressure in the Commonwealth

Budget.

Today the PBS subsidises around 80 per cent of all prescription

medicines available at pharmacies and accounts for more than 158 million

prescriptions each year. That’s more than 7.5 prescriptions for each

Australian every year.

The IGR showed that in future years, PBS expenditure

as a proportion of GDP could grow by more than four times, from 0.6

per cent of GDP in 2001-02 to 3.4 per cent in 2041-42. Indeed, over

the past four years, the cost of the PBS has increased by 60 per cent

to over $4.5 billion per year.

It is vitally important that we make certain that the

PBS is sustainable, because the reality is that the real cost of a

number of commonly used medicines puts them out of reach of many Australians.

For example, medicines to treat diabetes can cost up

to $200 per script, and for heart disease up to $115 per script. Under

the PBS, if you’re a general patient, you pay up to $23.10 for an

item received under the PBS, whilst concessional patients (pensioners

and those who hold concession cards) pay only $3.70 per script. Concessional

patients have a safety net threshold of $192.40 (equating to around

52 scripts each year) while general patients have a safety net

threshold of $708.40 each year (30 scripts per year at the maximum

payment). Once the safety net threshold is reached each year, general

patients pay only $3.70 per script whilst concessional patients then

receive their scripts free of charge. The difference between the actual

cost of a medicine or treatment and the amount paid by patients is

met, of course, by the taxpayer.

In 2002-03, 28 new medicines or significant extensions

to listings were subsidised by the PBS. And since 1 July this year

a further six new medicines or significant extensions to listings

have been included on the PBS, including Enbrel, a very expensive

arthritic drug which alone will cost around $100 million per annum.

The total cost of the three most significant listings since 1 July

is around $138 million per year. Without a PBS listing, Enbrel would

cost patients around $25,000 per year. As Enbrel requires around 13 scripts

a year, with PBS listing it costs concessional patients about $48.10

a year.

With this in mind the Government has been actively implementing

initiatives aimed at ensuring the sustainability of the PBS into the

future, including attempting to pass legislation to change the co-payment

rate by a small amount to restore the balance between government and

patient contributions to the PBS. This has been blocked in the Senate

twice. Today I again call on the Opposition and minor parties to put

aside opportunism and consider the longer term national interest.

If the Senate passed the co-payments legislation for

the PBS, this would involve a rise to $4.60 per script for concessional

patients and to $28.60 per script for general patients. This measure

is estimated to save around $250 million per year in the context of

a scheme that currently costs $5.1 billion per year.

When you put together all of the expenditure factors

– health, aged care, pensions and education, the IGR projects a fiscal

gap of around 5 per cent of GDP by 2041-42. This is a budget deficit

of 5 per cent of GDP assuming no debt costs from previous deficits.

To put this into perspective, the 2003-04 Budget forecast is for a

surplus of $2.2 billion. A budget deficit of 5 per cent of GDP would

mean that for 2003-04 the deficit would be around $40 billion.

These sobering numbers make it clear that society needs

to make some clear choices about how we wish to address the demographic

issue. In broad terms, there are a number of options available:

The first is to cut future government expenditure by

around 5 per cent of GDP. There is no doubt that we will need to be

very careful about government spending priorities in the future. However,

it is difficult to imagine that all of the response can be met in

this way, given that it is the ageing of the population that is driving

much of the expenditure and that this is not reversible.

The second approach is to increase taxes by 5 per cent

of GDP. This is not an option. To give you some idea of the magnitude

of taxes that would raise an extra 5 per cent of GDP – it would require

a GST of over 22.5 per cent. Alternatively, if all the marginal tax

rates were increased proportionally, the marginal tax rate for those

earning between 21,601 to 52,000 (currently the 30 per cent bracket)

would be 42.5. This means that those on average weekly earnings would

have a marginal rate of 42.5 per cent. The top marginal tax rate would

be 66 per cent.

A third option is to run deficits and hence increase

debt. This is not a sustainable or responsible solution, as it merely

passes the problem on to our children’s children at an ever-increasing

rate, and would eventually force them into ever more extreme measures.

One of the responses that would alleviate this problem

would be an increase in long term growth. This would generate extra

income to meet the demands of an ageing population.

Growth in GDP is driven by growth in population, productivity

and labour force participation. In my view, the best opportunities

for increasing Australia’s growth are to increase labour force participation

and productivity.

Population growth is a good thing but it is not the answer

to this problem. Australia’s current fertility rate has been below

replacement level of 2.1 for the past 20 years or so. It is currently

1.73 and falling. Fertility rates are low in all the advanced industrial

countries. This is a consequence of education and higher living standards.

Even if there were a government policy that could produce an immediate

increase in fertility rates, for the first 20 years it would decrease

the ratio of workers to total population (the worker ratio) and increase

pressure on the growth rate.

Similarly, for immigration to make a difference there

would need to be an eight-fold increase in our migration program by

2042. Moreover, since those migrants would themselves age along with

the rest of the population, an ever-increasing rate of working age

immigrants would be required.

There may be more scope for improvement with regard to

productivity. The IGR projections assume productivity growth of 1.75

per cent a year – the same as over the past 30 years. If we can do

better than that – and we did in the latter part of the 90s and the

early part of this decade – this will generate extra growth in incomes.

There is a considerable body of research emphasising

that policy reforms on a wide front are more likely to yield significant

dividends in terms of increased productivity than are reforms focussed

on just one set of markets. Continued microeconomic reform and efforts

to improve workplace flexibility to deliver productivity improvements

will assume particular importance in the context of slower growth

in the workforce. The task is never ending.

The third determinant of GDP growth is participation.

Amongst OECD countries, Australia’s total participation

rate ranked 13^th in 2001, suggesting there is significant

potential to improve participation both in the short and medium term.

I believe that there are a number of policy areas where there is potential

to improve existing participation rates, including: skills and education;

health; welfare reform; workplace relations; and retirement incomes

policies.

By addressing these, we can remove constraints or disincentives

that lead people not to participate in the workforce. It is not about

forcing people to work. Rather, it is about ensuring that free choices

made by individuals are not influenced by aspects of policy that currently

bias their choices against participation or make it difficult to participate.

Australia’s income support system is very extensive.

The flat rate of benefits coupled with means testing through the income

and assets tests places us in a better position to finance the system

than in many other countries, with their earnings-related benefits.

However, we need to ensure that elements of the system, such as income

test structures (including their interaction with the income tax system),

the eligibility criteria for payments, and activity tests attached

to payments for those of workforce age (such as requirements to look

for work) provide an adequate safety net while encouraging self-provision

and labour force participation.

For this reason, the Government remains committed to

changes to eligibility rules for disability support pension (or DSP)

announced in the 2002-03 Budget. When we have one in nine males aged

50 to 64 receiving DSP, I think it is fair and reasonable to look

at measures to address eligibility for those with some capacity for

work. For some, at least, DSP has become a de facto early retirement

pension.

With an ageing population, it is important that retirement

income policies do not encourage reduced participation in the labour

force.

One area that I think we will need to consider is preservation

age. At the moment, benefits must be preserved until age 55 – 10 years

before pension age. The preservation age can act as a signal to people

of an appropriate retirement age. A person’s retirement income is

also affected by when they start to draw down on their superannuation.

For these reasons the Government is gradually increasing the preservation

age to age 60 by 2024. Unfortunately, most of the baby boomers will

have retired well before 2024.

This is an important point – and one that should not

be overlooked in the current debate. Some people argue that we don’t

need to take steps now to address the ageing of the population. After

all, 2042 is a long way off. That is true. But the retirement income

system operates over a forty year timeframe. To get change that is

effective in 30 or 40 years time requires action now.

We need to take action, starting now, so we can maintain

a prosperous economy and a cohesive society that does not leave an

enormous burden on future generations. We cannot expect that these

problems will fix themselves.

The Government would like to start now and has put forward

a number of legislative reforms. But the Opposition in the Senate

has frustrated them.

The necessary legislation to implement the Government’s

2002-03 DSP reforms was rejected by the Senate, but the Government

remains committed to targeting funding to people with disabilities

who have the highest support needs.

Legislation to ensure the sustainability of the PBS into

the future, including a change to the co-payment rate by a small amount

to restore the balance between government and patient contributions

to the PBS, has been blocked in the Senate twice.

The Government has introduced some 22 workplace relations

bills into the Parliament between February 2002 and September 2003.

Over this period the Senate has either proposed unreasonable amendments

or simply refused to pass bills. The Senate has held up reforms that

would have resulted in more jobs for Australians.

To make our companies more internationally competitive,

the Government is also reforming international taxation. As Australian

companies grow to world size we have to help them access opportunities

in world markets, and provide job opportunities for Australian workers.

Unfortunately the Labor Party has indicated its opposition to these

reforms.

In the 2003-04 Budget, the Government announced

far-reaching reforms to Australia’s higher education system. The reforms

are to free up universities and allow them to build on their strengths

so that they provide the quality courses that our students want and

our nation needs. But the Labor Party has stated that they will seek

to block these measures in the Senate.

So we must now ask ourselves: how can we reform the Senate

so as to reduce the capacity of obstructionist behaviour that threatens

to derail our long-term opportunities?

I do not think our constitutional arrangements are set

in stone, that we can never improve them.

I would favour a system where measures which had been

twice rejected by the Senate in one Parliament, could be passed by

a joint sitting after an election.

Under this system, the Prime Minister of the day would

be able to ask the Governor General to convene a joint sitting after

an election to vote on legislation blocked twice by the Senate in

the previous Parliament.

The issues in contention would have been debated openly

in the Parliament beforehand and during the campaign. The mandate

would be clear, and resolution of the conflict possible.

Under the current policy of the Labor Party our House

of Review is failing us. A House of Review is designed to protect

the long term interest against short term and irresponsible decision

making. Under modern Labor tactics it is frustrating the long-term

interest in the interests of short term and irresponsible, opportunist

politics.

The Senators who are now restricting Australia’s long-term

possibilities are hardly known to the public. Who knows the names

of the Senators who are blocking these reforms? They have enormous

power but have little accountability to the public.

Here is the opportunity for a Labor Leader:- to end the

policy of obstructionism in the long-term national interest.

And the Senate itself should be reformed to prevent short-term

thinking and obstuctionism from restricting Australia’s opportunities.