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Is Gen Y getting a raw budget deal?

Date

Julie Novak

<i>Illustration: Frank Maiorana </i>

Illustration: Frank Maiorana

Special interests representing older Australians are crying foul over prospective budget cuts, but we should spare a thought for the indebted and unemployed millennial generation.

The first budget of the Abbott government is due to be released within the next fortnight, and public speculation has well and truly reached fever pitch concerning exactly how the government intends to end ''the age of entitlement''. The focal point of this speculation has centred upon certain expenditure programs, which are particularly sensitive to old age‑related demands, in the areas of welfare and healthcare.

The government is proposing raising the age pension eligibility age threshold to 70 years by 2029, or reducing the maximum investment income one can earn before pensions are reduced. Within the healthcare sphere the reform option of a modest Medicare co‑payment of $6 has been put forward as a prospective aid to the overall fiscal consolidation task (the National Commission of Audit has recommended a $15 co-payment in its report released on Thursday).

Rather unsurprisingly, assorted interest groups representing the financial interests of pensioners and other retirees have generally reacted in a caustic fashion to these and other policy thought bubbles floating in the pre‑budget air.

Seniors groups are among some of the most highly organised vested interests in the country, given the rapidly growing demographic representation of older Australians, and there seems little question their perspectives will hold even greater political sway in coming years. But in this era of big government crippled by a structural budget emergency, policymakers and members of the general public should be very mindful of the fact that persistent growth in age‑sensitive spending will hinder, rather than help, people in other age brackets. Indeed, as the Abbott government looks to start partaking in the daunting exercise of budget repair, it should perhaps be thinking of the future prospects of Generation Y, or ''Millennials'', born from the early 1980s to early 2000s, first and foremost.

It is true that Australia's Millennials are among the wealthiest, healthiest and smartest cohort of young people history has ever seen, by virtue of the unparallelled economic and social starting points bequeathed to them by previous generations. However, government policies, by and large, do seem to have let them down terribly, and this needs to change.

The worst aspect of federal policy to harm the interests of Millennials has been the rapid accumulation of government debts in Australia over recent years, as part of one of the fastest deteriorations in public sector balance sheets witnessed in the Western world.

The latest Mid‑Year Economic and Fiscal Outlook statement, released last December, showed gross federal general government sector debt ballooning from $55 billion, in the last full year of the Howard government in 2007‑08, to an estimated $310 billion this financial year and rising in the out‑years.

Taking into account some of the more liquid asset holdings of the government, net debt has also skyrocketed, from minus $45 billion (implying a net financial asset position) in 2007‑08 to $192 billion in 2013‑14, and estimated to further rise to $281 billion by 2016‑17. The repayment of these debts will be shouldered, in the main, by the Millennial generation, and perhaps by generations that follow them, in the form of tax burdens that would be greater than would otherwise be the case.

That future taxation of Millennials without representation is being politically organised by baby boomer, and to a lesser extent Generation X, politicians seems reprehensible enough from a democratic accountability perspective, but this is by no way the end of the matter.

What makes the radical upscale in debt particularly odious for young people is that the borrowings would have largely, but not exclusively, been directed towards welfare handouts primarily benefitting politically powerful seniors, as well as mainly middle‑aged families. We know this is true, in one respect, by an examination of the structural composition of federal general government expenditures.

Social security and welfare spending alone accounts for 34 per cent of the total estimated general government expenditure of $412 billion this financial year. If we add health and housing expenditure, much of which is subsequently redistributed to the states as tied grants, then this welfare state spending accounts for about half of the federal budget.

Most economists would tend to agree that government debts would be put to best use if their proceeds are being directed to genuinely productive, long‑lasting infrastructure assets. Putting aside the important question as to whether federal capital spending is productive in all instances, privatisation and other policy developments has meant that investment now makes only a fairly minor contribution to the overall federal government spending profile.

The notion that the debt boom has primarily not been to the advantage of Millennials is corroborated by statements in previous budget papers that borrowings were conducted to cover perceived revenue shortfalls, primarily affecting the general government sector that increasingly spends for redistributive reasons. Finally, the Bureau of Statistics figures on the distribution of taxes and benefits across households illustrates that, on average, young households pay more in taxes than they receive in government cash transfers, whereas the reverse clearly applies for retiree households.

The debt‑for‑handouts political culture was excoriated by economists such as James Buchanan, who once characterised it as ''placing claims against future incomes, with no future offsetting benefit stream''. Even more dramatically, Buchanan pictured the use of borrowings to finance the welfare state as ''bequeathing negative capital value to future generations in our capacities as members of the body politic''.

This fiscal harm meted out against the Millennials does not include other pressing policy problems, such as prescriptive labour market regulations contributing to unacceptably high youth unemployment rates, and housing taxes and land supply restrictions contributing to a lack of housing affordability. While young people will perhaps always tend to do it tougher, since they are still building up their human capital base and generally discovering what life has to offer them, it is incumbent that government policies not hold them back, as they presently do in key respects.

The coming federal budget might well contain some spending‑reduction measures baby boomers might not like, but they should at least accept that fiscal consolidation potentially presents an opportunity to short-circuit the politically induced conflict between generations. Older Australians were themselves young and hampered in so many ways by authorities once, but it does not make it right that they use political processes to extend economic and fiscal discriminatory treatment against the Millennials.

Dr Novak is a Senior Fellow at the Institute of Public Affairs, a Melbourne‑based think tank.

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