10 The Treasury — Intergenerational Report

Summary

The preparation of an Intergenerational Report (IGR) every five years was mandated by the Charter of Budget Honesty Act 1998, with the first report being released in 2002 and the second in 2007. The IGR represents a major departure from previous analysis available to the Government and the wider community in that it provides an overall assessment of the sustainability of government policies over a forty year period.

Establishing the IGR as an ‘authoritative’ assessment required the development of methodologies extending beyond Treasury’s established expertise in budget management and macro and micro economic modelling. The IGR was therefore developed on a whole of government basis.

Substantial input was sought from other key departments and academia to ensure the best available data and analysis on key drivers of the Government’s fiscal position in areas such as population, labour force, payments to the unemployed, aged care, health care and education, was incorporated into the Reports.

In preparing the first IGR, Treasury was able to draw upon an established capacity in respect of retirement income modelling developed as a consequence of the establishment of an inter-agency taskforce to examine these issues in 1992. This expertise made possible effective analysis of the interaction of superannuation, demography, labour markets, social security and taxation over the 40 year period of the IGR, these issues being central to the overall outcomes.

Further innovation in the IGR methodology continues to be pursued, with more refined analysis such as the ‘population, participation and productivity’ framework for developing projections for real GDP and real GDP per person being introduced in the second Report.

By providing an authoritative perspective on major issues affecting Australia’s longer term future, the Reports have been highly influential reference points for considering long-term issues and trends and possible policy responses within Government. In releasing the second IGR, the then Treasurer stated that ‘In practically every portfolio area — health, education, family benefits, welfare, superannuation, pensions — the IGR now provides the overall architecture within which we operate.’

The Reports have also been significant in positioning and increasing the influence of the Treasury at the centre of government policy advising.

Relevant chronology

June 1991 — Ken Henry returned to the Treasury from the Parliamentary office of the Hon Paul Keating, MP, and given task of building modelling capacity of Treasury. The Hon Paul Keating, MP, who had been the Treasurer until June 1991 became Prime Minister on 20 December 1991;

April 1992 — Senate Select Committee on Superannuation report;

Aug 1992 — Retirement Income Modelling (RIM) Task Force commenced operations as a joint endeavour by the Treasury and the then Departments of Finance and Social Security;

1996 — Commonwealth Commission of Audit report drew attention to the demographic issue using RIM projections and proposed the Charter of Budget Honesty.

1996 — RIM undertook road-testing of its projections with departments and stakeholders;

1997 — RIM Task Force became the Retirement and Income Modelling Unit and became part of Treasury;

1998 — Charter of Budget Honesty Act 1998 passed. The Charter of Budget Honesty provides a framework for the conduct of Government fiscal policy. The Charter requires fiscal strategy to be based on principles of sound fiscal management and improved public scrutiny of fiscal policy and performance. Amongst other things the Act requires an intergenerational report (IGR) to be produced every five years. The IGR is to assess the long-term sustainability of current government policies over 40 years, including the financial implications of demographic change;

2001 — Treasury undertook departmental consultations on the assumptions and modelling results underpinning the intergenerational report and the then proposed OECD Report on the Fiscal Implications of Ageing;

April 2001 — Ken Henry appointed Secretary to the Treasury;

September 2001 — OECD Report on the Fiscal Implications of Ageing;

May 2002 — The first intergenerational report (IGR1) was released as part of the 2002–03 Budget. The report focussed on the implications of demographic change for economic growth and assessment of the financial implications of continuing current policies and trends over the following four decades;

2002 — Academic and other commentators analysed technical issues and policy implications of IGR1;

May 2003 — Budget Paper No.1, Statement 4, Sustaining Growth in Australian Living Standards, articulated the population, participation and productivity (‘three Ps’) agenda;

January 2004 — Philip Gallagher awarded a Public Service Medal (PSM) in recognition of his contribution to the development and application of retirement income models, particularly in relation to the 2002 Intergenerational Report;

August 2004 — Economic Roundup article Policy Advice and Treasury’s Wellbeing Framework, described the framework for Treasury’s approach to policy advice and its mission to improve the wellbeing of the Australian people;

September 2006 — Access Economics IGR Review for Medicines Australia published and noted that small differences in assumptions used to estimate future costs can result in very large changes in projected outcomes;

2006 — Treasury task force commenced work on IGR2;

January 2007 — Ken Henry awarded a Companion of the Order of Australia (AC) in Australia Day honours list;

April 2007 — Second intergenerational report (IGR2) released by the then Treasurer. IGR 2 showed that the Australian Government’s long term fiscal sustainability had improved over IGR1 but demographic trends remain of concern. IGR2 discussed the three Ps agenda and was influenced by the ‘wellbeing’ framework; and

May 2009 Budget — the IGR models were used to produce medium term fiscal projections for the period to 2019–20 for Australia and 40 year costings of changes in pensions and offsetting savings measures. These medium term projections are informing current decision-making processes as the Government focusses on returning the Budget to surplus over the medium-term.

Key observations from case study

Major innovations

The intergenerational reports have been very influential at the political, bureaucratic and stakeholder levels in that they have provided an authoritative long term perspective on major issues affecting Australia’s future. The reports have had a substantial influence on Commonwealth departments and agencies thinking about long term issues and trends and possible policy responses. The reports have also been significant in positioning and increasing the influence of the Treasury at the centre of government policy advising.

Observations and lessons learned

• Innovation prompted by a problem — the Charter of Budget Honesty Act 1998 was seen as one answer by the then government to future governments concealing large deficits and it put in place a system of more open reporting and a greater focus on longer term trends;
• Built on previous experience and expertise — the Treasury has a long history and deep expertise in budget management and macro and micro economic policy advising and modelling. The creation of the RIM Unit brought together a range of additional skills, including, in Philip Gallagher, a person with deep understanding of social security, community services and health policy and statistics;
• Analysis based on data, analysis and evidence — the Treasury used the best available data and analysis and tested the assumptions underlying its modelling and early results with other departments;
• Importance of leadership — Following Ken Henry’s return to the Treasury in 1991, his previous experience in taxation policy with his new responsibilities for budget policy resulted in strands of Treasury thinking being brought together and a greater focus on long-term drivers of Australia’s fiscal position. As Treasury Secretary, Ken Henry, places considerable weight on Treasury‘s role as a central policy department, providing high quality policy advice and thinking analytically and strategically;
• Organisational responsiveness — the first intergenerational report was largely handled as a matter of compliance with the legislation. However subsequent developments and analysis, including the publication of the population, participation and productivity and the wellbeing frameworks, built on IGR1 and promoted further policy discussion and anticipation of IGR2; and
• Recognition and reward — Philip Gallagher’s award of a Public Service Medal (PSM) acknowledged his contribution to the development and application of retirement income models, particularly in relation to the 2002 Intergenerational Report. While not specifically related, the nomination and award to Ken Henry of a Companion of the Order of Australia (AC) recognised his contribution to the development and implementation of economic and taxation policy, his contribution to the finance sector and to the community.

 

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