The Treasury’s recently released Intergenerational Report (IGR) has come under fire from think tank Australia Institute for failing to recognise the mammoth growth in household wealth, which should be taxed at a higher rate to pay for public health services.
The IGR report, released by Treasurer Josh Frydenberg in late June, found that Australia is facing a dwindling population, a smaller workforce (meaning lower economic growth), as well as ballooning healthcare costs.
"Funding for public hospitals is projected to be the fastest-growing component of Australian government health spending,” the IGR report stated.
But a new paper by Australia Institute senior research fellow David Richardson described IGR analysis as “misleading” in that spending pressures are compared with GDP figures alone.
“The Intergenerational Report is completely missing some of the real challenges facing Australia,” Richardson said.
“The IGR compares government spending with GDP but misses the capital gains which boost capacity to pay and are heavily biased towards the rich who can afford to pay.”
Meanwhile, household wealth of Australians has ballooned by a stunning $9.55 trillion, or 302 per cent, over the last 33 years, he noted.
Another way to put it is, three decades ago, Aussie wealth was 3.6 times the size of GDP.
Today, it’s 6.4 times the size of GDP, and it’s projected to grow even more, with wealth “likely to swamp” GDP in 40 years’ time.
But the IGR “chose to ignore” this growth, Richardson said – and it’s this that should be taxed at a higher rate, he believes.
“Rapid increases in wealth, like the one Australia has already experienced and the one we will likely experience in the decade ahead, are a good problem to have,” Richardson said.
“But unless we reform our tax system, the benefits of growing wealth will come with significant costs in the form of inequality and economic inefficiency.”
Australia currently does not tax wealth and collects “very little” income from capital gains, Richardson added, and they may continue to keep doing so.
“However, such choices make it hard to argue that Australia ‘can’t afford’ to provide healthcare in the years to come to what will clearly be the wealthiest generation Australia has ever known.”
As the years go by, wealth inequality will continue to worsen, he added, with most wealth currently in the hands of those over 55 years old.
“In the coming decades, not only is the wealth of Australians likely to grow rapidly but that wealth will almost certainly flow primarily to those aged over 55.”
Looking at the data in a different way forces us to question the assumption that the ageing population imposes a burden on future generations, he said.
“The future generations are going to have to ensure that the rich and very rich old people assist the poor old people in their communities.
“We have misallocated our worries towards thinking that the problem is one of entitlements to government services when it is not.”
Australian wealth at a ‘record high’
“Australians have never been wealthier,” independent economist Stephen Koukoulas wrote for Yahoo Finance.
He pointed to data from the end of the March quarter that revealed total household wealth in home ownership is 565 per cent of annual household income.
“This is a record high, and up from around 300 per cent in the mid-1990s,” he wrote.
The value of Australia’s property market is also at historic highs and earlier this year surpassed $8 trillion.
This makes property the number one pillar of Aussie wealth, said CoreLogic head of research Eliza Owen.
“This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock combined,” she added.
But as wealth balloons, concerns about inequality are also growing.
A recent report by UNSW’s City Futures Research Centre described the runaway house price growth as a “triple crisis” widening the gap in wealth and income inequality and threatening the national economy.
Meanwhile, wage growth is also moving along at a glacial pace, and in the June quarter rose only 0.4 per cent, meaning millions of Australians are having to make do with less.