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Social Policy Analysis: Productivity Commission Act 1988
The Australian Government's Productivity Commission was asked by Commonwealth Government, under the Productivity Commission Act 1988, to produce a report on the economic implications of an ageing Australia, on the 24th June 2004.
It was delivered in March 2005 and covers over 400 pages, entitled The Economic Implications of an Ageing Australia. The Productivity Commission is the Australian Government's principal review and advisory body on microeconomic policy and regulation. It conducts independent public inquiries and research into Australian economic and social issues. The Productivity Commission's independence is underpinned by Act of Parliament. Its processes and outputs are open to public scrutiny and are derived by concern for the wellbeing of the community as a whole.
This document's subject is death and taxes. Simply put, it deals with the mortality rate of Australians over the coming forty years and the impact this will have on the Australian welfare state, which is supported by taxation and governed by fiscal policy. Since mortality can not be said to be policy issue we must focus on taxes.
Taxation comes largely in two forms, direct and indirect, according to standard economic theory, the Federal Government commissioned this report to assess how best to collect taxes from an ageing population who are no longer paying direct taxes, because they are, or no longer will be, working. Some figures will give us an improved understanding:
- One quarter of Australia's population will be over 65 by 2045.
- People aged over 55 years have significantly lower labour force participation rates, with overall rates projected to drop from around 63.5% in 2004 to 56.3% by 2045.
- The aggregate fiscal gap is projected to be about $2200 billion by 2045.
These three statistics all point towards fiscal policy being the underlying policy issue, not any other area of social policy, although there are complementary area which could be relevant, such as health policy, which would focus more on the health of the ageing population; or technology policy, which would focus more on the impact of technology at keeping the population young; or immigration policy, which could import a young population from overseas. None of these policy areas is the focus of this report, however. An additional benefit of focussing on fiscal policy is that it is clear and measurable, meaning that we can analyse the truth behind its policy claims with simple calculation, although we will not propose so to do.
As a policy document it is purely analytical; it is positive, not normative, choosing description over prescription. The assumptions behind this document are economic, with emphasis on limited factors of production, and the need for benefit payments. Benefits are strongly age-related, with about 80 per cent of the population aged over 65 years receiving an Ago or Service Pension; as age increases the number of people receiving a Disability Support Pension increases. The majority of children aged between 0 and 15 years are covered by Family Tax Benefit.
Age Pension is intended as a safety net for individuals who have limited opportunity or capacity to save for retirement. The age of qualification is 65 years for males and for females it is being gradually increased to 65 years. This is clearly an example of current sex discrimination which is being addressed. Qualification is also subject to the income and assets tests. In 2003 - 2004, Age Pension outlays were $19.5 billion, representing 2.4 per cent of GDP. Currently there are over 1.8 million recipients of the Age Pension. Family Tax Benefit has two components, part A and part B. Family Tax Benefit Part A is paid to low and middle income families with dependent children up to the age of 21, and / or older children between the ages of 21 and 24 who are studying full-time and not receiving Youth Allowance or any other Commonwealth payments.
Family Tax Benefit Part B provides extra assistance (over part A) for families with only one main income earner, particularly for those with children under five years. It is paid to families with dependent children up to the age of 16, and dependent children aged between 16 and 18 years who are studying full time. In 2003 - 2004, Family Tax Benefit outlays were 12.9 billion or 1.6 per cent of GDP. Other welfare state payments strongly related to ageing are Disability Support Pension, (0.9 per cent of GDP), unemployment allowances (0.7 per cent of GDP) and Parenting Payment Single (0.6 per cent of GDP).
The Commission's analysis suggest that the demographic transition will be large, with the population of the over 65s growing from 2.6 million to just under 7 million by 2045 (this is about one in every four Australians), a projection in line with other estimates (Australian Institute of Health and Welfare 2002, Borowski and Jing 1992, Commonwealth of Australia 2002, Jackson and Felmingham 2002, Kinsella and Velkoff 2001, United Nations 2000). Also, the Myer Foundation has a significant interest in the ageing Australian population, linking it with several key policy areas such as community care, housing, administration, funding and industry planning. The Myer Foundation has a significantly different policy remit from the Productivity Commission.
Its research, entitled 2020: A Vision for Aged Care in Australia, is much more fanciful, speaking of attitudes in a way the Commonwealth government commissioned report would not; for instance the Foundation has set out on its own journey, inspired by a Vision that the best possible care should be provided for ageing Australians, who need it. The commissioners of this text, Mr Baillieu Myer and Sir Arvi Parbo, aged philanthropists both, have produced a social policy document which is highly prescriptive.
The methodology of the Myer Foundation is to use case-studies as suggested by Bridgman and Davis (Bridgman and Davis 2004), but I suggest that the imaginary nature of these case studies is beyond belief.[i] For example, the Myer Foundation is a business that relies on other businesses, generates biased figures and is unable to implement public policy; its document on speaks of consulting firms such as Allen Consulting.
Returning to the Australian Government's social policy, further proof of the fiscal preoccupation of the Commonwealth Governments is the National Aged Care Workforce Strategy, announced by acting Minister for Health and Ageing and Minister for Ageing Julie Bishop, on the 21st March 2005. This is part of the Minister's National Strategy for an Ageing Australia, but it is primarily about the economic impact of the ageing workforce's incapacity to work, which increases the Government's fiscal risk.
The concluding section of the Economic Impact of an Ageing Australia covers the vertical fiscal imbalance and fiscal pressures (Productivity Commission 2005, pp. 385 - 401). The Australian Government raises more revenue directly than it spends. Its major revenue sources are income taxes, the Goods and Service Tax (explicitly collected on behalf of State governments) and excises.
Income taxes levied on businesses and individuals comprise 55% of the total taxation revenue raised by all tiers of Australian governments, GST comprises 13% and excises 9%, but State governments rely on the Federal government for income relating to their expenditure on those areas required by the ageing populace, primarily healthcare. Thus there is increasing fiscal imbalance between the needs of the ageing population and the ability of the State governments to provide for those needs. An appropriate solution is not, however, suggested by the Productivity Commission's paper because of its positivistic nature.
On an international level, the economic impact of ageing population is receiving the attention of policy makers. The United Nations' Department of Economic and Social Affairs produced a report Charting the Progress of Populations (United Nations 2000) which has a much more valued approach to managing ageing populations, with many more normative assumptions, leading to a much more valuable document. Certainly it is more interesting.
For example, the fiscal assumptions behind the Productivity Commission's paper might have come about because its principal commission, the Treasurer Peter Costello, has fiscal responsibilities, whereas the United Nations, by way of comparison, has a much more historical view, and is not influenced by politicians such as Peter Costello. This historical method is shared by other leading demographers (Hugo 2001, Khoo and Macdonald 2003, Shyrock and Siegel 1973, 1976). In my opinion, this historical approach could be incorporated into policy on ageing population, because it would make clear that the current state of population trends can not necessarily be extrapolated forty years ahead. Certainly it cannot be where purely fiscal matters are concerned.
The reason for this is that economic analysis is very good at describing, but not necessarily well for making decisions, which require historical judgments, in my opinion. Because all policy makers must make decisions, it would seem that economic analysis is therefore not the best method for policy research, but an example would strengthen this assertion:
The 2002 Intergenerational Report examined the fiscal effects of an ageing population from an Australian Government perspective. Following a request from the Council of Australian Governments, the Government asked the Productivity Commission to undertake a research study examining the productivity, labour supply and fiscal implications of likely demographic trends over the next 40 years for all levels of government. (Productivity Commission, 2005, p. III)
Thus, social policy issues are not appropriately dealt with using economic projections into the future However, since the report was commissioned by the Treasurer, Peter Costello, the Productivity Commission was not in a position to follow its instincts to use purely demographic values, as the United Nations was able to do, for example (United Nations 2002). The author of the Productivity Commission report, Gary Banks, is complaining to Peter Costello about this double-bind, when he concludes that Timely action would avoid a need for costly or inequitable 'big bang' interventions later.
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Population ageing can only be conceived as a crisis if we let it become one. (Productivity Commission 2005, p. XII) Big bang might be a historical reference to the rapid economic liberalisation in the United Kingdom in the 1980s, which led to the worst post-war economic depression, but certainly a fiscal policy based only on projections of the future can be improved with historical data.
In conclusion, reducing the policy issues raised by an ageing Australian population to fiscal issues or taxation, both direct and indirect, does not value key social work values of social need, equality or efficiency. (Alcock, Erskine and May, 1998) Death and taxes is not an appropriate way to research population issues, as we have argued The Economic Impact of an Ageing Australia concludes. Instead, an historical approach to demographics, taking into account broader social values and influences, offers a much more international solution to a problem which is not exclusively Australian. The future success of social policy is more probable with an historical approach.
Bibliography
Alcock Erskine, A., May, M., 1998. The student's companion to social policy Oxford, Blackwell.
Australian Institute of Health and Welfare. 2002. Older Australians at a Glance, Canberra: AIHW and The Commonwealth Department of Health and Ageing, 3rd edition.
Australian Treasury 2002, Intergenerational report 2002-03, Budget Paper No. 5, Canberra: Commonwealth of Australia.
Borowski, Allan and Jing Shu, 1991 and 1992. Australia's Population Trends and Prospects, Canberra: Australian Government Publishing Service.
Bridgman P & Davis, G., (2004), The Australian Policy Handbook 2"d Edition, NSW: Allen & Unwin.
Commonwealth of Australia, 2002. National Strategy for an Ageing Australia: An Older Australia, Challenges and Opportunities for All Canberra, ACT: Commonwealth Government Printer.
Hugo, Graeme. 2001. A Century of Population Change in Australia. In Year Book Australia 2001 Canberra: Commonwealth Government Printer.
Jackson, Natalie and Bruce Felmingham, 2002. As The Population Clock Winds Down: Indicative Effects of Population Ageing in Australia's States and Territories Journal of Population Research Vol 19, No 2, pp. 97-117.
Khoo, Siew-Ean and McDonald, Peter, editors, 2003. The Transformation of Australia's Population 1970-2030. Sydney: University of New South Wales Press, pp. 238-265.
Kinsella, Kevin and Victoria A Velkoff, 2001. An Ageing World: 2001, Washington, DC: US Government Printing Office, US Census Bureau (Series P95/Ol-1).
The Myer Foundation, 2002, 2020: A Vision for Aged Care in Australia, The Myer Foundation, Melbourne. Retrieved, 29th April 2005, http://www.myerfoundation.org.au/GroundControl/SiteContent/UserFiles/0000000233.pdf
Productivity Commission 2005, The Economic Implications of an Ageing Australia, Research Report, Canberra, Australia. Retrieved, 29th April 2005, http://www.pc.gov.au/study/ageing/finalreport/index.html
Shyrock, Henry S and Jacob S Siegel. 1973. The Methods and Materials of Demography, (2 volumes) Washington, DC: US Bureau of the Census.
Shyrock, Henry S and Jacob S Siegel. 1976. The Methods and Materials of Demography, New York: Academic Press.
United Nations, 2000. Charting the Progress of Populations (Report ST/ESA/SER.R/151) New York: Population Division, Department of Economic and Social Affairs, United Nations.
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