Academic journal article The Economic and Labour Relations Review : ELRR

A Set of Generational Accounts for Australia: Base Year 1994/95

Academic journal article The Economic and Labour Relations Review : ELRR

A Set of Generational Accounts for Australia: Base Year 1994/95

Article excerpt

1. Introduction

Recent fiscal policy debates in Australia have been dominated by the issue of whether fiscal policy should be generally tightened, particularly in terms of restraining expenditures. Politically, those advocating significant fiscal tightening appear to have won the argument, with the new Liberal/National coalition government elected in March 1996 announcing wide-ranging cuts to expenditure as well as some revenue raising measures. The main arguments put forward for fiscal tightening have been the desirability of reducing the relative size of the public sector in the economy, the need for government to play a role in improving national saving (e.g. FitzGerald, 1993), and more recently, concerns about the fiscal burden to be inherited by young and future Australians (e.g. National Commission of Audit, 1996). This paper provides some perspective on the last mentioned argument.

The generational accounting technique used here was first suggested by Auerbach, Gokhale and Kotlikoff (1991,1992,1994). From the perspective of a base year and given assumptions about future fiscal policies, growth and demographic change, generational accounts show the projected per capita present value of remaining lifetime net payments to government by each generation distinguished by year of birth. Generational imbalance in fiscal policy is gauged by comparing the (full lifetime) generational accounts of newborns in the base year and future generations (born after the base year). In addition, generational accounting exercises can give an indication of the intergenerational redistribution implied by alternative fiscal policy scenarios. Ablett (1996b) presents a brief summary of the generational accounting methodology.

As currently practised, generational accounting does not take account of general equilibrium feedback effects, therefore it can only approximate what would be the true incidence of fiscal policy changes on the welfare of generations. (1) In this regard, research by Fehr and Kotlikoff (1995) suggests the approximation may generally be fairly good. An additional problem with the technique is determination of appropriate discount and per capita growth rates to be used in the calculations. However, it is commonly found in applications that the qualitative conclusions to be drawn from generational accounts are robust against a range of growth and discount rate assumptions.

Despite its limitations, generational accounting has already been applied in a number of countries and its use is spreading. Generational accounts are now published annually as part of the U.S. government budget papers.

The baseline Australian generational accounts for 1994/95 presented in this paper reveal a moderate imbalance in favour of current generations, and thus a reversal of the imbalance evident in the 1990/91 base year accounts (Ablett, 1996a). Such a deterioration in generational balance appears to vindicate the need for fiscal restraint. However, as shown in Section 4, the fiscal constraint implied by recent official government projections should be sufficient to correct the projected generational imbalance. This result should add perspective to discussions of the need for further drastic expenditure cuts. The paper also looks at the effects of migration on the fiscal burden of current and future generations of Australians.

Before presentation of the baseline results (Section 3) and some alternative scenario simulation results (Section 4), Section 2 of this paper explains the adjustment for migration which is used in the Australian accounts. The impact of various migration scenarios on these accounts is examined in Section 5. The results of this section suggest post base year migrants belonging to age cohorts alive in the base year are likely to make a significant net positive contribution to the Australian public sector and hence to other Australians. Furthermore, post base year migration leads to a reduction in the generational accounts of future generations in Australia, compared to a zero net migration counterfactual. …

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