Forty years ago, the big prediction of economists was that people would not know what to do with increased leisure time as more labour-saving devices came on the market and employees negotiated ever shorter working weeks. Now the employed are spending ever more time at work.
Forty years ago, unemployment rates of more than 3 per cent were considered a social catastrophe – even in the 1961 recession – and no-one imagined that it would be a decades-long scourge from the 1970s on.
It is a brave economist or social engineer who attempts to look 40 years on. The Intergeneration Report (Budget Paper No 5) does precisely that. Like all economics, it is laced with assumptions. But it is better to do the projections on current trends than to remain in the dark.
Several parts of the report are clearly aimed at justifying this year’s cost cutting. The projections on the Pharmaceutical Benefits Scheme are based on the steady increased costs that have come with the pharmaceutical revolution of the past 25 years, particularly the past two years. Such revolutions do not last forever – the industrial revolution of the 19th century, the huge boosts in agricultural output in the 1960s and the information technology revolution of the 1990s, peaked and slowed. Newer bio-technology and genetic solutions to health are likely to cause the pharmaceutical outlay to plateau – as diseased organs are replaced or re-engineered.
But the big hike in PBS costs this year is justified.
The assumption that as the population ages, health costs go up commensurately. The correlation can be questioned. High health costs tend come in the few weeks before death – whether at 60 or 80. The fact that those under five are big health consumers is not considered. And there will be fewer of them.
On the other hand, the report assumes that education costs will go down with an aging population as the proportion of young people falls. But what if those older people need and want more education to keep up with technological change. The baby boomers have watched their parents’ difficulties with coping with new gadgets, especially the internet. They are likely to avoid that by demanding more education – not less. The growth in the University of the Third Age is testament to the folly of this assumption. Moreover, the report does not project large increases in research and development – which might underpin higher living standards in the long term.
The assumption that people will continue to leave the workforce at around 60 might be misplaced. The assumption that the workforce has shrunk has justified the revamp of the disability allowance to get more people into the workforce.
The report acknowledges the difficulty of predicting productivity, but does so by averaging. Productivity tends to come in spurts with technology. For example US productivity defied gravity through information technology while Japanese productivity languished despite its earlier industrial miracle. Who knows where the next spurt will come from.
But governments are often attacked for not thinking in the long term. The importance of this statement is not in the detail of what what it says, but the fact it says something at all and that it is sub-titled Budget Paper No 5 – indicating that it will be an annual exercise and that after this first one, debate and reaction should improve future ones, alerting policy makers to long-term possibilities.