An ageing Australia or keeping the States – which do you prefer?

Dr Lionel McKenzie

8^th Shed a Tier Congress

Albury 19-20 July 2003

First, let me say how much I welcome the opportunity to speak on a subject that is of pressing interest to all Australians, not just older Australians, in the context of whether we can actually afford to keep our federal system for another century, indeed even for another fifty years.

More than a century ago, our founding fathers built the present system on pre-existing foundations, the former British colonies in Australia. That which seemed a sound pragmatic solution to the practical problems faced by those separate colonies at the beginning of the twentieth century, federation has now become a major liability at the beginning of the 21^st century. Just how much of a liability becomes evident when we consider how much it costs us to keep it running; and how much we lose in keeping government accountable.

The cost of keeping the States and Territories in this current fiscal year will be $52 billion. More than $30 billion of that will be raised through the GST and will go directly to the States. The remainder is income tax revenue that goes to or through the States in tied grants. The Treasury doesn’t even count as Commonwealth revenue the amount raised through the GST because it is earmarked for the States.

My view is that that money could be better spent. How it could be better spent is in part what this discussion paper is going be about.

But before I launch into that discussion, I would like to set the scene, which is where I see Australia heading over the next half century.

Two time bombs are ticking away in Australia. Both are going to go off within that period of time and both are demographic. One is our increasing population fuelled by a migration program now running at about 135,000 a year. Neither major party has the political will to start defusing that time bomb by winding back the migration program to half what it is at present. Within fifty years our population will reach 27 million, the equivalent of another two cities the size of Sydney. This increase in population will occur as our agricultural production declines, mainly due to loss of productive soil through salinisation. Very soon we are going to have more people than we can feed and still maintain our export income. That’s one time bomb – increasing population and declining agricultural production.

The other one is an ageing Australia. Also within the next fifty years, more than a quarter of our population will be aged over sixty-five. Older Australians will be dependent on pensions that will be funded in full or in part by younger working Australians, of whom there will be fewer – regardless of migration even if kept at its present level and the birth rate, which will continue to fall. The Treasury, in its Intergenerational Report, which was budget paper no .5 of the 2001-2002 budget, predicts that there will be an $87 billion shortfall under existing revenue arrangements.¹

So the question becomes, Where will the money come from to support this ageing population?

The ageing population time bomb

No-one at present has any clear idea where that money is going to be found without running a large deficit and/or imposing a heavy tax burden on the next generation of taxpayers. However, the Coalition government has a few ideas that are worth more scrutiny than they have received to date.

They comprise progressively moving the big ticket items, health and education, off-budget. This means the privatisation of both health and education through the introduction of two-tier system in both of those areas.

We are already seeing the implementation of these policy directions in the current proposed changes to Medicare and funding of higher education through increasing full fee paying students and imposing HECS. The Federal Government is also looking at ways of getting older Australians to pay for their own health and aged care by unlocking the equity in the family home. Australia has one of the highest levels of home ownership in the world – more than 90 percent of Australian couples over sixty own their own homes and probably would like to pass them on to their own children. Meanwhile back in Canberra, the Senate Committee on Superannuation has other ideas; it is canvassing the possibility of requiring older Australians to take out reverse equity mortgages to fund their retirement.

The second time bomb therefore is an ageing Australia. To defuse this time bomb, the Coalition government plans to find the savings needed to cover the $87 billion budget shortfall in 2041 by privatising both health and education, and possibly tapping into home ownership. The sale of Telstra for $30 billion is part of this agenda.

But there is one source of revenue which, if it weren’t for conferences like this, wouldn’t be allowed by the major parties or the media moguls to get on the agenda of political discussion. That is the substantial savings that would be made if we simply abolished the States and Territories.

It is fitting that where federation itself was born we should have come together to make arrangements for its dignified interment at the term of its natural life. Nearby Corowa was the epicentre of constitutional change in this country more than a century ago. Today at Albury-Wodonga the centre hasn’t shifted too far. The Howard government is desperate to stay in power to push its agenda, even to the extent of proposing constitutional reform so that they can get their current legislative program through a recalcitrant Senate. The time is indeed ripe to start proposing genuine constitutional reform – namely, the abolition of the States.

The three pillars of Australian society and the Intergenerational Report

It is on this subject that I now want to focus attention in the context of how we maintain Australia as most of us have known it. That Australia has provided:

• fair and equitable access to higher education for younger Australians regardless of the socio-economic status of their parents;

• free hospital care for all Australians under Medicare, as well as a rebate on the cost of going to see a doctor; and

• a secure retirement for older Australians.

All three of those pillars of our society are in the process of being undermined by the Coalition government. They are doing it, moreover, under the mantra of intergenerational equity. Greater Orwellian doublespeak you could not imagine.

I mentioned just before the Intergenerational Report put out by Mr Costello in his budget before last. That widely unread document – it is already out of print but can be accessed on the internet - sets out the Howard government’s vision for Australia in 2041, if you can call it that. It also tells us how we are going to get there. We are going to get there by accepting that there are no policy options other than those which the government is already pursuing. If pursued to their conclusion, these policies will effect the demolition of the three pillars of our society in the name of intergenerational equity.

The definition of intergenerational equity used in the Report itself is unobjectionable: it is defined as fairness in the distribution of public resources between generations of Australians, an objective which all of us would support.²

The foreword of the Intergenerational Report proudly announces that is Australia’s first. It says that the Report “provides the basis for considering the Commonwealth’s fiscal outlook over the long term, and identifying emerging issues associated with an ageing population.” The Report follows from the government’s Charter of Budget Honesty Act 1998. This Act prescribes that “’An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including the taking account of the financial implications of demographic change.’”(p. iii)

What the Report goes on to claim is that Australia’s ageing population is not sustainable. It claims that we are heading for a crisis if expenditure on health, education and the provision of income support to an ageing population are maintained. It makes its projections as a percentage of gross domestic product (GDP). The Report predicts that the current generation of taxpayers is likely to impose a higher tax burden on the next generation. The gap between spending and revenue is projected to grow to about 5% of GDP in 2041, or $87 billion in today’s dollars.

I’m sure you’ll all agree that’s a lot of money to find, especially if we don’t increase taxes and we want to maintain spending on health, education and income support at current levels in real terms. The Report therefore focuses on health and aged care, social safety net payments and education. These areas are the most sensitive to population factors, and comprise so-called ‘demographic’ spending.

An ‘efficient’ medical health system

The first priority that the Report identifies to deal with the looming crisis, apart from balanced budgets, is “to maintain an efficient medical health system, complemented by widespread participation in private health insurance.”³

A greater inefficiency in the expenditure of health dollars than propping up an inefficient private health insurance industry one could not imagine. Yet the Howard government wants us to believe its subsidy to private health funds of about $2.5 billion, raised through the Private Health Insurance Rebate, is helping to maintain an efficient medical health system.

The government’s ‘A Fairer Medicare’ package announced in the current budget will cost $400 million of which $346 million is to pay for incentives to doctors to bulk bill concession card holders. The effect of this will be to create a two-tier system, and dismantle universal Medicare.

If doctors are not already bulk-billing concession card holders, they will have to raise their fees for private patients to make up for the money they will lose by taking up this offer. A cross-subsidy will be exacted by the poor receptionist in the doctors' surgery. She (or he) will have to ask low income earners to compensate the doctor for bulk-billing concession card holders. Only a lazy government, destitute of ideas about how to fund health care could come up with this shabby measure - and claim it in the name of fairness!

A more constructive measure would be to increase the Medicare benefits fee schedule and the Medicare rebate. However, it would need to be done on a differential basis to solve the shortage of doctors who bulk-bill in regional and rural Australia. The Government’s ‘A Fairer Medicare’ package offers differential incentives to GPs to bulk bill concession card holders depending on where they live. This is an attempt to encourage more doctors to bulk bill concession card holders in rural and regional Australia. If you had a differential Medicare rebate based on the same criteria of geographical need (that is, cities, outer-metro, regional cities, country towns and rural), the effect would be to redistribute the medical workforce by giving income parity to rural GPs. Inner metro areas have an over-supply of doctors; in the country as you know there is an under-supply. The pressures on doctors to bulk bill in the inner metro are already high because of competition and volume of patients. If rural doctors could earn the same income as their city counterparts, and possibly even see fewer patients to maintain that income, there would be a market-driven influx of doctors into rural practices and those already there would have every incentive to stay.

To illustrate by way of a rough example: Say an inner city GP sees 20 patients for an increased rebate of $6.00 for a standard consultation, which would mean lifting the current rebate from $25.05 to $31.05. If that doctor is bulk billing, he or she would gross $621.00. If, by contrast, a bulk-billing rural GP saw only 15 patients for a rebate of $41.05, or $10.00 more, that GP would gross $821.00, or $200.00 more than his or her city counterpart. Alternatively, to earn the same as his or her city counterpart that GP would be able to see five fewer patients.

A differential Medicare benefits fee schedule and rebate, based on similar criteria to those which the Government has already used in offering differential incentives to doctors to bulk bill concession card holders would have another effect. It would mean that the ad hoc measures to get more doctors to bulk bill in the bush through retention payments, bonding medical students and recruiting foreign doctors could all be dispensed with. Rational market behaviour could be left to solve the problem.

17 million Australians live in the capital cities, provincial cities and regional centres; the remaining 3 million live in the country. If every GP was given a flat $6.00 pay rise per consultation, it would cost $600 million, according to Professor John Deeble, one of the architects of Medicare.⁴ Of course I haven’t been able to do economic modelling on my proposal, but on a rough estimate it would cost about $1.5 billion. This is equivalent to a flat, across the board pay rise of $12.00. If I’m in the ball-park, this is still a billion dollars short of the private health insurance subsidy. I would spend the balance on more residential aged care places, training more nurses and giving them higher pay, especially aged care nurses to narrow the pay gap compared with acute care nurses.

Far from promoting efficiency, the Government’s subsidy of $2.5 billion to the private health insurance industry does the opposite. It also shows that the Government can selectively dispense with its economic rationalism when it has to accommodate powerful interest groups. What has happened with the private health insurance industry is that, after having received a boost with this injection of taxpayer money in 1998, it is now in its historical downwards spiral again. This is because younger, healthier Australians have done their sums and are either not joining or starting to drop their private health cover, once again forcing up premiums and obliging the funds to limit their products.⁵

The other reason is that the private health insurance industry cannot compete with Medicare. Ergo either Medicare goes because it is a monopoly; or the private health insurance industry has to go. No prizes for guessing what the Howard government wants to see happen. Its claim that subsidising private health insurance makes the delivery of health care more efficient is a reflection of the influence both of private health fund executives on Liberal health policy and of a wider agenda to privatise health care. It has nothing to do with intergenerational equity or even with rational market behaviour, to which the Howard government would have us believe they are unswervingly committed.

Alternatively, it could be argued that $2.5 billion being wasted on the private health funds in the name of efficiency is happening when people can wait all day in casualty departments of public hospitals, and still not be seen. If that money went to public hospitals each year it would halve all hospital waiting lists throughout Australia. The beneficiaries of this 30 per cent tax rebate are mostly high income people who already had private health insurance. Seventy percent of people with private health insurance earn over $70,000 per year.

I recognise that you can’t spend the same money twice: either a differential Medicare rebate, training more nurses and paying them better; or reducing waiting lists in public hospitals - but not both. Is there any other source of revenue apart from the PHIR so that we can do both?

The answer is Yes, if we think outside the square. The total cost of health care in Australia is $31 billion per year. The untied money that goes to the States through the GST each is running at $31.7 billion and rising. Some of the GST money that goes to the States and Territories is to fund free public hospitals and supplements the direct grants from the Commonwealth. However, the States’ contribution is only 25 per cent and falling. It seems to me to be more efficient for the Commonwealth to appropriate the States’ share of the GST that goes to public hospitals, and to take over fully the funding of our public hospital system. This seems preferable to entering into agreements to force the States to maintain their share of funding. But if the Commonwealth did that, and also did likewise in the other major area, education, wouldn’t it more efficient and more cost effective simply to abolish the States?

The three pillars of our health care system

I have said that there are three pillars to our society: fair and affordable access to education, universal health care, and secure retirement for older Australians. There are also three pillars to Australia's world-class health care system. They are Medicare, free public hospitals and the Pharmaceutical Benefits Scheme (PBS). To shore them up when the Federal Government is already knocking them down, we need to find new sources of funding. The money can be found by re-directing the tax revenue from the private health insurance subsidy - and abolishing the States.

If the Howard government were to remain in office until 2041, at the end of that time there would be no universal Medicare, only private health insurance. There would be no public hospitals, only private hospitals operating on a full fee-paying basis and nursing homes likewise. Most likely also, they would be owned by drug companies. That, friends, is how the Howard government is going to fund the projected $87 billion shortfall, two-thirds of which (or $62 billion) is projected to be on health and aged care.

Containing the cost of the PBS

Another Government priority as set out in the Intergenerational Report is containing the growth in the PBS, which is estimated to become one of the most significant areas of future spending pressure on the Commonwealth.⁶ This scheme, as you know, subsidises selected pharmaceuticals and provides access to affordable medicines for all Australians. The drug companies would be happy to see this scheme dismantled because there are aspects to its operation that have the potential to limit their already massive profits. To get their drugs listed, they have to be subjected to evidence-based assessment as to their cost-effectiveness. The Howard government, under the guise of keeping down budget costs, intends to dismantle this scheme along with Medicare. Coincidentally, or perhaps not so co-incidentally, this will serve the interests of the multinational drug companies.

How is the government going to do this without incurring an electoral backlash that would make the proposed sale of Telstra pale into insignificance? Before I explain how they are going to do it, no-one should be under any illusions about how much of a target the PBS is for the Howard government. Mr Costello said in reply to a question after his speech to the Sydney Institute last Wednesday night (16/7/03) that the ballooning cost of the PBS was taking money away from defence and security, in short, the war on terror. Funding the war on terror seems to have become more important than providing affordable drugs to Australians, more important indeed than intergenerational equity, otherwise much beloved of Mr Costello.

Free trade agreements and globalisation

Australia has just signed in semi-secret two sections of the General Agreement on Trade in Services (GATS) covering dental services and provision of private health care. The Government hopes to conclude a free trade agreement with the United States by the end of next year. In the health area, the main impact of such an agreement, which will be enforced by the World Trade Organization (WTO), will be to expose the PBS to legal challenge. This is because the PBS provides a subsidy to some drugs but not others; requires evidence-based assessment; and places limits on advertising by drug companies. Both the subsidy scheme and these further requirements may have to be removed, that is, the scheme dismantled, as they would be considered a barrier to trade. The Howard Government anticipates that the main pressure on the health budget caused by the rising cost of the PBS will be removed after we sign a free trade agreement with America. And this won’t happen over the long term. It may happen before the end of next year if the Coalition remains in office and the US comes to the party.

A possible scenario is that a drug company may be aggrieved that one of its expensive drugs, which cost $5 billion in R&D and another $10 billion in manufacturing and marketing, did not qualify to be listed on the PBS. Non-listing would deny it access to a two per cent share of the global market (which is what Australia constitutes). The drug company will take the Commonwealth Government to the WTO or possibly even just to the High Court of Australia. The subsidy of some drugs and not others will be found to illegal under the free trade agreement. That will be the end of PBS. And overnight drugs will double or triple in price up to the levels they sell for at present in the United States, Canada and the UK. Instead of copping the blame, the Government will be able point its finger at the High Court or the WTO. It will lament that this was a wholly unforeseen and truly regrettable consequence of entering into an otherwise estimable agreement, an agreement, moreover, that serves Australia’s national interest, especially trade in agricultural products.

GATS and local government

Perhaps I may digress at this point to consider the effect of GATS and any future free trade agreement with America on local government as a way of presenting my understanding of how free trade agreements work.

This conference is dedicated to the proposition of abolishing State governments. Not all of us here agree on what model of local government we should put in place after abolishing State governments. My own preference would be simply to retain the local government structure we now have as we have all had experience of it, and we know that it works. But if we sign multilateral or bilateral free trade agreements, our whole discussion here may indeed become academic. Such agreements may limit the capacity of both State and local governments to provide the goods and services they currently provide. It merely has to be proved before the WTO or probably just the High Court that the activities of State and local governments constitute a barrier to free trade. Not to put too fine a point on it, local democracy in whatever form will become moribund in this country.

Local government, through its peak body the Australian Local Government Association (ALGA) has urged the Commonwealth to ensure that the provision of a public subsidy (by any sphere of government) is not interpreted as a barrier to trade.⁷

ALGA, according to its submission to the Department of Foreign Affairs and Trade (DFAT), has been unable to determine what impacts trade liberalisation may have on the solid waste management and the critical water supply sectors. It has therefore urged the Commonwealth, prior to further negotiations, to undertake a detailed investigation of the potential impact of GATS-related determinations in these sectors. However, the negotiations are proceeding with very little public knowledge or discussion.

Under GATS, as ALGA explains, member governments are required to ensure sub-national governments observe GATS-related obligations and commitments. All services are covered, except those "supplied in the exercise of governmental authority". By entering into proposed new international commitments the Commonwealth obligates the other spheres of government to do or rather not do certain activities that they are currently performing.

Local democracy at a sub-national level therefore may be in some jeopardy. The extent of this jeopardy can only be fully appreciated when it is remembered what local government does for local communities. Local government in Australia offers a very broad and expanding range of services. They are all described in ALGA’s submission.

For example, local government operates ports and airports, protects the environment, provides welfare and aged care services, maintains the bulk of Australia's road network and plays a critically important role in the nation's health through environmental health measures, regulatory functions and waste management. In many parts of Australia, local government is also the major provider of water and sewerage services.

There are 720 local governing bodies across Australia, employing some 152,500 people. In much of rural Australia, local government is the major employer, thereby underpinning the viability of many communities

Collectively, local government is a significant sector of the Australian economy. In 2000-01, local government collected around $6.4 billion in property taxes (rates) and was responsible for maintaining around 84% of Australia's road network (683,893 km). It invested almost $16 billion in Australia's local communities, including:

• $4.5 billion in transport and communications

• $3.6 billion in housing and community amenities

• $2.1 billion in recreation and culture

• $820 million in social security

• $2.6 billion in general public services.

The forced removal of subsidies, on the basis of being a barrier to trade, would entrench inequity, particularly where the delivery of community services is not commercially viable. Foreign companies disputing local regulations (made in support of community interests) on the basis that they could constitute a barrier to trade may expose local government to considerable and burdensome dispute processes. As ALGA points out, local government has little if any expertise and does not have the financial resources to respond effectively to disputes in this area.

So to return to my main subject, the funding of health care, it is not just the PBS that is in danger if we sign GATS or a bilateral free trade agreement with the United States. It is the viability of local government itself, no matter which model of local government we may support.

An affordable and effective residential aged care system

Yet another priority of the Intergenerational Report is to develop an affordable and effective residential aged care system that can accommodate the expected high growth in the number of very old people (people aged 85 and over).⁸ Once again in translation this means affordable to the Commonwealth budget. The implication is that the user will be expected to be able to afford residential aged care by paying for it from private assets, primarily equity in one’s own home. If the user pays, then the taxpayer does not have to foot the bill. Brilliantly simple logic from an ideological standpoint. It merely overlooks the fact that not all Australians own homes in high growth urban areas. Many Australians, especially those living in regional and rural areas, would find the equity in their home exhausted long before their exit the nursing home. Rural and regional areas, moreover, are likely to have a higher proportion of aged Australians. For a lot of lower income Australians, the Federal Government envisages that they will be increasingly cared for at home by their family or by local government unless they can substantially fund their nursing home care from private savings.

A well-targeted social safety net and mature age employment

Two additional priorities identified by the Report are preserving a well-targeted social safety net that encourages working-age people to find jobs and remain employed and encouraging mature age participation in the labour force.⁹

The reality is that the buoyancy of the labour market will continue to impact on the success of job seekers regardless of age. The majority of older workers (generally from 45 onwards) face a difficult task in obtaining employment following voluntary or involuntary redundancy. There are a number of factors contributing to the difficulties and complexity of the job search for older workers, including:

• structural adjustment in industries (manufacturing, mining and agriculture) displacing workers with a mix of skills no longer in demand;

• competition from younger and more highly skilled workers for a fixed pool of jobs; and

• a government funded income security system, or safety net, for people looking for work/eligible retirees.

Because the drain on the budget will increase to provide income support to non-working Australians, of whom a larger number will be between 45 and 65, the Howard government will progressively withdraw this safety net in the name of ‘careful targeting’. It is another example of Orwellian doublespeak designed to avoid disclosing its intention to make more people fall outside the safety net than into it. These people will be forced to compete harder and longer for a fixed pool of jobs for which they will lack the skills needed to make them competitive.

Retirement incomes policy

The final priority of the Intergenerational Report is to maintain a retirement incomes policy that encourages private saving for retirement, and reduces future demand for the Age Pension.¹⁰

What the Report does not point out is that some 33 per cent of the Australian population over 20 are dependent on a pension or benefit of some sort. One in three voters is dependent on the Commonwealth government for their direct well-being.¹¹ 20 per cent of this third of the population are pre-pension age; the other 80 per cent are of pension age. The trend is that the proportion of people of pre-pension age dependent on welfare is increasing, not decreasing. If this happens, as more people reach pension age with fewer people of working age to support them, more of those few will themselves be dependent on income support.

The proportion of people dependent on transfer payments during their working age may continue to rise as a result of the rapid change in economic and social conditions. If this occurs at the same time as the proportion of older people starts to expand significantly after 2015, the potential expense will soar in line with Treasury predictions. As the Report foreshadows, we will see both increasing efforts to encourage older Australians to become more self-reliant in old age, which may mean more HACC and less residential care unless you can pay for it, and a more targeted qualification for the age pension.

Increases in the age pension are tied to increases in average weekly earnings whereas increases in family payments are tied to the CPI. If there is real growth in wages over this period, pension-age Australians will have incentives to arrange their affairs so that they can go on the pension.¹² At the same time working age Australians dependent on transfer payments linked to the CPI to supplement family income will be squeezed hard.

The government is already implementing its policy to prevent people taking advantage of a wages-adjusted age pension. That policy is simply to keep raising the pension age. If Australians are living longer, the Government will make them live longer before they qualify for the pension. By 2041 it is not unreasonable to speculate that the pension age will have been raised progressively to 70 for both males and females.

The Coalition government’s policy for the next forty years: moving the ‘big ticket’ items off-budget

It is clear, then, that Government policy boils down to only one thing: moving the big expenditure items off-budget.¹³ This means increasing privatisation of health care, despite the official rhetoric about maintaining a universal health care system based on the three pillars of MBS, PBS and free public hospitals. With a projected revenue shortfall of $87 billion in 2041, what viable alternatives are there?

The only one I believe is to appropriate the full amount of the GST to the direct funding by the Commonwealth of health, as well as education and the other areas to which the GST eventually finds its way via State governments.

The medical indemnity crisis

Before I move on from health and ageing, it would be remiss of me not to mention the incapacity of the States, especially SA, WA, Tasmania and the ACT, to undertake medical negligence tort law reform in a uniform way. The cost of medical indemnity cover and the liability of doctors to be sued long after the incident is contributing to the exodus of doctors from rural practice in those States, of which two, SA and Tasmania, have the highest proportion of older Australians. A no-fault, capped national insurance scheme is needed, as well as tort law reform. It has now been demonstrated that the States are incapable of doing that. The solution, therefore, is the abolition of the States.

The population time bomb

Now I want to turn briefly to consider the other time bomb – the population time bomb. If it continues to tick away at its present rate as driven by the migration program, it will ensure the degradation of our natural infrastructure. This will occur to such an extent over the next forty years that we won’t be able to generate enough export income from the agricultural sector to pay for the imports that same increased population will suck into the country. When this time bomb goes off, it won’t really matter whether we abolish the States. The Treasury projection of only an $87 billion shortfall will be blown away, and Australia will be in irreversible social and economic decline. Needless to say, if this happens Australia will also experience political turmoil on a scale not known before in our history. We shall be facing ‘failed nation’ status.

As I noted earlier, our population is projected by ABS to rise to more than 27 million over the next four decades, or another two cities the size of Sydney, if migration runs at its current level of 135,000. Australia, the second driest continent after Antarctica and with the poorest soils, consumes more water per capita than any other country on earth. This is because agriculture in the Murray-Darling Basin depends on irrigation. Irrigation, together with land clearance, brings salinisation. Large agricultural areas will go out of production because of salinisation over the next forty years. The Murray-Darling system, the food bowl which accounts for more than 40 per cent of the gross value of agricultural production, will begin to produce less as our population increases by one-third what it is at present. It doesn’t take too much imagination to foresee what the consequences for living standards, as well as taxation revenue, that outcome will have.

The Intergenerational report on the impact of federalism and population growth on the environment

I would like to turn back to the Intergenerational Report to review what it has to say about the environment on which the continued growth of the economy will depend. The first thing to note is that the Report considers the environment, unlike health and education, to be unaffected by demographic factors. This assumption is nonsense as we shall see in a moment. However, the Report recognises that “Australia’s environment provides natural capital, offering many essential services. It provides ecosystems that regenerate natural resources and assimilates the waste of people and industry, recreational benefits and inputs to industry. In addition, it has important cultural significance. Deterioration of our natural capital would be likely to affect the wellbeing of current and future generations, reduce the economic base and consequently affect intergenerational equity.”¹⁴

No-one would dispute any of those claims. Unfortunately, the Howard government washes its hands of the management of this key area. The Report leaves it to the States and local government, together with the market. The Report states, for example, that “the States have wide responsibilities for environmental matters, so often State or local governments can intervene most appropriately. In addition, increased demand for environmental quality is likely to provide new market opportunities for the private sector, leading to more environmentally friendly production.”¹⁵

At the very least these comments reflect an ideologically driven belief that the market will take care of the problem with some assistance from the Commonwealth in the form of token funding. This belief in the rationality of market behaviour in managing the environment is dangerous in the extreme and is contradicted by the State of the Environment Report 2001, on which the Intergenerational Report ostensibly relies.

The SOE 2001 report states:

There are clear market failures in that the costs of degradation to downstream users and to the environment, where known, are not borne by those benefiting from the upstream exploitation of the landscape. In many cases the costs will be borne by future generations. Rational market behaviour at the enterprise level will cause (and has caused) serious and irreversible offsite impacts to biodiversity, rural infrastructure and downstream water users, as well as causing unnecessary hardship to landholders [SOE 2201 quoting PM's Science and Engineering Innovation (PMSEI) Council 1998 p. 11]