We have arrested the development of our young

I hope you’re not among those silly people who concluded last week’s economic reform roundtable was just a talkfest that will lead to nothing concrete. Breaking news: we have to get together and talk about things before we agree on what our biggest problems are and what we will do about them.

Lots of bits and pieces came out of the roundtable, but by far the most important thing was universal agreement that something had to be done about “intergenerational inequity” – an economist’s way of saying that our young people have been getting a raw deal.

This came after Danielle Wood, the boss of the Productivity Commission, drew on its research to warn we were in danger of breaking Australia’s generational bargain – that our children will live better lives than their parents, as their parents did of their own parents.

Economists, naturally, see this largely in terms of reforming our system of taxes and benefits. The independent economist Saul Eslake summarises this by saying that our tax system “imposes a disproportionately high burden on younger working Australians, and a correspondingly lower burden on older, asset-rich Australians”.

Much of this disproportionate burden is accounted for by a problem we all know about – young people’s inability to afford a home of their own unless they have considerable help from their parents.

But a report to be released on Wednesday by Deloitte Access Economics reveals there’s much more to it than that. (The report has been prepared by Deloitte’s own young people.)

It says there has been an unprecedented shift in how young people under 35 work, vote and live. They’re navigating a version of adulthood that feels less like a rite of passage and more like a locked door.

The Hungarian sociologist Karl Mannheim argued that the economic and social conditions of our youth leave a lasting imprint on collective values, expectations and behaviour.

“Through this lens,” the report says, “Millennials and Gen Z are not merely younger versions of ourselves. They are products of their own formative experiences. The greatest mistake is to assume today’s young people are simply behind because they are young – and that, with time, they will catch up.”

Today’s young Australians are more educated than any generation before them, the report says, yet they face more insecure work and delayed financial independence. They are the first generation to live entirely online, and yet they report rising loneliness.

“They show up for issues and are determined to find balance, but remain locked out of the systems their parents helped to build.

“When the rules were written before they arrived, and the road ahead offers little promise of change, it is no wonder young people feel sidelined. In fact, 42 per cent of young Australians (18 to 24) feel they are missing out on their youth, and 41 per cent worry they won’t be able to live a happy and healthy life as they grow older,” we’re told.

Deloitte has used the census results for 1991 and 2021 to see how people aged 25 to 39 have changed between the Baby Boomers and the Millennials.

For a start, Millennials are better educated. The proportion of young people with post-school qualifications has gone from just under half to almost 80 per cent. The proportion of women with bachelor degrees has gone from one in eight to one in two.

Next, today’s young people are less likely to be married. The proportion which has not yet married has doubled from 26 per cent to 53 per cent. The median age at which the young marry has risen from 27 to 34. And whereas the proportion of 25- to 39-year-olds living as a couple used to be just over half – now it’s one-fifth.

Thanks to better economic management, the rate of unemployment among older young people has more than halved, falling from 8.4 per cent to 3.5 per cent.

The proportion of people with bachelor degrees whose earnings are in the top 15 per cent has risen from 38 per cent to 65 per cent. This may be because more of the female graduates have jobs and are working full-time. We know that the rate of participation in the labour market for all women has gone from almost two-thirds to more than three-quarters.

Now we get to home ownership. We know Millennials are likely to be better educated, more likely to be working and more likely to be in well-paid jobs but, even so, are less likely to be home owners. Whereas 66 per cent of Boomers aged 25 to 39 were home owners, for Millennials, it’s down to 55 per cent.

And whereas by that age, 19 per cent of Boomers owned their home outright, it had fallen to just 6 per cent for Millennials.

Elsewhere, we’re told that the younger generations are having children later, and more than half say they’re unlikely to have children.

The report argues that today’s young Australians are fundamentally different from previous generations, noting that they’ve grown up amid intensifying globalisation, a climate emergency, the rise of social media and now generative AI. Those young enough to have been at school during the COVID lockdowns had their educations significantly disrupted.

The report tells us how much a rapidly evolving labour market and financial instability are narrowing young people’s opportunities for economic prosperity. The way they see it is that the system has persistently moved the goalposts: you stay longer in education, you take longer to earn good money and longer to afford to buy a home. You marry later and have kids later (and maybe don’t have time to have as many as you’d have liked).

Little wonder the report tells us young Australians feel sidelined and unheard by political decision-makers, with only one in three trusting the federal government to do the right thing.

The way I’d put it is that, by our neglect, we’ve allowed our young people to suffer a bad case of arrested development. But thanks to the roundtable, I think we may be ready to do something to give the young a fairer deal.

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Let's stop kidding ourselves. Taxes will have to go up

Before the election, the business press was terribly concerned about the decade of budget deficits and ever-rising public debt the Albanese government had clocked up. Something must be done! After the election, however, when the government pressed on with a move to save up to $3 billion a year by making rich men pay more tax on their superannuation, it was appalled. The sky would fall.

What the two contradictory positions have in common was that both are criticisms of a government few of its business readers would have much sympathy for. But the episode also shows the way voters’ attitudes towards the budget abound in wishful thinking – something the pollies encourage. “You want more, but don’t want to pay for it? Sure, I can do that.”

In Treasury secretary Dr Steven Kennedy’s speech to the Australian Business Economists last week, he showed a graph of the budget’s “structural” deficit stretching all the way out to 2035-36. (The structural component of the budget balance is the bit that’s left after you’ve allowed for the effect on the balance of where we happen to be in the business cycle of boom and bust.)

The structural deficit for next financial year is estimated to be 1.5 per cent of gross domestic product. Kennedy noted that spending on the National Disability Insurance Scheme is expected to reach more than our spending on defence. But he reminded us that (thanks mainly to our good friend Mad King Donald) defence spending is likely to grow a lot in coming years.

And that’s just the feds. The combined state and territory budget deficits are likely to be 1.8 per cent of GDP in the financial year just ending – which is 1.5 percentage points higher than their pre-pandemic long-run average, Kennedy said.

So the states have been really going at it, with their combined debt at the end of this month expected to reach 18.9 per cent of GDP, its highest in the 30-plus years they’ve had control over their own finances.

And yet politicians, federal and state, persist in running election campaigns where they promise bigger and better spending on this, that and the other, without any mention of how it will have to be paid for.

Worse, no matter how much they’ve promised, the Liberals always claim that their taxes will be lower than Labor’s, without this having any effect on their spending on “essential services”. (Perhaps this boils down to a promise not to rely on bracket creep – the “secret tax of inflation” – quite as much as Labor does.)

What the pollies never tell us is that, if you want it, it will cost you. But one woman who is game to tell us what the politicians aren’t is Aruna Sathanapally, boss of the Grattan Institute. In a speech a year ago she told the unvarnished truth: our governments are “not raising enough revenue for what we spend”.

No one wants to pay more tax. And the richest of us protest more and fight hardest when asked to cough up a little more. I meet people who tell me we’re already overtaxed.

Nonsense. “We are a relatively low-tax country with high service expectations. Pre-COVID, Australia was eighth-lowest ranked country in the Organisation for Economic Co-operation and Development for tax collections relative to our country’s size, five percentage points lower than the OECD average,” Sathanapally says.

“Yet, Australians expect high-quality healthcare, aged care, and disability care, among many other things. Like other rich nations, government spending has grown as a share of the economy, particularly in recent decades.

“But our tax base is going in the opposite direction: narrowing as the population ages with the growing cost of tax concessions.

“This leaves a structural gap,” Sathanapally says. “You can tackle the structural problem by reducing spending, increasing revenue, and by growing the economy.

“Growing the economy is the easiest solution to sell, but it is the hardest to achieve in practice. Australia, like other advanced economies, is expecting slower economic growth over the next 40 years than we’ve had over the past 40 years. Even if productivity growth exceeds expectations, it is still unlikely to close the structural gap.

“As a relatively low-tax country, we can afford to raise more revenue, but of course there are better and worse ways to do this. Broadening the tax base and reducing tax concessions tend to be much less economically damaging than simply raising the headline rates of tax.

“Australia’s tax mix asks workers and companies to shoulder most of the burden, while offering substantial concessions for wealth. Wealth in housing and superannuation gets particularly generous treatment.”

“Take superannuation tax breaks for example. They cost the budget almost $45 billion a year and are projected to cost more than the age pension by 2036. These tax breaks predominantly benefit the top 20 per cent of income earners, so they do little to actually reduce age pension spending.

“Meanwhile the combination of capital gains tax breaks and negative gearing encourages speculation in the housing market in place of other more productive uses of funds,” she says.

We know how hard politically governments find it to fix these problems, “but frankly, we are sitting on a wretched generational bargain, and it has gone on for long enough.

“Young people today already face the prospect of weaker wage growth, higher hurdles to owning a home [or more likely, a lifetime of renting] and a future shaped increasingly by extreme weather and natural disasters.

“Yet, we ask our young people – our children and grandchildren – to contribute more towards supporting older generations than our older generations ever contributed when they were of working age,” she concluded.

Phew. It’s not often people in public life say things of so frank, so honest, so disinterested good sense that I want to quote them at such length.

Next, why doesn’t the business press write a desk-thumping editorial explaining how Sathanapally got it all so badly wrong.

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Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

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