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Discussion paper

The Intergenerational report ignores booming wealth and capital gains

Assets Economic indicators Wealth Australia

Household wealth in Australia is a massive $12.7 trillion in Australia and increased by $1.7 trillion from a pandemic low 12 months ago. By contrast GDP is a relatively modest $2 trillion (latest rolling 4 quarter figure). If these trends continue capital gains will be 56 per cent of household income in 40 years, up from a trend figure of 31 per cent now. Household wealth was 3.58 times GDP 30 years ago, is presently 6.37 times GDP and is projected to hit 14 times GDP in 40 years. Capital gains and the higher wealth it brings are just like any other income, wages, salaries, interest or dividends. But capital gains are not included in GDP.

The analysis behind the intergenerational reports is misleading to the extent that it compares almost everything with GDP. GDP is inadequate for many of the purposes for which it has been used. In the Intergenerational Report (IGR) context, GDP is not a good measure of Australia’s capacity to pay for government services. Wealth is also a measure of capacity to pay while the annual increase in wealth (capital gains) should be included in income measures. When that is done capacity to pay is much larger both at the moment and when we project into the future. Indeed, the government’s own 23.9 per cent taxation cap falls to 10.4 in 2060-61 using a comprehensive measure of income that includes capital gains. It will be ever more apparent that extreme inequality is being driven by booming wealth and capital gains that are lightly taxed if at all.

The findings in this paper represent a challenge to the government. Any attempt to compare the projected fiscal ‘problems’ with GDP should be required to justify why a narrow definition of capacity to pay is being used. Income as conventionally measured will be higher but wealth and capital gains will grow even more. Our ability to afford projected increases in government spending is beyond question.

Related Information

2021 Intergenerational report https://apo.org.au/node/312932

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