Right concerns, wrong policy

Ideas@TheCentre – The CIS newsletter (Sydney), 12 March 2010

When opposition leader Tony Abbott presented his parental leave scheme to a surprised public and bewildered parliamentary colleagues, the criticism could not have been more scathing. Shaun Carney at The Age summed up Abbott’s plans as a ‘half-arsed, impractical policy’; a Sydney Morning Herald editorial denounced it as a ‘a new form of middle-class welfare’; and the Business Spectator editor Alan Kohler went even further to call it ‘the mother of all policy blunders.’

There’s no point reiterating all the ways in which the scheme fails good policy standards. Suffice to say that it’s not only a big, indiscriminate tax on business but it also paves the way to creating an entitlement culture in society and a substantial redistribution within the business community. Other than that, it’s a brilliant idea, of course.

It is a pity that Abbott’s scheme suffers from numerous practical shortcomings because the problem it seeks to address is real. Abbott’s initiative shows that he is genuinely concerned about the fertility level, and rightly so.

Australia’s fertility rate, i.e. the average number of births per woman, has remained relatively steady at just about 1.9 for the past three decades. Although this is a bit below the replacement level of 2.1 to keep the population stable, it is much better than the rates of many other industrialised economies. For instance, the last available data show fertility rates of just 1.34 for Japan, 1.39 for Germany, and 1.59 for Canada.

The demographic consequences of low fertility rates are becoming visible in low fertility countries like the ones mentioned above. A shrinking and ageing population, especially if combined with generous retirement and health benefits, puts enormous pressures on public budgets and the welfare state.

Even in Canada, which has a moderately low fertility rate, the Parliamentary Budget Officer recently reported that ‘the ratio of prime working age Canadians to individuals of retirement age … is projected to fall from approximately five-to-one in 2008 to 2.5-to-one by 2033, stabilizing at two-to-one by 2070.’ It does not require much fantasy to imagine the challenges this creates.

Canada’s fertility rate is only about 17% lower than Australia’s. Although the Productivity Commission concluded in 2008 that Australia is currently in the ‘safe zone’ of fertility, there are good reasons to make sure that it remains there. Australia should not replicate the demographic time bombs ticking elsewhere.

Abbott’s scheme, while meant to create a more family friendly society, will only enlarge the welfare state and increase taxes. But looking at Japan, Canada or Germany we can see that imposing bigger tax burdens and increasing the welfare state are not conducive to lifting either productivity or fertility. Abbott’s parental leave plan is not only too complex and costly, it may also turn out to be counterproductive to creating a more family friendly society.

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