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What will it take for Australian policymakers to acknowledge it?
This country has a serious problem of intergenerational unfairness and it's souring the relationship between young and old.
Last week, former treasury secretary Ken Henry upbraided policymakers for what they've done to the tax system and economy during the past two decades.
He said younger Australians were being asked to do too much, and governments had to turn the ship around.
What's he talking about?
Let's start by visualising something.
In June last year, the Australian Bureau of Statistics published the below graphic.
It was a snapshot of what our population looked like when the census was collected in 2021, broken into generational cohorts.
It's already a little out of date (because the oldest millennials are now in their early 40s), but it shows something important: in 2021, millennials and younger groups already accounted for more than half of the population.
On a range of indicators, they aren't faring nearly as well as "Boomers" were at their age, especially when it comes to housing.
Do older policymakers appreciate what that means for the future of this country?
Younger Australians poorly treated
Dr Henry laid it out starkly in a speech to the Tax Institute last week.
"There can be no ignoring the extraordinary intergenerational inequity inherent in our present tax system," he said.
"This generation of young workers, weighed down with HECS debt, burdened with the responsibility of repaying a mountain of public debt and dealing with the costs of climate change, is finding it increasingly difficult to buy a home, having been priced out of the market by those who have already retired or are now moving into retirement, those who are sitting on tax-free capital gains in houses that are exempt from the pension assets test, those who are receiving refundable franking credits on share portfolios and a blend of publicly funded and tax-free private pensions from assets accumulated in lightly taxed self-managed superannuation funds.
"At some point, perhaps even already, the intergenerational social compact must surely fracture," he warned.
Then he showed this slide to the audience.
It illustrates how younger Australians are taxed very differently than older Australians, and why the future for younger generations will be challenging.
"The Australian tax system is in a parlous state," he said.
"Whilst government spending is growing strongly, the share of government spending being directed to the non-working, low tax paying, aged is also growing.
"At the same time, and in stark contrast to the post-war period, because of population ageing, a shrinking proportion of the population, made up of relatively young workers, will have to shoulder a rapidly accelerating share of the burden of financing government," he said.
The economy has experienced 'capital shallowing'
Dr Henry's frustration was obvious.
Looking back at his major tax review published in 2010, Australia's Future Tax System, he said Australian policymakers had let the country down.
Consider what's happened to our economy in the 21st century.
He said our decision to allocate so many resources to the mining sector to profit off the China-driven mining boom, without adapting our tax system, has had severe consequences.
He said much of Australia's productivity growth, historically, had been driven by "capital-deepening" (that is, higher capital per worker), thanks to a strong rate of business investment.
But two centuries of capital-deepening has stalled.
He said Australia has experienced capital-shallowing this century, with declining physical investment in the non-mining sectors and more and more non-mining capital heading overseas.
Why? Because policymakers have mishandled the mining boom so badly.
He said the positive terms-of-trade shock, caused by soaring commodity prices linked to the China-boom, pushed Australia's dollar higher this century.
The strong appreciation that followed in our real exchange caused a "profound loss" of international competitiveness for Australia's trade-exposed industries.
He said that pressure could have been released with a resources super profits tax or something similar, with the money reinvested in non-mining parts of the economy to boost productivity there, but it didn't happen.
Instead, governments just "let it rip."
"The collapse in the non-mining investment rate is remarkable," Henry said.
"The financial mirror image of declining physical investment and capital-shallowing is that, in recent years, we have recorded net capital exports on the balance of payments.
"Many commentators appear to believe that we have become a net capital exporter merely because superannuation has boosted household saving. But I would argue that we are exporting capital because Australia has become an increasingly unattractive destination for doing business, in the eyes of foreign investors and Australian savers alike.
"It is truly extraordinary that this country, which stood to gain the most, should be suffering capital-shallowing, and should be a net capital exporter, not withstanding a historic mining boom.
"Yet, that may be a natural consequence of fiscal policy that has simply 'let it rip', undermining Australia's international competitiveness," he said.
The story in four charts
You can see what he's talking about in a few charts.
In 1998, China took about 3 per cent of our exports. But after hitching our wagon so enthusiastically to the China-boom, by the time COVID hit Australia in 2020 China was taking more than 45 per cent of our exports.
It means our governments have become increasingly reliant on the tax revenue generated by the mining industry.
Since 2005, mining has increased its share of Australia's total corporate profits from 20 per cent to 50 per cent (the red line, below).
But the mining industry hardly employs anyone.
It employs fewer than 1.5 per cent of Australia's workforce (the blue line, below).
Although, that figure doesn't include mining construction. In the boom times, mining construction activity draws workers from lower paying jobs all around the country, with a disruptive impact on labour markets and businesses just about everywhere.
And to drive the point home?
Henry said our productivity growth rate was "negatively correlated" with the terms-of-trade.
What does that mean?
It means when global commodity prices strengthen (especially for coal, gas, and iron ore), and the value of our exports surges higher relative to the value of our imports, our nation's productivity growth slows down.
"In the past three years, the terms-of-trade have lifted even further to reach their highest level ever, and productivity growth has fallen below zero," he said.
The graphic below shows that inverse correlation.
Henry then told the audience of tax experts that the retreat of non-mining investment from Australia's economy had coincided with two decades of declining average living standards.
And it may have had a significant impact on wages, he said.
"Understanding the size of the adjustments that would be needed to restore international competitiveness provides a plausible explanation for a decade or more of sluggish nominal wages growth," he said.
"To put in a nutshell, the mining boom has left us with a very big competitiveness overhang that will probably take decades to work off.
"Much of the loss of international competitiveness caused by the mining boom could have been avoided had we had the intellectual and political capacity to apply a rational taxation regime to the windfall profits of mining companies. We didn't have to 'let it rip'. We didn't fall into this hole by accident. We chose to be here," he said.
It all paints an inglorious picture.
"In summary, mining employs a very small proportion of the Australian workforce, except in the boom times, when it induces a worker to leave other jobs for mine-site construction work, but generates about 60 per cent of Australia's exports, about half of pre-tax corporate profits, mostly repatriated overseas to foreign shareholders, and exposes the Australian economy to highly volatile global commodity prices and a heavy strategic dependence upon a single buyer, China," he said.
"Moreover, it is a sector heavily exposed to climate risk; specifically, the risk of global decarbonisation."
Go for 'big bang' tax reform
Which brings us to the final section.
Henry said our tax system needed a "root and branch" overhaul.
He said rather than relying so heavily on company tax, personal income tax, and transactions taxes for revenue, governments should be relying more heavily on taxing consumption, economic rents, land, other natural resources, and environmental externalities, including carbon emissions.
He said we needed new policies to encourage capital-deepening in the non-mining sector again.
"Australia lacks economic diversity in part because of its inability to attract, retain and develop a sufficient supply of mid-tier businesses in a wide range of industries," he said.
"Tax reforms that boost productivity and participation would enhance Australia's attractiveness as a destination for such businesses.
"The guiding principle should be to reduce the rate of tax applying to the normal return on capital while increasing the rate of tax applying to economic rents, including rents derived from the exploitation of our non-renewable resources, like coal and gas," he said.
And he encouraged Australian governments to embrace whole-of-system tax reform, arguing it would have a greater chance of succeeding politically than trying to reform individual taxes one at a time.
"Incrementalism sets up a single target on a battlefield occupied by well-resourced attack forces," he said.
"More importantly, incrementalism cannot address our budget and broader economic challenges. No amount of incrementalism is going to meet our fiscal challenges, far less turn around two decades of declining average living standards.
"There is no point planting a seed in a desert when what is needed is continental scale reforestation."
Will Australian policymakers hear him?
Because younger generations know what he's talking about regarding the intergenerational inequity in our current tax system, and our housing policies.