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‘Running down the stock of capital in aggregate diminishes the opportunities for future generations. In one way or another, eroding the productive base will lead to lower future wellbeing,' said Dr Parkinson. He held that if one component of the capital stock is eroded it should be at least compensated by increasing the other capital components. That is, if natural resources are eroded to take advantage of the favourable terms of trade at present then the returns from trade should be invested in developing physical and financial assets and human and social capital so that at least current level of wellbeing can be sustained for future generations.
Dr Parkinson, who served for more than three years as inaugural Secretary to the Department of Climate Change and Energy Efficiency, said that Australia is not getting sufficient return on its environmental capital.
‘Water and carbon are not yet priced appropriately,' he argued. ‘In the case of minerals and energy, arguably society is not sharing sufficiently in the returns from their exploitation, with the vast bulk of the benefits accruing to the shareholders of the firms doing the mining. As such, society is not getting the resources it would need to build up other parts of its capital stock.
‘Unsustainable growth cannot continue indefinitely - if we reduce the aggregate capital stock in the long run future generations will be made worse off. The problem is that we can be on an unsustainable path for a long period - and by the time we recognise and change, it could be too late.
‘Climate change policy - both in relation to adaptation and mitigation - is not just an environmental issue; it is more fundamentally an economic and social challenge.
‘To an economist, climate change is fundamentally a risk management issue. Even if you do not accept all elements of the science, prudence suggests taking out some form of insurance.
‘We also need to remind ourselves, and others, that if no-one acts first we all lose. But more so - unless we all act, we all lose in the end... Moreover, to suggest Australia should do nothing because we are only 1.5% of emissions suggests that most countries should do nothing - not Indonesia, not the UK or France.'
Dr Parkinson reminded his audience that 89 countries have made pledges under the Cancun Agreements, and that these countries account for 83% of global carbon emissions.
An ageing population, a pressured economy
Economists can't afford to ignore Australia's ageing population.
‘The proportion of the population aged 65 and over has increased from just over 8% in 1969 to around 13% today,' said Dr Parkinson. ‘The 2010 Intergenerational Report (IGR) projected that by 2050 the proportion of the population aged 65 and over would rise to around 23%.'
Increased government spending - on healthcare, aged care, and pensions, is inevitable. ‘As a consequence, spending [is] projected to exceed revenue by 2.75% of GDP in 40 years' time,' said Dr Parkinson.
Older Australians choosing to stay in the workforce longer, said Dr Parkinson, could have a positive impact on the budget. ‘If our participation rate in 2049-50 turns out to be 57% rather than the 60.6% we are currently projecting, real average annual GDP growth will fall by a further 0.11 percentage points. This small change in the participation rate will also lead to increased spending in the order of 0.9% of GDP in 2049-50 (or around $33 billion in 2010-11 terms) on health care, aged care, pensions and education, putting further pressure on the budget,' he said.
With numbers this large, it is clear that something is changing. And with careful economic management, this could be a change for the better.
The full transcript of Dr Martin Parkinson's speech, ‘Sustainable wellbeing - An economic future for Australia' is available from: www.treasury.gov.au/contentitem.asp?NavId=008&ContentID=2134. An audio recording is available from: https://lectopia.uwa.edu.au/lectopia/lectopia.lasso?ut=2200&id=160264.
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