The Task Ahead
It’s a great pleasure to be addressing the Centre for Independent Studies in my first domestic keynote address as Treasurer.
I want to declare my gratitude to Greg Lindsay and the CIS team for its advocacy of many values and policies that I share.
Initiatives that help facilitate enterprise, empower individuals and nurture consumer sovereignty will always have a page in my playbook.
With this in mind, today I would like to discuss the many challenges the Coalition economic team has ahead of us. The work of the CIS will, no doubt, be of great use as we deliver on our plans for the Australian economy.
The first few days in the job are reflected by the most common question I get from people on the street …, “Are you having fun yet?”
Whilst it is no joyride, my colleagues and I relish the opportunity to help turn things around.
We are cleaning up the mess we inherited.
We are determined, based on sound values, consistent principles and clarity of purpose, to re-empower the community.
Our plan is threefold.
Firstly we must be honest about the challenges we face.
Secondly we must lay down a road map that helps us to deal with those challenges.
And thirdly we must harness the support of the nation as we follow the road map notwithstanding the obstacles that will be put in our way.
1. The Challenges
Australia has enjoyed a remarkable period of prosperity and continuous growth for over two decades.
Some people attribute that to overseas demand for our resources, but that has really only been a factor over the past decade.
Much more important has been the series of economic reforms in the 1980s and 90s, and in the early part of this century, by both sides of politics. These lessened government control and regulation and unleashed the power of the private sector and the market.
These reforms shaped a more dynamic and adaptable economy that stood us in good stead to handle the shocks of the Asian and the global financial crises.
As a wise man once said to me, ‘the trees with the deepest roots are best able to withstand the worst storms’.
These reforms created the deep roots and were a testament to the power of economic rationalism. Distortions in the economy were fearlessly addressed through initiatives like tariff reductions and national competition policy. Freedom of choice to determine production and allocation decisions were delivered through workplace reform and financial services deregulation.
The reforms made people and businesses accountable for their actions. Importantly, Australians were able to own the rewards when they made the right calls.
This base strength in the economy ensured that government could sustainably afford the health care, education and a welfare safety net that Australians expect.
In short, the reform and the effort undertaken yesterday has paid for today’s quality of life.
Recently, we entered turbulent times in better shape than any of our peers.
We had surplus Budgets, no net debt, full employment, rising real wages and historically high and rising terms of trade.
However, since 2008 we have experienced a period of significant dislocation.
External factors have reshaped our destiny. Public policy incompetence has worsened the impact of that dislocation.
As we emerge from the worst of the global financial crisis we have rising unemployment, deteriorating debt, declining terms of trade and structural challenges in our Budget that need to be urgently addressed.
Global challenges remain, but they are not insurmountable.
In the next twelve months the identifiable risks on the horizon include the impact of monetary policy tapering in the United States and the impact of revelations about the health or otherwise of European banks by the ECB.
Of course, the third significant risk is where the United States Congress will end up on its new debt limit debate in a mid-term election year.
I am, for numerous reasons, less concerned about a domestic downturn in China.
What I am sure of however, is that we cannot influence any of these events. But we can prepare ourselves for the risk that they may turn out for the worst.
The Commonwealth Budget remains in poor shape.
In the eighteen months since the May 2012 Budget there has been a $95 billion deterioration in the bottom line across those forward estimates. When I release the Mid-Year Economic and Fiscal Outlook (MYEFO) Australians will see the true state of the books that we have inherited and I anticipate the story will be even worse.
It has been more of a disappointment than a surprise that overly optimistic forecasts over recent years have raised hopes only to be dashed by backfilling angst.
Consumers and businesses, who have rushed to strengthen their balance sheets, have been far smarter than the prior government, who have overpromised and under delivered on the Budget recovery.
The community is now far better prepared for the future than the Government.
But it’s not just fiscal ineptitude that has let us down.
Massive re-regulation of the workplace, claims for global leadership in areas where the globe did not want to go and chaotic and dysfunctional policies in areas from trade and taxation through to international relations and Commonwealth/State relations sapped the confidence of the nation.
But confidence is coming back.
The share market is around five year highs and the property market is gaining confidence.
Retail sales have lifted and business confidence is rising.
It’s not all rosy but the trend is encouraging.
Whilst the continuing surge in resources exports will support growth, the rest of the economy must now step up to the plate to fill the gap.
So much of our resurgence rests on improving our productivity growth.
We are currently lagging, not only behind the rest of the world, but also against our own record.
At the same time our participation rate is falling, largely due to the ageing of the population. And an ageing population means rising costs in health care, aged care, and pensions.
These are not insurmountable challenges.
For a nation that is as ambitious and innovative as Australia, we can make good.
Australia must first and foremost focus on building economic growth.
Strong economic growth in partnership with more prudent and focussed public sector spending will be the key to improving our standard of living. It is our best chance of returning the Budget to surplus and paying down our record debt.
High prices for Australia’s key commodities over the past decade sparked the largest boom in mining investment in Australia’s history.
That boom is now tapering.
Mining investment is currently expected to fall sharply from 2014-15 as major resources projects are completed.
I expect that the difference between a tapering and an investment cliff will largely rest on the performance of our trading partners.
This is one of the reasons why the Prime Minister and the Minister for Trade and Investment Andrew Robb are moving with great haste to expedite new trade agreements with Japan, Korea and China in particular.
Like a business, a country with growing demand for its products is best placed to improve its balance sheet.
Of course we need new investment to develop our nation’s products and a welcoming approach for foreign investment is essential in that regard.
It is worth reminding ourselves that each year we need $40 to $50 billion of net additional foreign investment just to fund our lifestyles through our current account.
This foreign investment has been a key driver of our economic growth since 1788.
We need foreign investment and whilst it may be plentiful now, despite a relatively high Australian dollar, as interest rates recover around the world to more normal levels, we will have to fight hard for that investment, particularly in our region.
So I do want to send the message that Australia is most definitely back open for business.
But we need to see higher household spending and growth in business investment in services, manufacturing, and the rural sector.
Of course the growth challenge is complicated by the inevitable fall in the terms of trade.
The remarkable expansion of the Chinese and other Asian economies drove an unprecedented increase in our terms of trade, which peaked in 2011 at their highest level in 140 years.
Since the peak, the terms of trade have fallen 14 per cent. And they are expected to continue falling as growth in new supply capacity continues to outpace growth in demand.
These forces will lead to a substantial slowing in growth of national income.
Let me provide some perspective.
National output per head of population has increased at an average annual rate of around 2 per cent over the past three decades.
National income per person has only declined twice in the last two decades. Once was in 2009‑10 when Gross National Income per head declined by 1.2 per cent directly after the Global Financial Crisis.
The second fall was last year. In 2012-13, the terms of trade fell by almost 10 per cent and as a result per-capita incomes fell by three quarters of a per cent.
With the ebbing of the terms of trade, growth in productivity will more than ever determine future growth in Australian living standards.
If we don’t start moving now we could face very different outcomes in the next decade.
If productivity growth matches its average over the past three decades, we may see growth in income per capita slow to less than ¾ of a percentage point per year – or around a third of what we enjoyed on average since the early 1980s.
There could even be periods where living standards actually decline. We don’t want that!
If we want to sustain national income growth at its thirty-year average, there will need to be a very significant lift in productivity growth. It will require lifting annual productivity growth to over 3 per cent a year.
That is significantly more than the long-run average – and higher than the productivity growth that was achieved in Australia in the 1990s following the economic reforms of the 1980s.
Maintaining historical increases in our standard of living will require a very big effort.
So the ‘growth challenge’ is not just an abstraction, it has implications for every Australian.
Nor is it a uniquely Australian challenge. It is the preeminent global challenge facing both developed and emerging economies over the coming decades.
This is something the Prime Minister and I will focus on in our G20 host year – which commences in just under a months’ time.
Obviously, what we need now and, what the world needs now, is economic growth.
It is the only way out of the global slump of confidence.
It is the only way for governments to undertake sustainable fiscal repair.
It is the only way for unemployment queues to shrink.
And it is the only way for more people to be lifted out of poverty, across our region and here at home.
Our G20 agenda also includes liberalising trade flows, measures to improve the integrity of the global taxation system, financial system stability, and a commitment to remove impediments to private sector investment, especially in essential infrastructure.
1.2 The demographic challenge
The second economic challenge is our changing demographics.
Our population, like that of most developed nations, is ageing.
In recent decades, Australia has benefited from what economists call the ‘demographic dividend’ – when increases in the number of people of working age outpaces the number who are either too young or too old to work.
But many of those baby boom workers are now scaling back their work hours as they move towards well-earned retirement. Labour force participation rates are in decline. The number of workers available to support those who do not work is falling.
The Intergenerational Report in 2010 projected that the proportion of people aged 65 and over will increase from 13 per cent to nearly a quarter of the population by 2050.
The report also found that the working age-to-retirement-age ratio had fallen from 7.2 / 1 in 1970 to 5 / 1 in 2010, and it is expected to fall further to 2.7 /1 in 2050.
At the same time spending on older Australians is rising, with increased spending on health and income support. Some of that is privately funded, but there is also an increasing call on government budgets – that is taxpayers.
Treasury estimates show that without restraint, real growth in government payments would average around 3½ per cent per annum between 2017-18 and 2023-24.
Combined social security and welfare, health and education spending is projected to be responsible for over 80 per cent of total expenditure growth in the 10 years to 2023-24.
This means that unless we change our ways, the size of government will creep ever upwards as a share of GDP. We cannot afford to get to the level of social expenditure seen in European countries of around 25% of GDP.
By comparison, Australian social welfare spending is around two thirds of that, currently sitting, according to the OECD, at around 18% of GDP.
That is why we have committed to reining in spending, reducing the tax burden on business and taxpayers, and reducing the overall size of government.
1.3 The fiscal challenge
That brings me to the next challenge: the fiscal one.
Over the past six years Australia has experienced the most serious deterioration in the budget, and the fastest increase in debt, in peace time history.
More damage has been done to the fiscal fabric of the nation than any other modern government in peacetime, ever.
This is the most serious failure of public policy that I can recall.
And it was not all due to a shortfall in revenue, the problem was excessive spending.
For example in its first year of operation the Mining Tax raised less than 10% of the originally announced proceeds yet the previous Government locked in an extra $13.5bn of expenditure above and beyond the proceeds.
As each day passes, from the other side of the House, Labor is still determined to damage the Budget with their opposition to our reforms.
And from Opposition they are arguing that there is some sort of policy equivalence between a tax they announced but never legislated in April this year on superannuation pensions which they claimed would raise just $313m but which could not be implemented, compared with an unfunded $3.7bn co-payment on superannuation for lower income Australians that they themselves would not have kept.
There is no policy equivalence. There is no fiscal equivalence.
Fiscal sustainability must be addressed. It will require eliminating the waste and mismanagement. But it will also involve winding back some spending that people have come to take for granted.
A key part of our job will be starting a national conversation about how we can live within our means, and how we can afford to pay for the things we really need, now and in years to come.
We will deliver sustainable budget surpluses on average over the next decade building to at least 1 per cent of GDP by 2023-24. (For the commentators in the room that may take that last statement out of context, we will most certainly achieve a surplus well before then.)
Sustainable fiscal policy promotes good macroeconomic outcomes.
The Coalition Government will make sure that our fiscal strategy is credible, transparent, and that we communicate it effectively. We will announce our strategy in good time for our first budget.
I note that the CIS Target 30 campaign has the same ultimate goal of restraining government’s share of the economy so that the private sector has room to grow – and I commend CIS’s work in that regard.
2. The Road Map
So we face a number of challenges across a range of areas such as growth and productivity, demographic trends and fiscal sustainability.
But we have a road map to deal with those challenges.
We will begin by reducing the size of government.
We will cut taxes, eliminate the carbon and mining taxes, cut the company tax rate, and deliver personal income tax cuts without the carbon tax.
We will reduce the burden of regulation on individuals and on business.
Just today the Prime Minister confirmed the Government’s commitment to reduce the cost of unnecessary and inefficient regulation on business and the community by at least $1 billion each year, every year. Regulation will not be the default position for government – it will only be imposed where unavoidable.
This is just the start of our clean up.
Together the cuts to taxes and regulation will mean you will be able to spend less time meeting the demands of government and more time running your business or living your life.
But there is an enormous amount of work that is still to be done.
2.1 Commission of Audit
In Opposition we began identifying savings that would deliver a $7 billion improvement on the budget bottom line. This is a good start even from Opposition.
Our Commission of Audit will review the government from the top down and program by program to ensure the services and income support Australians need are provided as efficiently as possible. It will lay down a road map to eliminate duplication and overlaps between levels of government.
The Commission is very ably led by Mr Tony Shepherd AO, whose business expertise will be indispensable in looking for efficiencies and economies in the public sector.
Tony is joined by a highly qualified team: Dr Peter Boxall AO, Mr Tony Cole AO, and Mr Rob Fisher – all experienced senior public servants – as well as by the Hon Amanda Vanstone – someone who has experience at the coalface of provision of Government services after being a cabinet minister for seven years in a variety of service delivery portfolios.
The Commission of Audit is the first step towards a more sustainable Budget and a more efficient government sector.
Its report will be a significant part of the first Coalition Budget next May.
2.2 Tax reform
Expenditure is one side of the budget coin, the other is revenue.
This week I announced that the inherited backlog of 96 announced but unlegislated taxation and superannuation changes dating back to 2001 would be addressed by 1 December. A number of meaningless and unimplementable tax changes will be dumped.
Moreover, tax changes that are of no net benefit to the community or the economy such as changes to FBT rules and self-education expenses have also been dumped.
We are committed to abolishing the mining tax and the carbon tax and legislation will be introduced as a first order of priority on the return of parliament next week.
Both taxes hamper Australia’s international competitiveness. And both taxes create structural holes in the budget.
I urge both Labor and the Greens to respect the mandate of the new Government and the will of the people and vote with the Government to repeal these corrosive taxes.
The repeal of these taxes will not only add to economic growth, they will clearly make us more globally competitive and affordable.
These reforms alone will deliver some period of stability in relation to taxation policy.
The Coalition is determined to avoid knee jerk rule changes in taxation policy that too often disrupt the confidence of capital flows across our economy.
But like everything we cannot ignore the medium term challenges.
The Coalition Government is committed to producing a tax white paper that will lay down a taxation reform program in harmony with our core principles of fairness and simplicity.
We are serious about the contribution tax reform must make to improving productivity.
We will then ask the Australian community to endorse our plan at the next election in 2016.
In order to drive economic growth we need to ensure that our productive capacity is at its best.
Now, more than ever, we must re-tool our nation for the economy of tomorrow.
We must build the modern infrastructure this country needs.
Building the right infrastructure in the right places at the right price is hard work.
It is easy to dream new infrastructure and it is exciting to announce. But serious infrastructure is hard to build and very expensive to pay for.
We all know that Australia’s infrastructure has not kept pace with demand.
That’s why the Government has announced an ambitious infrastructure platform, fast tracking essential projects and increasing funding so that we can start building the transport infrastructure of the 21st century, alleviating congestion in our cities, linking our regions, and underpinning business productivity.
Our infrastructure agenda includes over $20 billion in new or upgraded infrastructure projects including an investment of almost $5 billion of additional funding over the forward estimates period.
But we also know that Governments do not have the capacity to fund all of Australia’s infrastructure requirements – with estimates of Australia’s infrastructure deficit ranging from a couple of hundred billion to $800 billion. Private investment must help fill this gap.
Australia must find ways to encourage and facilitate more private sector investment in infrastructure in order to address our infrastructure needs.
Soon, with the Assistant Minister for Infrastructure and Regional Development, we will be announcing a Productivity Commission inquiry to look at ways to bring down the cost of infrastructure including facilitating greater private sector involvement in major infrastructure projects.
This inquiry will be about how this Government can build a constructive partnership with the private sector.
More announcements on infrastructure including a new partnership with our state colleagues will be announced over the coming months. Let me assure you that innovative funding models, a credible pipeline of work and a rigorous cost/benefit process will underpin our growth plan.
Our determination is to build productive infrastructure for decades ahead.
We will boost economic growth, help to create jobs and ensure Australians receive the productivity benefits of new and improved infrastructure sooner rather than later.
2.4 Economic Infrastructure
2.4.1 Financial System Inquiry.
Along with building forward looking physical infrastructure we must build economic infrastructure that also meets head on the challenges of the future.
Over the course of 2014 we will hold two significant inquiries into our key economic drivers of financial services and competition policy.
The last financial system inquiry, the Wallis inquiry, was held 16 years ago. There have been dramatic changes in financial services since then.
Whilst our regulators the Reserve Bank, APRA and ASIC have served us well, it is always prudent to have a look at how we can do better.
That however is not the main driver for the Inquiry.
The GFC exposed Australia’s vulnerability to offshore financial shocks. We must seek to prepare ourselves for the challenges that lie ahead.
Accordingly a key focus of the Inquiry will be addressing the long term challenge for our nation to sustainably fund its economic growth.
Moreover, we must recognise and prepare for a new era of global technological and regulatory change in financial services that will influence stakeholder behaviours.
We can either allow ourselves to become victims of change or else we can build the financial infrastructure that helps us benefit from that change.
We have committed to release the draft terms of reference for this Inquiry before the end of the year, but I can tell you now that they will be broad. This will allow the inquiry to chart a course for the financial system over the next decade and beyond.
To maintain certainty while the inquiry is underway, there’ll be a moratorium on significant new financial sector regulation.
2.4.2 Competition review
The second major health check will be a comprehensive root and branch review of competition policy.
This review will not only focus on competition laws, but it will help identify ways that we can deliver greater competition throughout the economy.
Competition is a key driver of efficiency and innovation, and unlocking competition in sectors where it is lacking or weak will deliver significant productivity benefits.
The National Competition Policy reforms of the 1990s delivered lasting improvements to our economy – and in the face of a challenging global environment, it’s time to re-examine and reinvigorate competition in our markets.
In addition to the above systemic reviews the Coalition is undertaking further detailed policy work on the car industry. And we have previously flagged Productivity Reviews of child care services and Fair Work laws.
We are mindful that our predecessors had lots of reviews with lots of effort but limited outcomes.
That weighs heavily on our minds.
But ultimately we will be judged on what we deliver rather than what we promise.
It is just 52 days since the Government was sworn into office.
In that time, in the Treasury portfolio we have drafted legislation to repeal the Carbon Tax package and the Mining Tax package. We have also drafted legislation to close down the Clean Energy Finance Corporation that relies on $10bn of taxpayer borrowings.
In the interim we are dealing with the Budget emergency by identifying where the bodies are buried. From a $100m plus shortfall in funding to the ACCC through to a prudent $8.8bn grant to the Reserve Bank Reserve Fund, we are dealing with legacy issues.
We have regrettably had to deal with Labor’s unwillingness to deal with the debt limit that is now needs to go up to $500 billion, and 96 unlegislated tax and super changes. The budget challenge remains a significant clean up job.
Importantly in just three weeks’ time, Australia takes the chair of the G20.
I must admit I underestimated the size of the G20 leadership task. The Budget left by the Labor government of allocating more than $400 million for the costs of hosting a year of high level meetings illustrates the scale of the challenge.
We want this to be a success. And this is another challenge that we are up for.
The first major event will be the G20 Finance Minister’s meeting here in Sydney in 3 months time.
A clear and deliverable agenda will be the focus of our leadership.
Ultimately, like everything else, our resolve can only be measured by achievement rather than promise.
And so, I conclude where I began.
The values we have as a Government will be the solid foundations for our decision making.
The Coalition knows that wealth and prosperity are created by the private sector. Our approach to government is to do all we can to unleash the power of the individual and private enterprise.
Government and business must work together to boost productivity and keep living standards rising.
Under the Coalition Canberra must become a facilitator for private sector growth rather than a punitive and unpredictable interrupter at a time when certainty is already fragile.
Our Government has made a strong start but there is much to be done.
We look forward to building on our new community and business partnerships over the days and years ahead.