9 June 2009 - 14 September 2010
Renovating the Financial System
Address to the 5th Financial Services Forum
14 May 2010
I am delighted to again address the Institute of Actuaries' Financial Services Forum on the Government's priorities and initiatives. I would particularly like to thank the President of IAA, Bozenna Hinton and IAA's CEO Melinda Howes.
Forums like this one play an important part in sharing experience and knowledge across the sector and help support its success.
It's good to conclude this Budget week among old friends and to be able to discuss the important initiatives contained in the third Rudd Government Budget.
We've had a few days to soak in the details of this year's Budget and to consider the content of the robust public debate over the past few days.
This debate has taken place in circumstances most of us in this room would not have foreseen - that is a stable economy, with low unemployment and economic growth trending to normal.
When I spoke to you at the 4th financial services forum in 2008, Australia was facing considerable uncertainty and volatility in the financial markets.
The theme of this year's conference is Renovating The Financial System from what your promotional material for this conference recognises was "the turmoil of 2007-2009". That's basically our period in Government.
I became a Minister as this turmoil was about to unfold. And we've come a very long way in that time, culminating this week in a Budget that sets the scene for Australia to consolidate and build on our exceptional strengths – and I know I don't need to stress to a room full of actuaries just how important it is to plan for the future.
As you all know, the global economy was devastated in 2009 with a record contraction of 3.2 per cent across advanced economies as a whole.
In comparison, Australia's performance has been truly remarkable.
Our economy grew by 0.9 per cent in the December quarter 2009, and 2.7 per cent through the year to the December quarter.
This performance is set to continue.
Australia has stronger growth, lower debt and lower deficits than any of the major advanced economies.
As outlined in Tuesday's Budget, the Australian economy is expected to rebound powerfully with forecast real GDP growth of 3¼ per cent in 2010-11 and 4 per cent in 2011-12.
And our unemployment rate, which peaked much lower than most of our peers, is heading down to 4¾ per cent by mid-2012.
The budget deficit in 2010-11 is expected to be 2.9 per cent of GDP, compared to an average of 9.5 per cent of GDP for the major advanced economies.
Through a new benchmark of strict fiscal discipline, Australia's budget is projected to return to surplus in 2012-13, three years early and ahead of every major advanced economy.
The Budget also delivers the fastest fiscal consolidation since the 1960s and it projects a fiscal consolidation much more rapid than we saw coming out of the 1980s and the 1990s recessions.
As actuaries with globally-recognised qualifications, you will all have contributed to this success, both in your day-to-day work and as part of a sector that generated about 10 per cent of GDP in 2008-09 – making the finance and insurance sector the largest contributor to the Australian economy.
Equally, in your discussions with your international peers you would know just how good these numbers are when compared to almost any developed economy on the planet.
Now, more specifically to you, our actuaries and the importance of the type of forward planning that is the hallmark of your profession.
The actuarial science is fascinating.
You are experts in the mathematics of risk – putting a bottom line on the challenges ahead.
And, as a responsible Government, we must also engage in such forward planning.
The 2010 Intergenerational Report is our effort. It tells us in stark terms how significant the challenges we face as a society.
Between now and 2050:
- The number of people aged 65 to 84 years will more than double
- The number of people aged 85 and over will more than quadruple
- Nearly one-quarter of the population will be aged 65 and over, compared to 13 per cent today.
This means there will be only 2.7 people of traditional working age for every person aged 65 and over, compared with 5 today.
The impact of the ageing population will be felt in the way we live, work and socialise. In terms of our living standards, real GDP per capita is projected to grow at 1.5 per cent annually over the next 40 years, compared with 1.9 per cent over the past 40 years.
At the same time, future governments will face even greater budget pressures.
The Rudd Government is particularly concerned that the ageing population, rising health costs, and strong growth in demand for health services pose a major long-term fiscal challenge for Australia.
Today, total healthcare expenditure is around 9 per cent of GDP. Over the next 40 years, it is projected to more than double, to around 19 per cent of GDP.
This obviously represents significant structural change to our economy.
Responding to These Challenges
The Rudd Government is responding to these challenges through its focus on productivity, fiscal sustainability and key reforms that set the Budget on a sustainable course for the long term.
The Rudd Government believes that growing the economy is the best way to increase our capacity to meet the fiscal costs of ageing.
If we can do that – by investing in skills and infrastructure, regulatory and tax reform – then we can establish the foundations for higher productivity growth in decades to come.
The Government is investing $661 million in a Skills for Sustainable Growth strategy to boost the skills and productive capacity of our workforce.
We will invest around $5.6 billion in a nation-building infrastructure fund over the next decade to improve Australia's living standards, beginning with $700 million in 2012-13.
And we are also investing nearly $1 billion in the Australian Rail Track Corporation to fund rail freight works across Australia;
Turning to our key reforms, the Rudd Government wants our health system to work better for patients and better for the nation's finances.
The National Health and Hospitals Network Agreement is a landmark reform that will put our health system on a sustainable financial footing by making the Commonwealth the dominant funder of health care services.
These reforms will create one health system with nationally consistent standards for quality and safety, and strong performance reporting requirements.
And they will mean we will have enough skilled health professionals to meet future demand.
The Government will provide an additional $2.2 billion to support the National Health and Hospitals Network including:
- $522.7m over four years for Australia's nursing workforce.
- $466.7m over two years from 2010‑11 to establish the key national components of a personally controlled national Individual Electronic Health Record system.
- $355.2m over three years to increase the number of GP Super Clinics across the country.
- $290.5m over four years to establish Medicare Locals across the country.
- $126.3m over four years to establish a national after‑hours GP Service.
The new investments in this Budget are part of $7.3 billion over five years to support the National Health and Hospitals Network, including more doctors and nurses, shorter waiting times and more hospital beds.
IGR2010 projects an increase in age-related pension payments from an estimated 2.7 per cent of GDP in 2009-10 to 3.9 per cent of GDP in 2049-50.
Two of the factors driving this increase are:
- an increase by around 150 per cent in the number of people of eligible age; and
- a significant rise in the proportion of people receiving part Age Pensions.
While the projected increase in age-related pension spending as a proportion of GDP is significant, it remains relatively low compared with most other OECD countries.
In fact, compared with international experience, the fiscal pressures associated with Australian age-related pensions are relatively moderate.
This is because our pensions are means-tested and because of the tough decisions this Government has made in the last two budgets - decisions like progressively increasing the pension age from 65 to 67 - to ensure the system is more financially sustainable into the future.
Stronger, Fairer, Simpler: a Tax Plan for our Future
Earlier this month, the Government announced our tax reform package, Stronger, Fairer, Simpler: a Tax Plan for our Future, to make the most of opportunities presented by the current resources boom and to address the challenges that it presents.
This long-term plan applies a Resource Super Profits Tax to the profits from resources that all Australians own, and uses the revenue to:
- generate more superannuation savings for working families;
- lower tax for all companies, especially small businesses; and
- invest in our future infrastructure needs, particularly for mining states.
The Resource Super Profits Tax will ensure Australians get a fair share from our valuable non-renewable resources. It only starts to tax profits after the point where shareholders have received a normal return on their investment. It fully recognises the large investments made in resource projects.
The revenues will be used to deliver a stronger economy for Australian families. Around a third of the package will directly assist the resources sector. A Resource Infrastructure Fund will make infrastructure spending a permanent feature of Commonwealth and State budgets. And a Resource Exploration Rebate will encourage further exploration.
Around a third of the package will ensure we save rather than squander the benefits of the current boom, and translate the higher economic growth and wages we are currently enjoying into long-term benefits and more secure retirements.
The Government will gradually increase the Superannuation Guarantee to 12 per cent. This will increase the retirement incomes of around 8.4 million Australians, including 3.5 million lower paid Australians who will receive a tax concession on their Superannuation Guarantee contributions, for the first time.
Over 50s with lower super balances will be given more generous contribution caps to allow them to make catch up contributions. And the higher Superannuation Guarantee age - 75 from 1 July 2013 - will benefit around 33,000 employees.
Over the next 10 years, the Rudd Government's superannuation changes will add $85 billion to Australia's pool of superannuation savings. Some of these savings will be channelled back into the Australian economy to fund jobs and nation-building infrastructure, ensuring our reliance on foreign funds is lower than it otherwise would be.
Another third of the package will promote growth across the economy, addressing the risk of a "two-speed economy" by taking the brakes off the slower lane.
A phased cut in the company tax rate to 28 per cent will assist the competitiveness of all Australian industries. The Government will also seek to cut the company tax rate further, as fiscal circumstances allow.
Small businesses will get a head start on the company tax cut, with the 28 per cent rate applying from 2012‑13.
The RSPT and the cuts in the company tax rate, taken together, will increase Australian GDP by 0.7 per cent and increase real wages by 1.1 per cent in the long run.
The Stronger, Fairer, Simpler package depends on successfully implementing the Resource Super Profits Tax. This tax generates the revenue needed to fund the other parts of the package and a large part of the economic gains from the package.
The Government understands the challenges of tax reform. Simplifying the system often means doing away with favourable treatment for particular groups. Often their expressions of disapproval can drown out the support of the broader community.
So we know tax reform will meet opposition, but we also know the gains can be really substantial.
This set of measures is a solid and fiscally responsible start to the long-term project of tax reform. It's not possible to reform the whole of the system in one package and it would have been foolish of us to try.
The Stronger, Fairer, Simpler package will yield important gains for Australia.
We're also delivering real personal tax simplification and as the Minister responsible for this area – I'm delighted to see it in the Budget.
From 1 July 2012, taxpayers will be able to claim a $500 standard deduction for work-related expenses and this will go up to $1,000 one year later.
More than 6.4 million tax payers will be an average of $192 a year better off by being able to tick a box rather than collect receipts and lodge returns.
The Budget will also help Australians save for the future by providing a 50 per cent discount on tax payable on interest from savings. This measure will be of particular benefit to small savers and to older Australians.
Of course, the Government has also fulfilled its election commitment and from 1 July Australian workers will benefit from the next round of tax cuts. This includes lifting the low income tax offset to $1,500 to provide an effective tax free threshold of $16,000 for Australians with income up to $30,000.
The Rudd Government is committed to securing Australia's future as a financial services hub.
That's why we commissioned Mark Johnson and a panel of experts from the financial sector to prepare a report on measures that could be undertaken to position Australia as a financial centre.
In January 2010 the Government released the Johnson Report – Australia as a Financial Centre: Building on our Strengths and this week we issued our response.
The report concludes that Australia has arguably the most efficient and competitive financial sector in the Asia-Pacific region, but that there are opportunities to expand our exports and imports of financial services to make the sector truly international.
The Report made 19 recommendations across 4 areas:
- Taxation of financial services;
- Regulation of financial services;
- Regional engagement on financial services issues; and
- An ongoing role for a dedicated industry Taskforce.
The Government's response to the Johnson Report provides in-principle or direct support for nearly all the 19 recommendations, including the introduction of an Investment Manager Regime, the establishment of an online regulatory gateway and the development of an Asian Region Funds Passport.
These are important reforms that will enhance Australia's status as a financial services centre and help expand exports and imports of financial services.
We've announced a Board of taxation review into the tax treatment of Islamic finance in Australia and on Budget night we announced that we will phase down the interest withholding tax (IWT) paid by financial institutions.
The main IWT rate will come down from 10 per cent to 5 per cent and we will reduce that to zero when fiscal circumstances allow. As an integrity measure, the Government will maintain the existing IWT rate on non-resident retail deposits in Australia.
The Government has also announced an additional proposal, not identified by the Johnson Report, to establish a Centre for International Finance and Regulation in Australia.
This Centre, which will receive Government funding of up to $25 million over the next four years, will be a regional centre for excellence in financial system regulation and innovation.
As well, we are implementing other reforms to improve our competitive advantage.
We want to ensure that our financial sector is well-placed to make the most of the opportunities that will emerge as the economic recovery takes hold.
That's one of the reasons why the Government's tax reform package announced a phased cut in the company tax rate to 28 per cent, starting from 2013-14. This should help attract foreign investment, including to the financial sector.
I've spoken today of the challenges facing Australia over the next 40 years and the Government's substantial response across taxation, governance, budget and fiscal policy.
These time horizons are well understood by those in this room. Actuaries model the future, you allow us to plan for the long horizon.
The Rudd Government is similarly committed to such critical forward planning.
It's a pleasure to be here today in an environment where I can confirm that, while it will take some time to implement the important policies I've run through, one thing we can be sure of is that early action will place us on a secure footing to meet these challenges.