The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

30 June 2011

NO.021

The Role of Government in a Changing Economy

Address to the Economic and Social Outlook Conference

Melbourne

30 June 2011

Like every speaker at these conferences I'm faced with the choice between taking a very specific topic – like I did about eight years ago when I talked about transfer payment design and in 2008 when I talked about commonwealth-state relations – or to take an overall view of the big macro trends and the broad sweep of our economic evolution. Today, conscious that others will focus on filling in the pixels of the bigger picture, one PowerPoint slide at a time, I want to do the latter.

I take this approach for two reasons. The first is that the longer I'm in this job the more I value the opportunity to focus on the bigger things like Australia's place in the broad sweep of global economics, and the less patience I have for the day to day political claim and counter-claim. I've also learned to appreciate Paul Keating's view that the type of economy we have says a great deal about the type of society and the type of country we want to build together.

I have come to Paul's view that economic identity is inseparable from national identity, and I think this applies to the choices governments make as we go about passing the tests set for us by the world. Today, in that vein, I want us to consider three tectonic shifts in our economy, and the proper role of Government in harnessing them in a way that makes more of our people more prosperous.

The three most important changes we face are:

  • the dramatic shift in global economic weight from West to East;
  • the crucial task of de-linking our economic growth and our carbon emissions; and
  • the demographic shift to a much older population over time.

The first of these is familiar to you but too often viewed through the narrow prism of a mining boom, which is really only one part of a much bigger story about the dynamism of Asia and the awesome growth of its middle class, particularly in China and India.

This is not to downplay the benefits of the terms of trade at their highest sustained level in 140 years. It is not to downplay the pipeline of $430 billion in resource investment alone, or the major boost to national income growth. It is not to downplay its contribution to a dramatic appreciation in the dollar to post-float highs, which has seen prices for imported consumption goods fall by 17 per cent since early 2009 and is contributing to lower prices paid by consumers for many of these goods.

Nor is it to dismiss the downside of the mining boom for other parts of our patchwork economy: the manufacturing, tourism and educational exporters buffeted by that high dollar or losing valued workers who are lured away to booming sectors that can afford to pay more. These are crucial considerations for all of us, and not a day goes by where we don't grapple with them in one form or another.

But the mining boom is but one manifestation of a broader, deeper and more enduring story about our economic evolution in what I've called the Asian Century. Many of you know that the Chinese and Indian share of global output has rocketed from less than 10 percent in 1990 to twice that figure today. By the end of this decade 25 percent of global output will come from those two countries and, by 2030, a third.

But look a little deeper and it is the spectacular growth in the Asian middle class in particular that will matter most to us in the years to come. Beyond mining booms mark one and two, some analysts predict Asia's middle class will be as numerous as the middle class of the rest of the world added together. This will impact on the Australian economy more than any other structural shift ever imposed on us.

It will force a change in our industrial and employment mix and compel us to seek new and better opportunities for our businesses and our people. The types of opportunities I and other ministers look forward to discussing when we lead business delegations to China in the period ahead.

Now, I know many of you keenly anticipate the release of the detailed modelling of various carbon price scenarios led by my department, and I'm looking forward to doing that very soon. A key part of this is of course the 'reference scenario modelling' - the part of modelling showing the path of our economy without a domestic price on pollution. It tells a really fascinating story.'

It's a story of services sector output – in industries like education, health, finance, professional services, information and communication technology, recreation, retail and wholesale – increasing by around a third in the next decade as the services sector goes about filling the growing needs of the middle class here and in the region.

It's a story of mining and construction output growing at a real annual rate of around six per cent and four per cent respectively to 2020. The high capital intensity of the mining sector and its rapidly growing capital base translates into rapidly growing deductions. Combined with its growing share of the economy, this means a lower economy-wide average corporate tax rate. And in turn this will constrain the ability of government to simply 'buy' the reforms that are needed as we manage these structural shifts in our economy. Of course, it also means that workers and capital will be drawn from other parts of the economy, which will grow more slowly.

Manufacturing for example is expected to grow at a slower rate than the rest of the economy — at around 1/2 a per cent annually to 2020 in real terms. This means the manufacturing sector will be larger by 2020, but its share of GDP will continue to fall, as it has since peaking five decades ago at one quarter of our 1950s economy. Hundreds of thousands of Australians will still work in the sector by 2020, but more of them will be performing higher-skilled, higher-wage design, development, and management roles. And while there will be variability across sectors, the reference scenario modelling tells a story of an economy that will grow strongly, generating jobs and income growth.

The reference scenario modelling also shows Australia's pollution growing rapidly – in the absence of a price on pollution – from the 2010 level of about 580 million tonnes to 680 million tonnes by 2020 and to more than 1,000 million tonnes by 2050.

And here's the crux of the issue – do we really expect that we can continue to increase our pollution at this rate while the rest of the world moves to tackle climate change? Of course not. It is now beyond question that the economies of the world are moving to cleaner energy to power their businesses.

The Chinese have recognised this, as have the Indians, the Europeans, and the Americans. Right around the world countries are moving to cut emissions – a reality underscored in the recent Productivity Commission report. The PC concludes that we're in the middle of the pack at the current time, but we all know that other countries are moving forward. And if we are to protect our future competitiveness in a carbon-constrained global economy, we need to begin this transformation as well. We need to keep up.

What the Treasury modelling will show is that by putting a price on carbon pollution, we can make this transition at a very modest cost. For most of the economy, putting a price on carbon does not change the outcomes of the reference scenario modelling that I described above, with the obvious exception of cutting our pollution.

Despite what we hear from all the Chicken Littles – the mining sector will experience strong growth and increase as a proportion of the economy regardless of a price on carbon. The outcomes for manufacturing are broadly the same under a carbon price, although there are changes within the composition of the manufacturing sector towards lower emission activities. Similarly, the services sector is broadly unaffected by carbon pricing.

Where we do see significant change is in the energy sector, driven by investment in clean energy. Instead of emissions from the electricity sector increasing by 60 per cent to 2050 as it does in the reference scenarios, it will decrease by around 60 per cent below current levels. Renewables, excluding hydro, grow by over 1700 per cent, taking total renewables to around 40 per cent of electricity generation by 2050. In short, it is very difficult to imagine a first-rate economy in the future that hasn't successfully made this transition.

The third big shift is the ageing of the population as illustrated by the Intergenerational Report I released in 2010. Many of you will remember the key conclusion, that, by 2050 around one-quarter of Australia's population will be aged 65 or older, up from 13 per cent today. Arguably the most significant conclusion of the IGR is that ageing will see a relative decline in the number of people in work and that will slow annual growth in GDP per capita by about 0.3 percent over the period to 2050.

This underscores the need to drive productivity in our economy and to drive reforms that increase participation in the workforce, across all ages, but in particular in this growing cohort of experienced workers.

To date there has been a tendency to only look at the ageing of the population as a problem to be solved. But as I've said before we must not lose sight of the opportunities that come with a larger and more active community of senior Australians. That's why we've appointed a new Advisory Panel – headed up by Everald Compton – to ensure these considerations are injected into a range of contemporary policy debates, such as the opportunities created by the National Broadband Network for senior Australians.

Australia simply cannot afford to waste the massive economic potential of a growing community of active and experienced senior Australians. And while some have only recently stumbled upon these challenges, they have been driving much of the Government's policy agenda for a number of years. This could be no more evident than in our most recent budget, which has at its core a set of policies that will equip our economy and our people to meet these challenges and make the most of the opportunities they present. I believe that once you understand and accept these three shifts in our economy the necessary policy levers become very clear.

Principle among these levers are:

  • counter-cyclical fiscal and monetary settings,
  • tax reform to boost competitiveness and national savings,
  • public and private investment in productivity, and
  • market mechanisms where possible to achieve best outcomes at lowest cost.

That's why we are returning the Budget to surplus in record time, so that we don't compound the inevitable pressures that will come from the boom. This represents the fastest positive turnaround in the budget position on record – a fiscal consolidation of 3.8 per cent of GDP over 2 years. And we are delivering this by keeping real spending growth across the Budget estimates at just 1 per cent a year on average, the lowest rate in any 5-year period since the 1980s.

At the same time we need to ensure the opportunities of the boom are spread to all corners of our economy. This is one of the driving forces behind our tax reform agenda. It's why, through the Minerals Resource Rent Tax, we are funding a company tax cut and tax cuts to small business. This is vital policy recognition that not all businesses are in the mining boom fast-lane, and indeed many face major challenges associated with the boom.

We are also boosting national savings, by lifting the superannuation guarantee from 9 to 12 per cent. Since our initial response in May last year, I've announced a further 12 measures that deliver on reform directions identified by the tax review.

I'm also looking to the upcoming Tax Forum helping to identify the next steps in the decade-long process of making our tax system stronger, fairer and simpler. I'll be releasing a framing paper next month to help encourage debate within the community on options for tax reform. It will point to the key principles that drive us when it comes to tax reform: making our economy stronger by rewarding hard work and promoting investment, productivity and international competitiveness; ensuring the system is fair; and making tax time simpler, especially for individuals and small businesses. But given our commitment to fiscal discipline, any tax reform proposals also need to be revenue neutral.

I've delivered four budgets now, and over that time I've had a lot of interest groups walk through the door and tell me why they should get a tax cut and how someone else should pay for it. Having everyone in the one room at the Tax Forum should bring into sharp focus the point that people can't simply pitch up a tax cut and expect someone else to pay for it. If participants work from this basis, then I'm confident we can get some really good progress out of the Tax Forum.

On top of our ambitious tax reform agenda, we're also investing in the skills and the infrastructure needed by our economy, so that we are better placed to take advantage of the opportunities presented by the middle classing of Asia.

These investments will also help to lift our productive capacity and - along with reforms to lift our participation rates - are helping to counter the impacts of an ageing population. Investments such as the National Broadband Network will be critical if we are to be an innovative knowledge‑based economy of the future. Commonwealth-State reforms I spoke about here in 2008 are helping to streamline regulation, freeing up our business to do what they do best.

Of course we must also keep pace with competitors increasingly powered by new sources of energy by transforming our own economy for the clean-energy future. Central to this is putting a price on pollution, while providing generous assistance to low and middle income families and pensioners, as well as trade-exposed industries to help them adapt.

A carbon price makes higher pollution goods and services relatively more expensive, and those that generate less pollution relatively cheaper. If people want to continue buying the more expensive goods and services, they'll be to do that. But if they switch to items made with lower carbon emissions at a cheaper price, they'll be able to pocket some of the additional household assistance. This will provide a compelling incentive for people to change their behaviour in ways which reduce our carbon pollution.

This approach of course harnesses the great power of markets to drive innovation and efficiency. It's why business groups like the BCA, as well as senior business leaders, and our most respected market economists, all support a market-based mechanism for cutting carbon pollution. So when you look objectively at the pressures we face and the opportunities we are presented with, when you look at the policy levers we are employing, it is difficult to imagine why the economic debate has become so negative and so unconstructive.

Sometimes it seems like the main criteria our opponents in the parliament and sections of the media use to evaluate policies is not what's good for Australia but what's bad for the Australian Labor Party. It is at times like this that we should see greater consensus on the big challenges we face and the policies that will drive our economy forward. But there is a yawning gap between the magnitude of our reform agenda and the seriousness with which it is treated in some quarters.

In the face of the largest fiscal consolidation in over 40 years, it is hard to imagine that there are calls for the government to go harder. But that is what we hear. Or in light of one of the biggest microeconomic reforms in our nation's history – the structural separation of Telstra – we hear some claim an absence of reform. Or following a budget quite uniquely supported by both business and unions for its massive skills investment, we hear some claim an absence of productivity-enhancing measures.

And we see those loudly advocate for more cuts in government spending turn around and lead the chorus of opposition to any cuts put forward. For example, take family payments, there have been wide-ranging calls for cuts to family payments to so-called middle class families. Now, I've never agreed with that characterisation, but I do believe in a sustainable family payments system. But when the government introduces a temporary freeze on a family payments threshold that keeps it at $150,000 rather than increasing to $155,000, we hear cries of outrage from our political opponents – and also from the very same voices in the media that had previously called for even tougher cuts.

I believe much of the blame for this can be sheeted home to a conscious rejection by the Liberal Party of its economic heritage. It's now broadly accepted that the Liberal Party has abandoned the field on economic policy. Yet we have the strange situation where the most economically illiterate, policy-free, anti-reform Opposition in Australian history is cheered on by those who advocate for reform and considered policy debate.

Through the worst global recession in 75 years, when our nation was rallying to meet the challenge, we were faced with two years of mindless negativity from our political opponents. But we stuck to our beliefs and got the big calls right. We are recognised around the world for the way we powered through the GFC, avoiding the recession that hit virtually every other developed economy. When I'm sitting around the G20 table, my fellow finance ministers wish they could say the same about their own economy.

I don't want to go through another two years of such mindless opposition in domestic politics and I think it does a gross disservice to our nation. We have another huge mountain to climb if we are to successfully manage the structural shifts underway both globally and domestically.

The Government is pursuing some of the toughest reforms in a generation – you only have to see the daily diatribe against them to appreciate that. We're getting on with these very tough jobs and delivering – despite being in minority government – because they are vital for our country. That's what leadership is about, and Julia Gillard has got it in spades.

So make no mistake, how we go about reforming our economy says a great deal about our country and its capacity. The economic tests before us are great – both dealing with the challenges and rising to the opportunities. But let us never forget that ours is a society of great capacities too. We must not become a country obsessed with what divides us and not what unites us.

So I say to you here, if we focus on the things we agree on, the things we can work together on, we will walk the reform road together. It requires a hard-headed assessment of the future direction of the economy and the disciplined application of the right policy response. And that's why I appreciate the chance to speak today about all these things, and to be part of such an important discussion.