27 June 2013 - 18 September 2013
'Labor: Managing the Economic Transition'
Address to the National Press Club of Australia, Canberra
Thursday, 18 July 2013
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I'd like to thank the National Press Club for inviting me to speak today.
I am here in a slightly different capacity to that envisaged when the invitation was offered and accepted just a couple of months ago.
To those who came here today to hear the backbench Member for McMahon talk about his new book – I apologise. The Treasurer has turned up instead.
So today I am not going to talk in detail about Hearts & Minds – fantastic read that it is. Get one before they hit the remainder shelves.
But I am going to talk to you about growth and opportunity – what Labor believes in.
Plenty of people have focused on the section of the book that calls for Labor Party reform, which is fair enough.
But more than half of the book deals with the beliefs and philosophy of Labor – the only major political party in the country that combines a belief in growth and opportunity.
The party that, despite the rhetoric of our opponents, is the true party of the individual.
The only party that cares that each individual – regardless of whether they are an Indigenous child in the outback, the daughter of a single mother in Melbourne's western suburbs, or the son of a merchant banker on Sydney's North Shore – is able to grow to their full potential.
So instead of being here as an author talking about the theory of growth and opportunity, I am here to talk to you about both in what is, from my point of view and perhaps yours as well, a rather unexpected capacity.
Labor as reformers
My colleagues will forgive me for saying that I believe Treasury is the most Labor portfolio of them all.
Treasury is core business for Labor because we are at our best when we use market forces to drive economic growth – and use the national wealth created by economic growth to drive greater opportunities for people from all walks of life.
Labor governments don't just adopt policy settings that promote economic growth, we are advocates for growth and explainers of the need for sometimes difficult policy decisions which may have short-term adjustment pain but long term economic benefit.
This is in many ways the Hawke-Keating model of reform.
That's why I thought Paul Keating was onto something in 2004 when he said:
"Many senior people in public life speak of their regard and affection for the Australian public … But I am afraid there are hardly any whose regard and affection for the Australian people went so far as to provide those same people with the truth … to tell them how it really is."
For better or worse, Australians were told how it really was. As a consequence Australians backed a reform agenda of unprecedented size and scope – taking down the tariff walls, opening up and diversifying the Australian economy, fostering competition and productivity.
It was explained that the world's economic model was changing – and that Australia needed to change too.
The Australian economy has profited from those reforms for a generation – 22 years of continuous economic growth.
Economic challenges and transition
In a modern context, that's why the Prime Minister and I have been talking about the current challenges facing the Australian economy and the need for a new competitiveness agenda.
The Australian economy is strong and resilient. Our success as a nation through the Global Financial Crisis stands us in very good stead. But reform is necessary to keep our growth continuity.
Today, I want to talk about recent developments, both here and abroad, since the Budget was released in May.
We have seen regular downgrades of forecasts for global economic activity. The IMF has now downgraded its projections five times.
In the United States, growth forecasts have held up reasonably well.
Fiscal contraction is still weighing on US growth, but monetary policy is accommodating – and labour and housing markets are showing signs of improvement.
This is welcome news.
In the euro region, the outlook is difficult, with economies in a significant and persistent recession – and no quick fix possible.
Europe's sovereign debt took time to develop and will take time to alleviate.
Even on a best case scenario, Europe remains a significant downside risk.
Closer to home, China's exports to Europe and the US have softened. So, too, have growth prospects.
Chinese authorities have stepped up efforts to rein in credit growth, most visibly through some rather dramatic steps in the interbank lending market.
It's easy to see why China has acted.
Credit in China grew around 30 per cent over the past year – raising concerns about the quality of lending.
In the near term, these tighter credit conditions will weigh on China's growth prospects – and are a factor in the declining prices of Australia's key commodity exports.
As the Prime Minister said last week when he spoke at the National Press Club, the China resources investment boom is over.
We have reached a crossroad.
This is not a crisis. But it is a challenge.
The reality is that China is entering a new phase of its economic growth.
What Chinese authorities are striving to achieve is stable, long-term single digit growth.
And that is the right approach.
It's in Australia's national interests for China to go down this path.
Also, it's also worth noting that the Chinese economy is 50 per cent larger than it was five years ago.
As a consequence, growth rates of 7 or 8 per cent are similar, in their contribution to aggregate global growth, to the 10 per cent growth rates we saw in China before the GFC.
That being said, any probable scenario for China includes more volatility in prices for our key commodity exports and, therefore, our terms of trade.
For example, a few weeks ago the Treasury Secretary noted that the terms of trade outcome for the March quarter was weaker than Budget forecasts.
This result was largely driven by a decline in iron ore and coal prices, although the significant decline in gold prices was also a factor.
This is a result, primarily of two things – significant increases in global supply coming on line – not least of all from Australia – at the same time as the cooling of Chinese growth.
The decrease in Australia's terms of trade since the peak of the September quarter 2011 has weighed heavily on nominal GDP growth – impacting on government revenues.
Meanwhile, the depreciation of the Australian dollar has worked in the other direction, cushioning the decrease in US dollar commodity prices.
At Budget, the forecasts were for the Australian economy to grow at – or slightly below – its trend rate of 3 per cent over the next three years.
This follows a period where growth and employment outcomes in Australia have been much more favourable than most other advanced economies.
The Australian economy has grown by 14 per cent since the end of 2007;
The US economy has grown by only 3 per cent;
And the euro area and Japanese economies have both contracted.
Our labour market has also outperformed most advanced economies, with Australia adding over 950,000 jobs since the end of 2007 – compared to the loss of nearly 5 million jobs in the euro area and around 2¼ million in the US.
The reality is that the actions this Government took during the Global Financial Crisis helped avoid the kind of mass job losses and social upheaval that is still ongoing in the US and across Europe.
We went hard and we went early – going into deficit in the process – but it was worth it because it saved jobs and saw Australia through our biggest economic challenge in generations.
And of course, a recession would have driven us further into deficit in any event.
It wasn't good fortune that saw us avoid the Great Recession – it was good management.
Australia's relatively strong economic performance is expected to continue – with real GDP growth over the next two years expected to exceed that of advanced economies as a whole.
But, the truth is the next few years will be challenging.
It will be challenging because – at a time when Treasury is forecasting the Australian economy will grow at or slightly below its trend rate – we are facing two large and very important transitions.
The first transition is within the resources sector.
This sector is transitioning from the largest investment boom in our history to a production and exports phase.
During the resources boom – from 2002‑03 to 2012-13 – resource investment in Australia increased from a 1.8 per cent share of the economy to an estimated 8.1 per cent.
Until the recent fall, our terms of trade were as high as they had been at any time since Federation – indeed at their peak, 60 per cent higher than their average across the 20th Century.
This gave us a windfall of roughly 15 per cent of GDP in national income.
The terms of trade increase encouraged investment in a supply response to capture not just the elevated prices for our minerals but the elevated volumes on offer.
This has been a structural economic adjustment.
Our floating exchange rate, responding to those higher terms of trade, underwrote the reallocation of labour and capital to those parts of the economy offering the greatest returns – out of manufacturing and services and into the mines and gas fields.
This adjustment also saw economic activity move to different parts of Australia – to the West and the North and away from the traditional centres of economic activity.
We know we can expect resource investment to peak this financial year.
At that point, resource investment will begin to detract from Australia's economic growth.
The reality is that the past decade has been abnormal.
Over the next two years, the Australian economy will begin to return to normal.
But now we have to undertake a different transition.
Not just a smooth transition from the investment phase to the production phase in the mining industry, but also the change from most of our investment activity being in resources to being in the secondary and tertiary sectors of the economy.
That doesn't mean that economic growth will fall off a cliff.
As resource projects reach completion, the production phase will gather pace – generating significant growth in resource exports.
For example, iron ore exports – which have grown 80 per cent over the past five years – are forecast to grow a further 41 per cent over the following three years.
Growth projections in the gas sector are also impressive.
The Bureau of Resource and Energy Economics expects Australia's exports of liquid natural gas to more than triple in the second half of this decade – making Australia the largest exporter of LNG in the world by 2020.
However, the increase in resource production is not expected to be enough to fully offset the decline in resource investment.
The estimated net contribution of the resource sector to real GDP growth is expected to fall – from contributing to roughly half of Australia's economic growth over the past two years to around a third by the end of the forecast horizon.
The production phase of the resource boom will also be significantly less labour-intensive than the investment phase.
This brings me to the second transition we face.
That transition is to growth being driven by the non‑resource sectors.
It's not surprising to see Treasury forecasting that the non-mining economy will make a larger contribution to Australia's economic growth.
These transitions will occur inevitably.
The question is: will they be smooth or bumpy? Will the Australian economy benefit from them or suffer?
Our challenge is in improving our productivity and competitiveness to assist in this transition.
This is the key economic challenge for the next three years – and lies at the core of Labor's positive plan to promote competitiveness to spur jobs and investment.
This will mean working with the manufacturing and services sectors to promote investment.
I'm not talking about picking winners or subsidies – I'm talking about breaking down barriers to competitiveness.
What we're doing in financial services is a good example of what can be done.
The financial services sector has seen incredible growth in the last 20 years and it is this growth that we need to harness.
Despite the strength of the local industry, our exports and imports of financial services are low by international standards.
There is a great opportunity for the financial services industry to become more outwardly focused.
Encouraging competition and efficiency would improve the range and choice of financial products available to consumers and promote increased exports of financial services.
Improved economies of scale would reduce the costs of financial products for Australian consumers and businesses.
As our track record shows, only Labor is interested in taking advantage of these opportunities.
In 2009 and 2010, it was pretty unfashionable for Governments around the world to announce that they wanted to promote financial services.
But in January 2010, as Minister for Financial Services and Superannuation, I released the Australian Financial Centre Forum's report on Australia as a Financial Centre – the Johnson Report as it became known – and four months later, the Government started implementing the key reforms.
Stages 1 and 2 of the signature reform – the Investment Manager Regime – have passed the Parliament.
We have taken steps to create a deep and liquid corporate bond market in Australia. Legislation to simplify corporate bonds issuance has passed the House of Representatives.
The Government has passed legislation to enable the retail trading of Australian Government Bonds.
And the Government recently announced that Australia will be the third major currency in the world to be able to trade directly against with the Chinese Renminbi, after the US dollar and the Japanese Yen, in China's foreign exchange market.
Why have we done this?
Because Labor knows that increased trade in financial services will increase Australia's growth prospects and standard of living.
We know positioning Australia as a financial services centre in the region means that we would be able to offer increased job opportunities for a range of skilled workers in the financial sector.
And there is potential to do so much more.
Managing the transition
Our challenge is to manage this transitional period. From the mining investment phase to the production phase, from resources investment to investment in services, manufacturing and clean energy.
We need to ensure this is as smooth as possible and the bumps are minimal.
We need to ensure we see structural adjustment which doesn't have jagged edges and a significant increase in unemployment.
We have a flexible labour market, open and competitive product markets, a flexible exchange rate and sound macroeconomic policies.
This economic framework has served us well and must be preserved – and built upon.
To do this, productivity must be front and centre of Australia's economic agenda.
Growth in productivity to realise higher incomes and higher standards of living – both for Australians today and into the future.
It is up to government to provide leadership and create the right conditions for businesses to innovate, improve and grow.
Just as importantly, it's also up to business and unions to come together in partnership with government to take ownership of the reform agenda.
As the Prime Minister has outlined, we must embrace a new national competitiveness agenda.
The heart of this agenda must be a common goal of lifting Australia's annual productivity growth rate to 2 per cent or better for the future.
Labor wants to build on our already significant investment in productivity since coming to power. We have:
- Invested over $36 billion in roads, rail and ports over the six years to 2013-14, as part of our Nation Building programs;
- Invested in the National Broadband Network, which will have profound implications for the way we work and the way businesses operate;
- Put in place reforms to reduce red tape – and business costs – under the COAG National Partnership Agreement to Deliver a Seamless National Economy, including reforms that set in place national regulatory frameworks for Personal Property Securities, business names, payroll tax, product safety, and consumer credit;
- Invested heavily in human capital by increasing university places by 75 per cent between 2007 and 2013. There are now around an extra 149,000 Commonwealth Supported university places, a 35 per cent increase compared to 2007, with about 577,700 Commonwealth supported places expected to be funded in 2013.
Last week, the Prime Minister set out seven point plan that business, unions and the Government can further work on.
I won't revisit them all here.
But one key element was addressed earlier this week, when the Prime Minister, Minister Butler and I announced the Government's intention to move to an internationally linked emissions trading scheme one year early.
It has always been the Labor Party's preference to have an emissions trading scheme, because tackling emissions through a market mechanism is the most economically efficient way to reduce our carbon pollution.
Coincidentally, yesterday was the six year anniversary of Prime Minister Howard's announcement that he too intended to introduce an emissions trading scheme to tackle climate change.
It is worth recalling his words from six years ago:
"…mankind has powerful tools for the task ahead, none more so than the spirit of discovery inspired and channelled by rational science and free markets…"
Of course, this was also the position of the Labor Party and it remains so today.
But the Liberal Party have disowned what was and should be a bipartisan position of support for science and efficient markets. The contrast between Mr Howard's statement on emission trading three years ago, and Mr Abbott's four days ago couldn't be greater.
When asked about emission trading, Mr Abbott dismissed the idea, saying: "It's a so-called market in the non-delivery of an invisible substance to no-one".
The fact is emissions trading is the right policy response to climate change.
The Germans know it, the British know it, the French know it, the Americans know it, the Chinese know it, the Kiwis know it, the Japanese know it and the Koreans know it.
Moving to emissions trading one year early will provide businesses and households cost pressure relief.
It will give a competitive boost to our non-mining sectors, so they can more easily rise to the task of fuelling our growth in coming years.
Of course this does come at a cost to the Budget; $3.8 billion over the forward estimates.
But this is a cost that we can bear by identifying reasonable savings, whether by ensuring industry assistance remains proportionate to the impact of a carbon price, by reforming tax concessions so they do exactly what they are meant to do, and by making tough but reasonable decisions about what we can afford given lower revenues.
In this savings exercise, we have protected assistance for families and pensioners and assistance for the renewable sector.
Over the coming years, they will play a significant part, not just in tackling climate change, but in diversifying the economy and providing a new source of jobs and growth.
To conclude, managing this transition in the Australian economy is an opportunity as well as a challenge. It's the sort of opportunity Labor governments embrace.
It was a Labor Government which, in the 1980s and the 1990s, transitioned Australia from the old post-war economy to the new responsive and productive economy; playing a huge role in unleashing 22 years of compound growth, underpinned by low inflation.
Who is best placed to manage and engineer this transition will be a key battleground – the key battleground in this election.
Last week, we could have had a debate between the Prime Minister and the Leader of the Opposition here on this very podium.
It would have been a good thing for democracy.
A good hour long discussion on the economic questions facing the nation and who is best placed to deal with them, would be better than the battle of the sound grabs.
Likewise, the Treasurer and the Shadow Treasurer should be engaging in a healthy series of debates.
A number of media outlets have suggested debates between the Shadow Treasurer and I.
I've agreed to them all – Mr Hockey has yet to agree to any.
You have to ask just why the Opposition is so scared of engaging in these debates.
I'm happy to return to the National Press Club anytime – with two podiums – to debate the economic issues and debate alternative approaches.
The Australian people deserve nothing less.
It's a debate I'm looking forward to – and a debate based on substance that the Government can, and will, win.