Making the Federation work Better for All Australians'
Thank you to the University of Adelaide for the opportunity to deliver the Sir John Downer Oration.
Sir John Downer was born in Adelaide in 1843.
His father, Henry Downer, was a tailor who had migrated to the colony of South Australia from England five years earlier on the sailing ship Eden.
Sir John enjoyed significant success in the law, but public service soon called.
He entered political life in 1878, elected unopposed for the Barossa electorate where he was returned in eight successive elections.
Sir John went on to serve South Australia in various capacities.
He became South Australia’s Attorney-General in 1881 and served twice as Premier from 1885 to 1887 and then from 1892 to 1893.
While Sir John oversaw the growth and development of South Australia, he also had a bigger vision.
A national vision for the six colonies, which were at that time basically separate countries.
Returning from the first intercolonial convention in 1883, Sir John outlined to his dinner companions what he, and the others at the convention, were seeking to achieve:
“We consider we have been rallying around all Australia to bring it together in that union which is absolutely essential to the greatness which we all confidently anticipate for her”.
Sir John went on to play a major role in the subsequent debates and constitutional conventions that culminated in the Federation of Australia.
He also served as one of the first South Australian Senators in Australia’s first Parliament.
Sir John’s legacy lives on, both in the enduring words of the Constitution he helped to develop and in the significant contributions made by subsequent generations of his family to public life in Australia.
Our journey towards Federation is embodied in the life and career of the statesman honoured in this biennial public lecture.
This evening I would like to discuss how our economy has changed since Federation, the challenges it faces today, how our Federation for all its faults has served us well and how all levels of government must work together to meet the challenges we face to ensure the prosperity of all Australians.
The Economic Context
The Australian economy has transformed since Federation.
It has become more diversified.
At Federation, the agricultural sector made up around 20 per cent of our economy and the manufacturing sector made up around 12 per cent.
Since then, the services sector has been steadily increasing in size and today makes up almost 70 per cent of our economy.
Our trading partners have shifted towards Asia.
At the turn of the 20th century the United Kingdom was our largest trading partner. Today China is our largest trading partner, comprising over a quarter of Australia’s trade in 2018.
And there have been significant rises in life expectancy and real incomes.
In the first decade of the 1900s, life expectancy at birth was 55 years for men and 59 years for women. Today, life expectancy at birth is nearly 81 years for men and 85 years for women.
Australia’s per capita real gross national income is now 75 per cent higher than levels in 1990 and more than 3 times higher than levels in 1960.
Australia is now the 14th largest economy in US dollars.
We have the fifth most traded currency and we are one of only 10 countries to have a AAA credit rating by all three major rating agencies.
But today’s economy is not without its challenges.
Drought is continuing to be a major economic and social challenge with over 95 percent of New South Wales and two-thirds of Queensland affected.
Farm GDP was down about 14 per cent in 2018-19 detracting around 0.2 percentage points from economic activity.
The challenges posed by our hot and dry continent have been made all too clear by the recent bush fires ravaging parts of New South Wales and Queensland.
Dwelling investment is also detracting from growth after making strong contributions to growth between 2013 and 2017.
As new dwellings have been built, the increase in housing supply has outpaced population growth. This is likely to have contributed to housing prices starting to fall from late 2017.
Following price declines, new residential building approvals have fallen before picking up slightly in September.
And global political and economic uncertainty is affecting business investment and growth.
The IMF has downgraded its forecast for global growth to 3 per cent for 2019. This is slower than rates recently recorded, but is still reasonable.
Some countries face more challenges than others. Germany, the UK, South Korea and Singapore have all experienced negative quarters of growth this year.
The trade dispute between the US and China hovers over the global economy like a dark cloud. But the language from both the US and China on trade has been more positive recently.
The global economy also faces challenges of slow inflation and wage growth despite low unemployment and the low interest rate environment.
Global demographics are a contributing factor that partly explain the low interest rate environment evident in the world today.
As more people globally save for retirement, global savings have increased. This has resulted in surplus savings, which are driving down the price of funds and ultimately interest rates.
More than 50 central banks have cut interest rates this year, with Japan and some countries in Europe seeing their long term bonds trading at negative yields.
And around a quarter of all government bonds globally are now trading at negative yields.
While interest rates remain low, global debt levels are being managed.
But, concerns are rising. Global debt levels have risen rapidly in recent years and are now at a record high of US$188 trillion or 230 per cent of global output.
Countries that have high debt levels are more vulnerable to future shocks. Their ability to respond is more constrained and the impact of any future shock is amplified.
In this global environment, the Australian economy has proven to be remarkably resilient and there are reasons to be positive.
We have supportive monetary policy settings, a strong fiscal position and are living within our means.
The Government has worked hard to rebuild the nation’s finances.
In 2013-14, some five years after the Global Financial Crisis, the budget deficit was still the second highest in nominal terms in Australia’s history.
Since then, the Government has made steady progress to repair the budget and chart a responsible path back to balance.
In 2018-19, the Commonwealth budget returned to balance for the first time in 11 years.
The 2018-19 Final Budget Outcome showed that we have kept spending as a share of GDP at 24.6 per cent of GDP.
This is below the long-run average of 24.7 per cent for the second consecutive year, while also providing record levels of investment in essential services like hospitals, schools and aged care.
These results come down to responsible fiscal management.
They demonstrate a steady commitment to a strong and flexible medium-term fiscal strategy. This is a strategy that ensures that budget settings are on a sustainable footing.
It is a strategy that shows we have the capacity to respond flexibly to unanticipated events and future challenges.
It is how a strong fiscal position builds economic resilience and creates fiscal flexibility.
A strong fiscal position is about paying down debt to reduce our $19 billion-a-year interest bill.
A strong fiscal position is about ensuring Australians do not bear an unsustainable tax burden, keeping taxes as a share of GDP well within the 23.9 per cent cap.
Most importantly, it is about ensuring that we can guarantee the essential services that Australians rely on while also putting the Budget on a sustainable trajectory for future generations.
If we were to respond to every call from every corner for increased spending we would not be in a position to pay down the debt we inherited, to have the flexibility to respond to future shocks and to provide the stability and certainty that households and businesses need to continue to consume and invest.
The stability and certainty in policy settings gives people the confidence to plan for the future. They can do so in the knowledge that the Government will not be forced to impose punitive taxes or dramatically cut funding for essential services.
Importantly for the economy, mining investment is set to rise, which comes after falls for the past six years following the commodities boom.
Mining investment grew by 2.4 per cent in the June quarter. It was only the sixth time it has grown in 24 quarters since the height of the mining investment boom in 2012-13.
And there has been a lift in mining exploration expenditure. More than $3.6 billion was spent on minerals exploration in 2018-19. This represents an increase in real terms of around 15 per cent on the previous financial year.
There are signs that the established housing market is stabilising.
Combined capital city prices rose by 1.4 per cent in October. This is the fourth consecutive monthly rise and was the largest monthly gain since May 2015.
The strongest gains continue to be in Sydney and Melbourne, but growth was broad based in October with all capital cities recording price increases with the exception of Perth.
National auction clearance rates have also returned back to their early 2017 levels, now tracking at around 70 per cent compared to less than 50 per cent this time last year.
Treasury estimates that a 10 per cent increase in house prices could result in a corresponding lift to GDP of about half a per cent.
Labour market conditions continue to be strong with unemployment at 5.3 per cent compared to 5.7 per cent when we came to office.
Employment growth is more than double the OECD average, and nearly three times what we inherited, with more than 1.4 million jobs created since the election of the Coalition Government in September 2013.
The participation rate is near its record high and the proportion of working age people on welfare is at its lowest level in 30 years.
In other words, more people of working age remain attracted to looking for work and joining the workforce.
The Government’s tax relief and high levels of public infrastructure spending are also supporting the economy.
We have delivered the biggest personal tax cuts in more than a decade which are part of a package to create a stronger, simpler and fairer tax system.
Treasury has estimated that from 2019-20 the Government’s personal income tax plan will boost aggregate household disposable income by around $8 billion each year for the next four years.
The Government has also delivered lower taxes for small and medium sized businesses.
This includes delivering lower company taxes 5 years earlier than planned, enabling 970,000 companies employing 5.2 million Australians to invest and grow.
We are also boosting investment through increasing the instant asset write-off to $30,000 and expanded it to all businesses below $50 million turnover.
On public investment, we have a 10-year $100 billion infrastructure plan which will see major new projects in every State and Territory. This record investment in transport productivity will better connect people to jobs, their homes and their communities, and improve businesses’ access to domestic and export markets.
This includes an additional $23 billion for new projects and initiatives through the 2019–20 Budget.
Our commitment to public infrastructure is creating thousands of jobs and providing opportunities for local businesses.
This is important for the longer term productive capacity of the economy and is supporting the economy in the nearer term.
Importantly, the Government’s economic plan also extends to the workings of our Federation. Before turning to the important productivity-enhancing reforms that we are pursuing in this area, I want to briefly reflect on our Federation, the progress we have made and why we must do more to deliver on its promise.
Our Federation and its promise
A healthy and working Federation is critical to the livelihoods of all Australians.
Both the Federal and State governments share responsibility for funding essential services with the States having primary responsibility for service delivery.
Over 80 per cent of taxation revenue collected in Australia is by the Commonwealth with the States receiving on average 45 per cent of their revenue from the Commonwealth.
This notion of vertical fiscal imbalance and the notion of horizontal fiscal equalisation has allowed citizens to share equally in the prosperity of the nation irrespective of which State they reside in.
As a result a patient in Hobart is able to receive the same quality of care and treatment as a patient in Sydney even though Tasmania’s economy is one tenth the size of NSW.
It’s been said that if our Founding Fathers started again with a blank sheet of paper knowing then what that we know now, they may have not landed on the federal system we now have.
However, they did and it can be said that our Federation for all its faults has served us well.
While people in different States have developed and retained a parochialism that can be seen on the football field and the cricket pitch, their overwhelming sense of loyalty and identity is with our nation.
Unlike the American experience which saw unity out of conflict, our pathway to nationhood has seen a peaceful transition which for more than one hundred years has remained intact.
What is more is as our Federation has matured the barriers have broken down.
Systems are increasingly uniform be it around taxation, education or transport where we now have a common approach to aviation, shipping and rail freight.
In important areas of the economy like corporations law and the regulation of credit, we now have a single national approach through Commonwealth legislation.
But despite this progress we should be under no illusions about the inefficiencies that exist in our Federation and the handbrake it represents on our productivity.
This is where we can and must do better, knowing full well that a new bucket of money will not make our economy more efficient or businesses more productive.
As we seek to lift our productivity from its current five year average growth rate of 0.6 per cent Commonwealth and State governments need to work together and treat the productivity challenge as a national imperative.
The Productivity Commission has given us a blueprint of microeconomic reforms with 28 recommendations in the Shifting the Dial Report, 22 of which are either the sole or joint responsibility of the States.
The economic and social dividend from these reforms which are largely on the supply side is immense. Changes in the health sector alone could be worth up to $140 billion over two decades.
Cognisant of these opportunities Federal, State and Territory Treasurers met recently to advance a program of work to boost the nation’s productivity.
We agreed to develop actionable items in the areas of transport, health, skills and environmental regulation.
The work will lay the foundation for the next wave of collaborative reform between the Commonwealth and the States.
Heavy vehicle road reform
In transport, heavy vehicle road reform offers a number of potential benefits, transparency for industry and ultimately lower costs to businesses and consumers through improved freight productivity.
The Transport and Infrastructure Council is developing a nationally consistent service level standard for roads and is considering a number of reforms including independent price regulation, setting charges on a forward-looking basis, and potential funding reforms to strengthen links between heavy vehicle charges paid and road investments.
The Council on Federal Financial Relations recently discussed the heavy vehicle road reforms and agreed the reforms will be a focus area as part of its program of work to boost the nation’s productivity.
In relation to skills there are significant potential productivity gains in agreeing to a more nationally consistent approach to funding and quality in the VET sector.
By examining skills shortages, the Commonwealth and the States can align their efforts to ensure industry and workers get the skills they need to succeed in the future.
The newly established COAG Skills Council held its inaugural meeting on 20 September 2019 and agreed three priorities for VET reform - relevance, quality and accessibility.
The COAG Skills Council will advise COAG on future reform priorities by the end of this year and provide the reform roadmap to COAG in early 2020.
In addition, in the 2019-20 Budget, the Commonwealth Government announced the $585 million Delivering Skills for Today and Tomorrow package.
The Commonwealth is currently working with the States to co-design the key elements of the package with consultations underway on:
- A National Skills Commission which will provide national leadership of the VET sector by setting priorities for course funding.
- Three pilot Skills Organisations, to work more closely with industry when developing course content and direction. This will help raise the standing and relevance of VET qualifications.
- A National Careers Institute and Ambassador, which will centralise and improve education and career information provision.
This will be a key and continuing area of focus for the Commonwealth.
In the area of Health, providing funding certainty to public hospitals across all States and Territories through the finalisation of the next National Health Reform Agreement is critical. Through the agreement the Commonwealth and the States have committed to progress long term reform of our health system – to help Australians stay in better health so they can get to work and participate in society.
Four Labor and three Liberal governments are now signed up to the Commonwealth’s proposed arrangements. We encourage Queensland to join their colleagues to secure record funding for Queensland public hospitals and patients, providing more doctors, nurses and services.
The Commonwealth Government has also signed agreements with all eight State and Territory governments, Primary Health Networks and community organisations to deliver the first round of projects under the landmark $1.25 billion Community Health and Hospitals Program.
Our focus is also on partnering with jurisdictions to streamline environmental approvals processes.
This will address duplication across all levels of government with the aim of getting major projects up and running sooner without compromising our high environmental standards.
Just two weeks ago the Government announced the commencement of a once-in-a-decade review of Australia’s environmental law.
Delays in obtaining environmental approvals have been estimated to cost the economy around $300 million per year.
We have also initiated a 12-month review by the Productivity Commission into streamlining regulation in the resources sector.
The Productivity Commission will examine regulatory settings across the sector to highlight best-practice examples from across Australia and against our global peers. The objective is to improve the efficiency of environmental approvals and reduce the regulatory burden on business.
In addition to this work we are progressing together, the Commonwealth, the States and Territories are individually pursuing their own reform agendas.
For example at the State level we have seen New South Wales develop their own body of work which looks at their tax mix including payroll tax and stamp duty.
In this State as well the Marshall Government is pursuing a range of reforms including in relation to its land tax settings.
At the federal level, we have made significant reforms to our tax system for income earners and small and medium sized enterprises, enhanced competition through the implementation of the Harper Review and more recently, legislated the Consumer Data Right.
As I indicated, we are also rolling out a ten-year $100 billion infrastructure program which will see major new projects in every State and Territory.
The Government’s infrastructure plan involves not only direct Commonwealth funding, often in partnership with States, but also using our tax system to tap the growing pool of global savings for nationally significant infrastructure projects.
Today, I have released a Treasury Paper which outlines a framework where investors can access a tax rate of 15 per cent, instead of the 30 per cent which would otherwise apply.
To qualify, these major projects will have an estimated capital expenditure of $500 million or more and cover a diverse range of economic infrastructure projects in the areas of transport, energy, communications and water.
The application of this tax rate will apply to projects that are in the national interest and "significantly enhance the long term productive capacity of the economy".
This tax incentive maintains Australia's competitiveness in a global market where the infrastructure funding gap is estimated to be $15 trillion by 2040.
As our Federation evolves and we work together across all levels of Government to meet the challenges such as an ageing and growing population we must make sure the lines of accountability between levels of Government are not blurred.
We may often have joint responsibility for funding, but not always joint responsibility for delivery. The best case in point is in relations to our schools and our hospitals.
Despite 28 years of consecutive economic growth, a AAA credit rating, and a Federal Budget back in balance for the first time in eleven years, there is no room for complacency.
As I have said, the global economic headwinds are real and the devastating drought at home is impacting on the Budget and weighing negatively on business and consumer confidence.
While we conceived our economic plan laid out in this year's Budget cognisant of these threats, we must continue to look for every opportunity to take the country forward.
Making the Federation work better is essential to this task.
It's not about pitting the Federal Government against the States, or the States against each other, but recognising that we're all serving the interests of the same people, 25 million proud Australians.
The areas of collaboration that I have highlighted show promise but will require a shared resolve – a resolve that was reflected in the commitments made by Commonwealth and State Treasurers alike at our recent meeting of the Council of Federal Financial Relations.
In progressing this agenda we continue to strive to realise the promise of Sir John Downer’s vision.
 The Supreme Federalist: the political life of Sir John Downer, J.C. Bannon, pg 47-48.