7 March 2014

Keynote Address to the ANZ Global Capital Markets Corporate Debt Conference, Hunter Valley


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Thanks very much Warwick. In my role as Assistant Treasurer one of my jobs is to be out there communicating with this sort of audience to try and give you a feel for where the government is going.

It’s only been in six months, but a lot has happened already and that early period of government is always the time when you set a few markers up.

Let me give you an example - industry policy.

We’ve had a number of issues in the industry policy space lately.

There were things like whether we extend assistance to SPC Ardmona around Shepparton. There have been issues around the future of subsidies to the motor vehicle industry and most spectacularly in recent days there have been issues around the relationship between the government and Qantas.

And one of the things I think one of the things the Prime Minister has been determined to do is to say that I’m drawing a line under some of the practices of the past. That the old politics of: you get put under pressure, this is going to happen, you’ve got to do something about it, you’ve got to throw money at it. This industry is going to crumble. These jobs are going to go… He’s saying look, the adjustment is on in the economy.

We know the adjustment is on and it’s not just because we’re transitioning from the mining economy being the main driver to trying to get the non-mining economy going properly, but it’s also because the competition around the world is really intensifying. And it’s not the OECD, the US, the UK or Europe. It is Asia, Africa, Latin America. The competition is coming from everywhere and so what the PM is saying is we need more of a global mindset.

If we’re going to have a global mindset, we’ve got to be prepared to take the competition on. And in the case of a company like Qantas, it means if we are standing in the way of them being more competitive, what will we do to make them more competitive?

In that context getting rid of elements of the Qantas Sale Act, making a more level playing field between them and Virgin, was part of creating that more competitive environment and maybe taking some of the shackles away from Qantas. A debt facility would be nice, but we can’t do that for them and for everybody. That is the point.

And at the end of the day we’re saying management, employees, suppliers, all the other stakeholders, have a responsibility to get on with the job and our role as a government is to create the best possible environment – particularly at a macro level – to then where we’re in the way, to get out of the way, where we can facilitate change and facilitate the change where there are areas of market failure, for example in the areas of innovation, commercialising things in Australia. That’s where we can play more of a role.

So when you go and talk to someone like Joe Hockey these days, he’s talking about, well ok, look at start-ups in the economy. Now small business is a great source of start-ups obviously, but across the economy there are all sorts of start-ups you can get, particularly in innovation areas.

What are doing to actually promote start-ups? One thing we’re doing is trying to reduce the burden of regulation where we can.

Another thing we want to do is promote the sort of people that want to work in start-ups. So employee share schemes which actually genuinely recognise the risks people undertake when they’re in small business or in start-ups. Reverse some of the things that Labor did.

Some of you here will remember, possibly all of you the changes they made to employee share schemes in 2009. This could only have been done by a lot of people who are completely uncommercial and did not understand that it’s not fair to get people to pay money on things they haven’t even received yet. They haven’t even realised yet. They haven’t crystallised. Because they take and they still do take.

Labor still takes this very redistributionist view of the economy. Their focus always is on how we’re cutting the cake up. Well that’s fine, but we’ve got to keep building the cake. Building the cake means incentivising people and taking everybody with you.

Tony Abbott, Joe Hockey and others are not saying that someone’s got to be left behind in this process. Not only do we think the rising tide will lift all boats, but we’re also consciously changing the focus of industry policy to help workers adjust so that those workers who are leaving declining sectors or areas where there is no prospect of viability, have other options. It’s a very important process.

So this is about smoothing adjustment. The economy’s reaching a tipping point and our job is to reinforce that tipping point, because we need our economy to adjust and become more fit for purpose.

It has gone through a period where, partly because we’ve had really fantastic terms of trade, there’s been all this income moving through the economy and that’s taken some of the pressure off. There’s no doubt about it.

Now, that’s all reversed. The impact on the Budget is reversing. Revenue hasn’t been growing as strongly as it used to.

The impact on incomes is reversing. Incomes are not growing strongly as they were.

So today, to replicate the sort of income growth we’ve had or we’ve been used to over the last few decades without the benefit of the terms of trade helping us, we need productivity, labour productivity to double to something like three per cent. Now that’s a big ask. That is a lot. That is not all going to happen in one go and it may not completely happen. But the point is, now we can’t hope for another gold rush or something to get us out of it. It’s higher productivity, it’s higher competitiveness.

The resources boom has left a legacy of high costs, particularly in the mining sector, but also in other parts of the economy and then because of the structures we’ve got in the economy, these costs tend to linger. We don’t tend to have a situation where over time these costs sort of somehow recede as the cost drivers recede.

That means that we’ve got a relatively high cost, relatively highly regulated economy having to compete with all these emerging markets. Now the emerging markets are our customers and our friends as well as our competitors, but they won’t hesitate to eat our lunch. They’re not waiting for us to succeed. And so even in the mining sector now, if you’re a mine in Western Australia, you would look closely at your prospects, not just in Western Australia, but in Africa, just over the Indian Ocean. On the east coast it’s the same. People look north and so forth.

The fact of the matter is, companies here have a lot of other options and so therefore our role if we’re going to keep jobs here, if we’re going to keep head offices, so we don’t become a branch office economy is we’ve got to be working smarter. It’s not about working harder. We can work smarter in a lot of ways.

That means the whole focus as I said, the policy has to focus on innovation and creativity. Now, I mentioned macro factors before because one of the big roles of government is to reinforce if you like, a favourable macro environment.

Now we’re trying to do this in a number of ways. First and foremost by making sure the Budget is under control. The reason we talk about a Budget emergency is not because tomorrow we’re going to run out of money, we’re not running out of money tomorrow. But what is happening over time is there have been all these cost drivers built into the federal Budget. For example, the IMF said recently that between last year or so and 2017 we have the highest rate of spending growth projected among 17 economies in the IMF area among the western economies.

Joe Hockey had some comments in the paper this morning about the fact that when you go just beyond the four years of the forward estimates in the Budget, you suddenly start to get a big increase in spending on defence, the national disability insurance scheme, healthcare - you go through the list. Conveniently it was just beyond the forward estimates that Labor had put together when they were putting together their last Budget and their pre-election economic fiscal outlook.

So, the challenge is that on current projections if we don’t change policy, we get debt at around $667 billion by about 2023/24. Now, by the standards of Greece, Portugal and Spain and parts of Europe and America, Japan, it’s not 80 or 90 per cent of GDP. But it’s about, if you don’t put in the restraints now, you can bet your bottom dollar that’s the minimum about where debt will end up.

The problem is as debt accumulates, it gets harder and harder over time to take the measures needed to bring it under control. As a small open economy still relatively speaking, we need to be able to have the insurance to withstand adverse external shocks.  The global financial crisis is another example of where having done the hard work in the nineties, in the mid-nineties in particular on the Budget as well as on structural stuff, we’re in a position where we had that insurance – that safety net. We could spend without greatly endangering either our credit rating or our overall levels of indebtedness. And on top of that we had a sound economic framework and we had the benefit of stimulus from China and the region.

The point is, you need that insurance because you don’t know what’s around the corner. You need to take those decisions early. So what Joe Hockey and Tony Abbott were saying is we’re going to take the decisions now in this Budget that lay out a pathway back to surplus over the next few years.

Now not all those measures take effect right away, but we announce them now, we legislate them now, we lock them in now, so everybody knows where we’re going. There’s a bit of certainty around about the pathway back to surplus. And it’s important to lock them in now, but it’s also important in doing it as Joe has emphasised to take account of the state of the economy, because the fact of the matter is, we’re having that transition as I mentioned between the mining and the non-mining economy. It’s not smooth and it’s not going to be seamless.

Look at the national accounts the other day – some good pointers in there. Household consumption was up, dwelling investment… But look at non-mining investment. It was relatively flat at a time where mining investment is coming off.

Mining or resource investment went to about something like eight per cent of GDP. Historically, it’s been around two or three per cent. So it’s readjusting down. So that’s going to be a big downward thrust on the economy.

What we want to make sure with the Budget is putting in place the measures to promote savings particularly over the medium term. We’re not creating a shorter term drag on growth as well. And we want to reinforce the settings that the bank has got at the moment around monetary policy – so a relatively low interest environment. Hopefully that also translates into the dollar coming off a bit more. As long as the Americans are confident that their economy is growing properly and the tapering continues and I know that there have been a few questions about that lately.

The point is, if they continue to taper, what will happen is of course, their interest rates will tend to go up and their dollar will tend to go up and we will tend to go down and we want to reinforce that downward pressure on the Australian Dollar where possible. It is very important in helping us engineer the transition.

In helping with the transition, Hockey has also made it clear that when we look at the composition of Budget spending, we’re turning more of a focus on infrastructure spending. Not just because we love roads and bridges and big projects, although politicians do love those things I’ve got to say. It is nice to go and open them and take credit for it, spending other people’s money. But the point is that we do need to change the composition of government spending in a way which also helps us support activity and where we’re providing much needed infrastructure that’s also the underpinnings of further growth and productivity and competitiveness.

We are trying to do it in a way where we’re improving the way Infrastructure Australia operates in selecting projects so there’s a better process, a more open process, you know what the cost-benefit of projects is. There’s more of a pipeline of projects being put together. So you’ve got more certainty as an investor that there’s a 10 to 15 year horizon of what is possible in terms of investment.

Joe Hockey’s been talking to the states and has incentivised them to recycle more of their assets into new infrastructure spending. So for example poles and wires in New South Wales, Queensland. Obvious candidates at some stage you would think because you could raise a fair bit of money there.

What Joe is doing is talking to the states and territories and I’ll have meetings again with them soon around how do we encourage them to sell existing assets, particularly to people like super funds and others who want mature assets, that have a stable, predictable return and then recycle that money into greenfield investments.

Also through the Productivity Commission, we’re about to launch a study or release a study about private financing in the infrastructure space and how we promote that more.

We went to the 2010 election with a policy around promoting infrastructure bonds with tax breaks. I’m not sure where that will come up in the Productivity Commission report. But they’re looking at what do you need to provide a secure environment for private finance in this space.

What New South Wales is doing of course is trying to de-risk projects by having the government take risks at the beginning during the construction phase, get projects built, make them bankable, sell them off and flip the money into new infrastructure.

I’m talking a bit about infrastructure because it will be a feature of the Budget – an important feature of the Budget and it also links with our strategy in the G20, where we are talking to other countries about how we promote better infrastructure outcomes in the region and across the G20. This is very important to do because there are a lot of circumstances where, for example, we look at emerging markets which have underdeveloped capital markets.

They actually have in many cases quite good levels of savings. But what’s happening is a lot of those savings get recycled in the west rather than being used domestically for productive investment.

So what we’re talking to people in the G20 about is how we further develop those capital markets so more of those domestic savings are mobilised for domestic investment.

There’s quite an action agenda that’s come out of previous G20s, it hasn’t all been progressed. We are saying that we want that progressed and we want Australia to play a role in the region in promoting the further development of capital markets in emerging economies.

We have a lot of expertise to offer. We want to promote exports of financial services. So for us, selfishly it’s about promoting ourselves, but it is also about the good we can do in the region.

At the moment, for example we are trying to do a fair bit with the Chinese around internationalisation of the renminbi. I’ve been involved in a number of exercises with China Construction Bank, Bank of China recently where they’ve been promoting clearance and settlement services for the renminbi in China/Australia trade.

I recently attended an event with the stock exchange and the Bank of China where the stock exchange is going to be using their infrastructure to help with the clearances. So they are getting into this with their ears peeled back, which is great.

I went along to a signing of a memorandum of understanding between Hancock Prospecting and the Bank of China, which is again around how they promote the use of the renminbi internationally.

And we see what we do with the Chinese in this space as a way of promoting our own wears in terms of financial services – our expertise. Promoting their international engagement. Encouraging them to further develop and liberalise their capital markets.

Now, we want that for geopolitical reasons. We want them to be as engaged as possible in international markets under the existing rules. It’s like all these things, the more they have a stake in the international system, the more they feel ownership and party to the international system, the more they will want to observe and obey the rules of the system. And the existing rules have been good rules for the world economy.

As an emerging superpower, this comes along, engagement is very important – that’s a positive engagement. As part of our economic diplomacy with them, the Prime Minister is going to be going up to China for Australia/China week in April. Warwick’s going up there. He is a constant feature of these things. That sort of engagement at this level, at the Prime Minister’s level is very important and we were very encouraged the other day that the Chinese Premier in his speech to the peoples’ congress, I think it was, talked about the aspiration of completing a free trade agreement this year.

This free trade agreement has been in the works for eight or nine years and has spent a long time in gestation. But it is very important that we get a good quality agreement and if we can get that agreement this year. The Prime Minister, when he first came into office, expressed a desire that it be done within twelve months.

If we can get it done this year on top of having done the free trade agreement with Korea and the free trade agreement hopefully with Japan - in other words, if we complete three trade agreements with our major north Asian neighbours - I think that’s a tremendous fillip to trade and investment in the region and for us.

Of course one of the challenges of that agreement with China would be the treatment of agricultural land and the like and how we treat state-owned enterprises. But look, these things are not beyond the wit of a man. If we can land on the moon, I’m sure we can get a free trade agreement with the Chinese in due course.

That sort of engagement is going to be very important to us going forward. One of my roles as Assistant Treasurer is to promote that sort of engagement. I’m promoting the ASEAN region funds passport to promote funds management in the region and the opportunities for us. But it is two ways, it’s not just for us. I think that’s very important.

I want to complete the work of the Mark Johnson report on how we promote Australia as the hub for financial services. That is not to say that we’re going to sort of takeover or supplant Singapore or Hong Kong or Shanghai, but particularly Hong Kong and Singapore. This is all complementary, but we shouldn’t take a backward step. We’ve got great competitive advantages because of the expertise we’ve built here over thirty years of financial deregulation.

The great advantages we’ve got as a location in the region and lifestyle wise, there’s a lot of really good things going for us. So, yes and there are tax and other issues and we’re looking at things like the investment manager regime and all the rest of it.  Some of the stuff that Mark Johnson wanted to do in that space. And that’s all important. So getting the tax base is important. Getting offshore banking units sorted out which we’re doing is part of that process. But it’s all part of that broader vision as I said.

In the context of this broader vision, the point I want to make about our engagement with the region is that there’s a lot of talk around the mining resource boom, but what we’ve got to get used to is the idea that there are successive waves of potential opportunity coming in the region, particularly with China. Resources is one, food and agriculture is another, advanced services is another. This is all because particularly in China and India as their middle classes expand and their tastes change and as incomes grow up, they ask for more processed foods for example and they demand more services as is usual in any high growth, high income economy.

We are ideally positioned to do a lot on this. Now none of it is a foregone conclusion. We can fritter away the opportunities and we can be too high cost and all the rest of it or nonresponsive.

The fact of the matter is, we have got to get into our heads that there are successive waves of opportunity coming.

It is not a waste of time to be engaging and establishing the right sort of presence in those markets. And the role of the Australian Government is to reinforce that through our diplomacy. Our presence in the G20 is giving us a great platform to do this. In that context, we’re promoting as I said infrastructure. We are promoting capital market liberalisation, we are completing the financial regulation agenda that came out of the global financial crisis.

The point Joe Hockey keeps making as chairman of the G20 is we want to complete that process. But we’re not necessarily going to entertain more and more ways of further financial regulation. Certainly not without thinking carefully about the costs and benefits for Australia, because the reality is that many of the measures that have been put into place reflected the failures of regulatory regimes in Europe and the US rather than what happened here.

We’ve had a relatively sound regulatory framework for a long time. So for example, we’ve announced the Financial Systems Inquiry under David Murray – a very important inquiry. When that was first mooted, the context was more around competition in the banking sector and that will still be an important part of it. For example, the relationship between large and small banks. How is that affected by how they are regulated? The sort of prudential requirements. Do they have competitive effects? Large versus small.

But it’s more than that, particularly now that technology and innovation are changing the way payments are made. Payment systems are changing, but platforms around us are changing all the time. The way mobile devices are dominating the landscape.

So you’ve got all this technological disruption going on. You’ve got all these big new players with massive footprints coming in like the Googles and others, eBays with PayPal and all the rest of it. You’ve got all these players and then you’ve got the Woolworths and the Coles of the world with their sort of footprint and the way they’re expanding the scale and scope of what they provide.

So, for regulators the challenge is well ok this new world, what is a bank? What does a bank look like? How do you define a bank in that context? How do you regulate it, what they do? How do you regulate what other financial institutions do?

The experience of financial regulation going back to the 50s and 60s and this is one of the reasons why we have financial deregulation by the way is when you regulate part of the system, you create incentives for people to go elsewhere. You create non-bank financial institutions, you create shadow banking – something which the Chinese are grappling with at the moment.

So for us, when it comes to regulation, it’s having the sort of forward-looking innovative regulation which is anticipating where things are going rather than always having to play catch up. Because inevitably when you play catch up, you end up with regulatory overreach. And the big trade-off here is the trade-off between how you create stability in the system, particularly the financial system. It’s very important, it has to be. And the relationship between that and competition and growth and innovation.

Now the fact of the matter is that at the moment as I was alluding to, innovation is really taking off. So we have to think, how do we regulate this system?

I also have some aspirations about how to further liberalise and deepen the Australian capital market. We’re looking at again through the lens of the Johnson report things like retail corporate bond market. We want to get that properly underway.

Joe Hockey wants to look at the term of commonwealth government bonds – lengthen those terms. Create more of a benchmark for longer term private securities as well. I think he very much understands the linkage between having a strong and vigorous capital market and its role in allocating capital through the economy. And David Murray’s inquiry will be looking at some of those capital allocation issues as well, particularly in the life of the development of superannuation in Australia.  We’ve got one of the biggest pools in the world - $1.6 trillion or so – a huge pool. Remarkable for a country of our size. A great national asset. We don’t want to sort of fritter that asset away. We don’t want to mandate how those funds are used. They’ve got to be used in the interests of members. But the point is, how do we create an environment which optimises the use of that savings pool?

Some people say to us, with such a savings pool, why are we so dependent on foreign investment? Well apparently dependent. Well actually in a sense that’s a different question. How much foreign capital you get depends on the balance of your domestic savings and investments. It’s a slightly different thing but the point is, there is a lot of debate around how that capital in super funds is allocated. There’s a lot of debate around the extent to which the way it’s allocated now means that there’s too much having to be put into equities for example vis-à-vis other asset classes. Is that an issue? Should it be an issue?

If we are looking to develop other asset classes, how do we do that? We talked before about retail corporate bonds. I’d look at the self-managed super fund sector which has now got a third of Australian’s super savings. They’re looking for infrastructure projects – retail infrastructure projects – So I’m keen to get ideas on how do we package that up?

Maybe when we solve the broader issue of how super funds can invest more in infrastructure assets, maybe out of that something will come.

So it’s all about how you create all sorts of different products to create a greater choice of asset test if you like. So for us that’s a very important process that still is ongoing.

The final thing to say is when you talk to Tony Abbott about economic matters, the thing that comes through to him in particular is he believes in the first six months he has had to set the tone. So as I said at the beginning, part of that was to say the role of industry policy is changing. We need to be on the front foot. We need to facilitate adjustment.

And the second part of that in the Budget is that while taking account of the state of the economy, we’re going to make sure we put in the measures now that have good savings over time.

So for us, they’re going to be the priorities over the next few months and on that note, I’m happy to take some questions.

Thank you.