Good morning and thank you for the opportunity to be here so soon after the federal Budget, which confirmed the strength and resilience of the Australian economy.
Macro-economic overview – Budget position
The Budget is now projected to return to surplus in 2012-13 – three years ahead of schedule. This will make us the first advanced economy in the world to return to surplus.
The Budget deficit for 2010-11, at 2.9 per cent of GDP, is well below the 9.5 per cent average of the major advanced economies in 2010.
The Budget bottom line is a testament to the strength and resilience of the Australian economy over the last two years.
It is also a reminder of the truth that, faced with a significant economic slowdown, the best way to ensure the long-run robustness of our public finances is to take early action to decisively stimulate the economy.
In the absence of fiscal stimulus, it is estimated that the Australian economy would have contracted by 0.7 per cent in 2009, rather than growing by 1.4 per cent.
Of course, this would have had fairly obvious impacts on the unemployment rate and would have seen the Australian Government sustain a bigger Budget deficit for longer.
In contrast, the forward projections announced last night represent the most rapid fiscal consolidation since at least the 1960s – and one of the most rapid anywhere in the world.
We will return to surplus before any other major advanced economy and we will pay off our government debt three years before any other major advanced economy.
Our net debt – as a proportion of GDP – will peak at 6.1 per cent of GDP – in 2011-12 – and will be paid off three years earlier than projected.
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It is a Budget built on fiscal discipline, with every new spending measure fully offset over the forward estimates, and with an additional net save of $544 million over the forward estimates
This is in line with our commitment to tough fiscal rules as growth returns to trend.
Keeping growth in government spending to 2 per cent in real terms as growth returns to more normal levels does require fiscal discipline.
Prior to the global financial crisis, real growth in government spending exceeded 2 per cent in 8 out of 10 years. The average growth in government spending was 3.7 per cent over this period.
So our commitment to keeping government spending growth to
2 per cent in real terms represents a real and significant change from the practices of the previous government.
Just as it is incumbent on us to ensure the strength of our macro-economy coming out of the GFC is capitalised on and built on, so it is important that we build our national savings and take advantage of our opportunities in financial services.
Action on Reform
When I spoke at the IFSA conference in August 2009, it was to underscore that, while the industry faced challenges, we also found ourselves with a great opportunity to embark on meaningful long-term reform of our savings and investment system; reforms that could build wealth for Australians.
I'm sure some of you who were in the audience at that conference were dubious about whether these good intentions would be converted into a real action.
In the nine months since that conference, the Government has laid out a comprehensive plan for Australia's savings and investment system:
- We have re-shaped the financial advice industry to improve trust and confidence.
- We have acted to ensure that our national savings will be boosted by half a trillion dollars through our comprehensive plans for superannuation.
- And, of course, last night, the Treasurer announced that, from 1 July 2011, the Government will provide a 50 per cent discount on the tax paid on up to $1,000 of interest income earned by individuals on savings products (such as deposits), held with any bank, building society or credit union – as well as bonds, debentures and annuity products.
Each of these measures will have real benefits for the living standards of Australians for many years to come, through improved national savings.
They also help to position Australia as a financial services centre, which has been a clearly stated goal of this Government since day one.
That's why we set up the Australian Financial Centre Forum and that's why we commissioned the Forum, under the leadership of Mark Johnson, to prepare a report into what we needed to do to achieve that goal.
Response to the Johnson Report
Last night, the Government formally responded to the Johnson Report.
Our response provides in-principle or direct support for nearly all of the 19 recommendations in the report.
These include:
- the introduction of an Investment Manager Regime;
- the establishment of an online regulatory gateway; and
- the development of an Asia Region Funds Passport.
We have already made progress on several of the recommendations in the report.
For example, on 31 March, I announced support for competition between markets for trading in listed shares in Australia and in‑principle approval of the market licence application of Chi-X Australia.
This announcement is in line with a Johnson Report recommendation, which encouraged competitive, efficient and innovative equity markets, and is a vital step in the development of Australia as a financial services centre.
On 26 April, Senator Sherry and I jointly announced that the Board of Taxation will undertake a comprehensive review of Australia's tax laws to ensure that, wherever possible, they do not unfairly disadvantage or preclude Islamic finance, banking and insurance products. This will open up further opportunities for Australian capital, jobs and growth.
Last night, the Treasurer and I jointly announced the release by ASIC of class order relief allowing listed entities which meet ASIC's criteria to issue bonds to retail investors using a simplified process.
This initiative will help to further develop our retail bond market, and is in line with a key recommendation of the Johnson Report.
As the Johnson report notes, Australia's equity market is well developed and significant on a global scale – being seventh largest globally and the second largest in the region behind Japan.
However, our debt market is relatively small. Last night's announcement will help develop a deep and liquid Australian corporate bond market, making it easier for Australian businesses to diversify their funding sources as an alternative to borrowing from the bank.
Over time, this is expected to put competitive pressure on bank lending rates to business, and also reduce the amount of wholesale funding which our banks are required to raise in international capital markets.
Last night we also announced the decision to phase down the interest withholding tax paid by financial institutions, including local subsidiaries and branches when they pay interest on borrowings from their overseas parents.
This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution accessing offshore retail deposits, which they on-lend in Australia.
These changes will provide an extra boost to banking competition, as well as promoting Australia as a financial services centre, and represents action on another Johnson recommendation.
Now, with these decisions and reforms under our belt, I don't want anybody to be under the impression that we feel we have done all there is to do; that there isn't more to be done.
Reform to promote Australia as a financial services hub is an ever-receding finishing line. As we reform, so will other nations. And we will need to respond.
To ensure we continue to make progress, the Government has appointed an ongoing Financial Centre Taskforce.
The taskforce will comprise Mr Mark Johnson AO as Chair, Mr Paul Binsted, Ms Jo‑Anne Bloch, Mr Alf Capito, Mr Phil Chronican, Mr Jeremy Duffield, Mr Craig Dunn and Mr Paul Schroder.
The taskforce will continue its work in promoting Australia as a financial centre for the region and facilitate industry input into the design of a range of proposals, including the Asia Region funds management passport, the Investment Manager Regime and funds management vehicles.
A working party will be established under the Taskforce to progress the Asia Region Funds Passport. I regard this as a key area for further work. I have invited IFSA, as well as AFMA, to provide a representative to sit on this taskforce.
As I've mentioned both publicly and privately, I value IFSA's input on policy proposals, and I would like to acknowledge the role of IFSA in the preliminary work on this initiative.
Centre for International Finance and Regulation
Last night, I was pleased to jointly announce with the Prime Minister a further measure related to the aims of the Johnson Report — the establishment of a Centre for International Finance and Regulation in Australia.
Funding of $25 million will be provided to the Centre over the next four years.
One of the key themes underlying the work of the Centre will be to address ways to foster financial sector innovation, while ensuring the risk inherent in the financial system is appropriately managed through best practice regulation.
The Centre's work will inform government, regulators and financial industry practitioners in Australia and the region.
It will contribute to regional financial system stability by developing and supporting students, academics and researchers from the Asia Pacific region and by building regional capacity.
The establishment of the Centre for International Finance and Regulation will complement the Government's response to the Johnson Report, and will be a significant step in advancing regional engagement.
Taxation of Managed Investment Trusts
Last night, of course, we also confirmed our changes to the MIT tax regime, as announced by Nick Sherry to you last Friday.
Those measures flow from our first reference as a government to the Board of Taxation – to advise on the modernisation of the tax regime that applies to managed trusts.
I first announced that we would refer this to the Board of Taxation at the IFSA annual conference in August 2006, back when we were in Opposition.
Good reform doesn't always happen quickly – but it has long-lasting and beneficial results.
The Government's decision to accept and implement the majority of the Board's 48 recommendations – including a dedicated tax regime for MITs from 1 July 2011 – will increase certainty, reduce complexity and minimise compliance costs for managed funds and the industry more generally.
As Nick pointed out last week, these changes will also directly benefit almost every single Australian who, although they may not be fully aware of it, have extensive investments in MIT structures through their super funds. That's in addition to the 630,000 individual Australian taxpayers and 276,000 businesses and superannuation funds who received a distribution from a MIT in 2008.
The Government's response to the Board's review also goes to the broader goal of improving Australia's global competitiveness, making Australia more attractive to foreign funds and increasing our appeal as a place to do business.
Reform of Financial Advice
Of course, last night's Budget built on the significant reform announcements we have made over the last two weeks.
Among those, I see the "Future of Financial Advice" reforms and our steps to strengthen superannuation as vital to the development of Australia as a financial services centre.
In relation to the reforms to financial planning, I would argue very simply that it would be impossible to ask those in other countries to place their trust and confidence in our financial planning industry if Australians do not.
This point was made very clearly by the Johnson committee, which observed that realisation of opportunities to attract overseas capital to Australia "is dependant on, amongst other things, the reputation and integrity of Australia's financial advisory sector being maintained and, where necessary, improved".1
To this end, their report argued that resolving conflicts of interest in the financial planning industry is "consistent with ensuring that the reputation of Australia's financial sector, in particular funds management and financial planning, is maintained overseas, a prerequisite for greater international engagement".
I actually have confidence in the skills and expertise of Australia's financial planners to not only provide high quality advice to Australian residents but to develop as a significant potential export supplier.
The reforms we announced two weeks ago will, by introducing more transparency, trust and confidence for our financial planning industry, enable it to potentially be seen as world's best, with all the export opportunities that opens up.
Superannuation
And that brings me, of course, to the future of our superannuation sector.
The primary motivator of our superannuation policy is – and must always be – a comfortable retirement income for Australians.
This has not, of course, meant that improved retirement incomes for Australians have been the only benefit of our superannuation system.
The skills that Australia has built in terms of funds management as a result of our superannuation system are, in my view, the single most important factor in our competitiveness as a financial services centre.
And the sheer size of our retirement savings pool means that Australia is regarded as a serious player in the world's wealth management sector.
Growing our pool of funds under management can only have positive implications – very positive implications – for our ambition to be a significant financial centre.
Australia's superannuation pool was projected to grow to $5.3 trillion by 2035. The reforms we announced on 2 May will add another half a trillion that amount.
The events of the last few weeks and indeed the last few years, underscore the value of building a large pool of patient investment capital that can be re-invested in the domestic economy.
Consider how much better-placed so many economies around the world that are having difficulties would be if they could point to pool of private capital, standing at 100 per cent of their GDP, set aside specifically for their citizens' retirement… if they could point to a pool of patient capital that would stay invested in the economy when "hot money" moved away.
If they could point to future changes in policy that would grow this pool of capital by a further $500 billion over the next 25 years to $5.8 trillion.
Conclusion
Ladies and gentlemen, on any objective analysis, we've made good progress in the last three years in our efforts to promote Australia as a financial services hub.
The scene was set with out first Budget – in 2008 – and the implementation of our election promise to cut the withholding tax for distributions to offshore investors in Australian managed funds – to promote the attractiveness of Australia as a funds manager.
This reform, implemented gradually of course, means that from 1 July this year, Australia will have gone from the highest withholding tax rates in the world to one of the lowest.
I'm proud of the fact that every single one of the budgets brought down by the Rudd Government have included measures to promote Australia as a financial services centre.
The 2008 Budget contained the withholding tax reductions. The 2009 Budget included the abolition of the Foreign Investment Fund rules. And last night's Budget included the measures outlined earlier.
The global financial crisis, which shook the financial sectors and real economies of so many nations to the core, saw Australia's real economy and our financial sector earn renewed international respect.
The Government is committed to creating Australia as a financial services centre, not as a lofty ideal, but because of the many benefits it would bring to our nation.
Increased trade in financial services would improve Australia's growth prospects, Australians' standard of living and the range and choice of financial products available to consumers.
Becoming a financial services centre in the region would mean more job opportunities for skilled workers in the financial sector, create an attractive environment for the return of skilled Australian expatriates, and enhance our broader national interests in the Asia-Pacific region.
This is one area where we see so much "up side". The opportunities for leveraging our financial services skills and expertise, in the region and beyond, are potentially enormous.
Our ambition to make Australia a significant financial services centre means real opportunities for growth – opportunities we must capitalise on.
1Australia as a Financial Centre – Building on Our Strengths, page 30.