6 August 2014

For richer, for poorer: What governments can (and cannot) do to grow national prosperity, ANZSOG National Conference, Canberra


Check against delivery

This speech entitled "For richer, for poorer: What governments can (and cannot) do to grow national prosperity" was presented by the Hon Joe Hockey to the ANZSOG National Conference in Canberra

I do make a confession: a few years back I had Harry Kewell and he is a very famous soccer player – I didn’t know that at the time, and I walked into a school hall with 1200 kids who were very excited and I said what am I doing and they said, “you are introducing Harry Kewell.” I said who is Harry Kewell? And at the moment, the MC said, “to introduce Harry Kewell we have asked the local member Joe Hockey”, and I went up there and said, “well you don’t want to hear from me, he needs no introduction; Harry Kewell,” and they cheered.

So, thank you very much Garry and to my great mate, Bill English.

As someone with a bit of Kiwi blood myself thanks to my Bay of Islands born grandmother, I have a special affinity for New Zealanders – and none more so than my good mate, Bill English.

Now, I have known Bill now for a number of years. We both have sons by the name of Xavier, which is a very Anglo-Protestant name of course and when he was in Opposition, for a brief time in New Zealand he came and visited us when we were in Government. When we were in Opposition for way too long here, I went to seek advice and encouragement from him. And I thank him for his advice.

In fact, I well recall a chat we had in 2012, during my days in Opposition, when he came to visit me in my North Sydney office to discuss a speech I gave in London titled “The End of the Age of Entitlement”. Well, Bill got it straight away. 

Sadly, it took a number of others a bit longer to understand what it really meant.

But so much of the Australia/New Zealand story – which is as much about shared values as it is about friendly sibling rivalry – particularly on the rugby pitch – much of it is based on individual friendships that we have and mutual ambition for our nations.

Only a fortnight ago I was in New Zealand with Bill where we further progressed the relationship between our two countries.

I have to admit I am just a little bit jealous of what they have done.

New Zealand has stolen the advantage from Australia over the last few years by combining domestic structural reforms with newly negotiated trade opportunities in Asia.

As a result, they have falling unemployment, rising living standards and a Budget that is coming into surplus.

New Zealand has not achieved this through luck or complacency; there is no ‘she’ll be right’ attitude, there.  They are not blessed with an abundance of energy and resources like Australia. New Zealand’s success has come through the delivery of necessary economic reforms. Even with the advantage of a single Parliamentary Chamber and at this very moment I am quite jealous, the delivery of reform has been a great credit for Bill, to his Prime Minister, John Key and their New Zealand National Party colleagues.

New Zealand is showing the world how economic reform should be done.

Despite being a small open economy, the nation did undertake structural reform at the most opportune time – even though it was done against an incredibly difficult backdrop.

With the full impact of the Global Financial Crisis and the devastating Christchurch earthquake, and the rebuild cost almost 20 per cent of GDP, to give you some perspective, the National Government is on track to deliver a return to fiscal surplus over the coming year.

In fact, since 2010, New Zealand’s Budget balance has improved by 7.5 per cent of GDP. Australia’s fiscal consolidation since then has been around one third of that.

New Zealand has done this through careful use of public resources, sound economic policies, and a commitment to improving the quality of public services.

Like Australia, it set out a credible path back to surplus and to paying down debt – but most importantly it was able to stick to that path. That means the Government can spend more money on things New Zealanders actually need like roads and ports rather than using their taxes to pay interest on debt.

In New Zealand, the sustained public sector efficiency improvements, reprioritisation of the government balance sheet, and changes to entitlements on schemes such as student loans, retirement savings, and welfare – one area we’ve paid particular attention to recently – they are all impressive achievements.

As the New Zealand Deputy Prime Minister has said to me multiple times “you have to fix the roof when the sun is shining”.  It is simple enough logic to make the tough changes when times are relatively good because it is much more difficult to make meaningful changes in times of crisis.

New Zealand also recognises that reform is an ongoing process.  Bill English knows well – and indeed said in his Budget speech two days after mine – reform must not end with achieving a surplus – a surplus is only part of the ever continuing reform story.

In New Zealand, the Government’s core expenses have come down from over 35 per cent of GDP in 2011 to a forecast 30 per cent in the coming year. This compares with our expenses, which have increased over the same period by around one per cent of GDP.

Last month, Fitch Ratings revised up their outlook for the New Zealand sovereign credit rating from stable to positive.

New Zealand’s unemployment rate is forecast to fall by almost a percentage point over the next couple of years. Unemployment currently sits at the same level as Australia at six per cent. But while our rate is forecast to rise to six and a quarter per cent for the June Quarter of 2015 – New Zealand’s is forecast to drop to around 5.4 per cent by then.

So, the New Zealand population is benefiting from a stronger economy, more jobs, and a Government that lives within its means. It is also making itself a more attractive investment destination with a top personal tax rate of just 33 per cent, no payroll tax and I understand no land tax either.

Sounds like a pretty workable model, doesn’t it?

Partly as a result of this there has been a significant turnaround in trans-Tasman migration flows over the past year.  For the first time in years, more New Zealanders are returning from Australia than are departing to Australia.  Kiwis are going home – and staying home – because times are good.

I commend you, Bill, for what you and your colleagues have achieved.  You are changing the size and scope of government to build prosperity in New Zealand.

It is these sorts of results, coming from sound economic and fiscal stewardship, which the Abbott Government is working to achieve for the Australian people. 

Australia has been missing from the reform party for much of the past few years – but we can catch up.

In a speech to The Australian’s Economic and Social Outlook Conference last month, I talked about the changing role of government. 

Governments must adapt to new “disruptive” technologies, new industries and a changed mindset of our citizens. If they don’t adapt then they risk being left behind at the ballot box in both the long-term and the short-term.

The Government’s role is changing from an initiator of change, to a facilitator of change.

Australian Governments have not taken the opportunities to facilitate that change in recent years.  We now have the opportunity to build the environment for long-term prosperity and we must take it.

The first step in creating an environment for prosperity is to get the Budget back in order and for Australia to start living within its means.

By making the tough decisions now, we will free up future generations to react to challenges without being hamstrung paying for the spending of the current generation.

In fact, Garry used the words a little bit earlier which I thought were very impressive, he said, “we cannot re-distribute what we do not produce”. That is exactly right.

Our interest payments of over $1 billion a month is not money well spent, it is dead money that doesn’t create jobs, nor boost the economy. Without action, this would rise to almost $3 billion a month, and because around 70 per cent of our Government bonds are held offshore, if we don’t fix the Budget now, we will end up sending around $2 billion each month in interest to people living overseas to people we have borrowed money from.

This is not a productive use of the taxes Australians pay. Every dollar spent on interest could be better spent on our education system and on our health system.

If we don’t pay down our debt, we are more susceptible to external shocks.  We will not be in the best position to cope with the demographic challenges that face us such as an ageing population brings or a falling workforce participation.

Just in the last two months both Standard & Poor’s and Moody’s have warned that the inability to stabilise debt would put pressure on Australia’s AAA rating. All three major ratings agencies have commended the action taken by Australia in the recent Budget.

Our Budget restores sustainability to public finances by slashing projected Government debt by almost $300 billion over the next decade, saving $16 billion in interest payments per year by that time. That is the equivalent of building two world class teaching hospitals in each capital city each and every year.

But we can only achieve that by taking action now.

The Commission of Audit, released in early May, showed that without action, Government would simply continue to become a bigger and more influential part of our lives with the funding for this either being raised through higher taxes or more debt.

The population shouldn’t have to pay higher taxes in an increasingly competitive world.

And we should not ask future Australians to pay for our current quality of life by borrowing money today that must be repaid tomorrow.

Let me be very clear – failure to fix the Budget now will impact on our living standards in the future. There is no alternative to the Budget repair task.

This is a view that has been supported by the Business Council of Australia President Catherine Livingstone, the Governor of the Reserve Bank Glenn Stevens, the Parliamentary Budget Officer Phil Bowen. Even our political opponents Paul Keating and Bob Hawke or Paul Keating’s economic adviser who sits on the RBA Board, John Edwards, described the current Budget as, ‘in crisis’.

It seems the only people in denial at the moment are some members of the Parliament. 

As Martin Parkinson, the Secretary to the Treasury said in June:

“It is quite another thing to exhort to vague notions of fairness to oppose any form of reform. If you do that, if you use such an argument to defend what is an unsustainable status quo, what you are doing is consigning Australia to a deteriorating future.”

Say that again, ‘an unsustainable status quo’ and if you continue to argue for that, you are consigning Australia to a deteriorating future. Therefore, anyone opposing the measures we set down in the May Budget must think long and hard about the longer-term ramifications of their actions for the Australian economy and for society.

At a minimum, they owe the Australian people an alternative approach – any alternative. 

This is what we did in Opposition.

In Opposition, we were upfront with the Australian people. We laid down policies, such as Tony Abbott standing up in a Budget Reply Speech in the Parliament before the election and saying were going to abolish the Schoolkids Bonus. It took enormous political courage to do that but he did it because we said at the time, the Mining Tax wouldn’t raise the money to pay for it, it had to go. So we have the political courage to lay down all our cards ages before the Budget, ages before the election and currently our political opponents show no respect for what was the endorsement of the Australian people. 

We need to transform passive parts of our economy into productive ones, even going beyond the Budget.

All of us in this room know that the economy is in the midst of a major transformation, moving from growth led by investment and construction in resource projects to broader-based drivers of activity.

This transformation is occurring at a time when the economy has generally been growing below trend, the unemployment rate has been rising, and commodity prices have been falling.

There are some indications that the economy is starting to transition from construction activity to a broader story about growth in the economy. Most notably, housing sector construction is clearly responding to low interest rates.

It was pleasing to see data last week released from the Reserve Bank of Australia showing that private sector credit growth had accelerated in June, rising 0.7 per cent for the month – the strongest monthly increase since late 2008.  All the indicators about the economy are heading in exactly the right direction because we are now providing stability in policy, certainty about economic direction, and importantly we are rolling out our reforms. 

The annual rate of private sector credit growth to June, as I said, was also the strongest in over five years. Consumer confidence has bounced back. Business confidence, according to indicators yesterday – the highest rate in more than a decade. So, they are all pleasing figures.

But this is the start, only the start. We need to do more. We need to get broader-based growth to bring the unemployment rate back down and to support sustainable growth in our living standards; we can no longer rely on the resources industry to do the heavy lifting.

To do this, we will have to pursue a productivity plan.

Productivity has consistently been the most significant source of income growth.  Growth in productivity means that more or better quality goods and services are generated with the same level of resources.

It will be the creativity, innovation and risk-taking of businesses, investors and workers that will sustain productivity growth in the future.  

But government policies and decisions can shape the incentives for work and enterprise, and have a profound impact on current and future rates of productivity growth.

However, much of government expenditure in the Budget is simply not productive investment.

That’s why our Budget decisions move expenditure from consumption and towards investment that will increase our future productivity.  Our infrastructure programme and our reforms to higher education are based on these criteria.

We are kick-starting the non-mining sector of the economy by facilitating the building of $125 billion of additional productivity enhancing infrastructure over the next decade – that’s the modern day equivalent of eight Snowy Mountains Power Schemes, in additional infrastructure over the next decade.

This investment will boost economic growth and jobs. It will lower business costs and improve the quality of living by easing congestion.  It will also increase the productive capital of the economy and raise the “speed limits” to growth in the future. 

Importantly, we are ensuring that not only does the Budget fund more infrastructure, but we also get the right infrastructure to ensure we get the best productivity impact.

This means that the level of government that actually delivers key infrastructure is the one to make the decision about what infrastructure they need. Our Asset Recycling Fund works hand in hand with State Governments to provide incentive payments as long as the proceeds from the assets recycled are reinvested into productivity enhancing infrastructure. 

The irony being that the Labor and the Greens in the Senate are opposing our Asset Recycling Fund and the two State Governments that are most eager to sign up to the Fund are the two Labor Governments in the ACT and South Australia. So, it goes back to that old Paul Keating saying, “You don’t want to stand between a Premier and a bucket of money”.

The Parliament of course, is opposing this. The Senate is opposing the Asset Recycling Fund which would mean that if they had its way at the moment, those Senators – Palmer United Party, the Greens, various independents and the Labor Party would stop the infrastructure that would result in $125 billion of new investment. Well, we are going to go around them. We are going to have it as an appropriation; we won’t go through the Fund. We will not stop the development of new Australia and we are going to do it in a meaningful way.

All of the projects of course, will have proper scrutiny and as part of this, Infrastructure Australia will conduct a national audit of significant infrastructure that Australia needs, together with a 15-year plan. 

All projects where we are contributing funding in excess of $100 million will be assessed by Infrastructure Australia to ensure the best use of available taxpayer money and importantly, they will be required to publish justification for all project recommendations.

These reforms are important because we need to get on with building the other job of building the other 90 per cent of the economy that is not involved in resources or mining. At the same time, we have to reduce the tax burden on Australia

We’ve already got rid of the Carbon Tax – and we are working with a diverse Senate to get rid of the Mining Tax.

The Mining Tax is a tax on prosperity; the Carbon Tax was a tax on households and electricity use. The abolition of the Carbon Tax will save Australian families, on average, around $550 this year alone and the Australian economy will have increased cumulative output of over $1.3 trillion between now and the middle of the century. In 2050, Gross National Income per person will be over $4,000 higher because of the abolition of the Carbon Tax. That’s real and it is quantifiable.

It will alleviate the red tape burden for around 75,000 Australian businesses and organisations. Removing red tape is a key commitment that we made at the last election; we are delivering on it. We have dedicated sitting days of the Parliament to remove regulation.

We also want to get more Australians into work through Work-for-the-Dole, changes to the social security safety net, and incentive payments to get our older Australians back into a job.

It is good news that some of these reforms have already started, and it is further good news and welcoming that in the first six months of 2014 over 110,000 jobs have been created and over 85 per cent of these jobs are full time.

But we need to do better.

I have said many times that if we can improve workforce participation and if we can improve female workforce participation, the Australian economy will be stronger. In fact, if we had the same level of female workforce participation as Canada, our GDP would be $25 billion per year larger.

Indeed, there are also lessons to be learned from across the Tasman on this. Over the past fifteen years, female workforce participation in New Zealand has been consistently two to three percentage points higher than that of Australia. In 2013, New Zealand’s female workforce participation rate of ages 15 to 64 was 73.2 per cent – three per cent higher than us and New Zealand’s flexible workforce arrangements play a part in this.

We have looked more broadly at the welfare system and the way it interacts with other areas of government.  With over one-third of Government spending on welfare, it is by far the biggest line item in the Budget.

We need a welfare system that is sustainable and targets assistance to those most in need. It also needs to encourage participation in either work or study.

As a society, we have a social and moral duty to provide for those who cannot provide for themselves. However, components of the welfare system – such as job search payments – should be temporary assistance rather than a long-term crutch for people. The goal of these payments should help transition people back into work.

The current system is outdated and has limited flexibility.

We need to get more Australians into the workforce. But getting them into work is only the start. Once they are there we want them stay there.

If more young Australians are able to experience the dignity of work through secure employment, then the dream of social independence will become more accessible.

Sustainability also underpins our reforms in both health and education.  The Commission of Audit showed Australia that Commonwealth funding for Medicare growing at over seven per cent a year.  Similarly, it showed that Commonwealth higher education expenditure was growing at nearly six per cent per year; all above inflation.

The Medicare co-payment will be invested into what will be the largest medical research endowment fund in the world and our higher education reforms will make sure that Australian universities are able to compete in an increasingly competitive university environment.

There is a very strong link between the level of education and outcomes for employment and income, and this Government wants to create an environment where all Australians have more choices about the investment they can make in their future.

A strong education system is critical for our economy and it needs to work hand in hand in building for the future through health and medical research and a more engaged workforce.

But I say to you, the Budget is only the beginning – the reform process must be ongoing.

There is no finish line for reform.

The process of undertaking structural reform in Australia – or, as you might call it in this forum, ‘catching up to New Zealand’ – will continue with reviews of the Federation, the taxation system, workplace laws and in my area, the financial system and competition policy. 

It is important that these comprehensive and methodical reviews get the reform right.

The work of the Australia and New Zealand School of Government has shown the importance of Government process relating to reform and its important lesson is that you have got to be careful and methodical about the development of government policy.

So, the title of this session is “What Governments can and cannot do to grow national prosperity”.

Well, New Zealand has shown us what governments can do. Bill English and John Key have set a fine example.

This is a time of transition for Australia’s economy and as a Government, we must embrace that challenge.

Now is the time to fix our Budget. Now is the time to start paying down our debt. Now is the time to facilitate greater productivity in our economy. Now is the time to start building long-term prosperity.

By creating an environment where businesses can grow and succeed, we will improve both the quantity and the quality of jobs available for ourselves, and ultimately for our children.

Indeed, if we want to improve the living standards that we have and those of our children and grandchildren, then now is the time to act.

Thank you very much.