Introduction
Good morning ladies and gentlemen.
Thank you for the opportunity to deliver the keynote opening address to CEDA's Annual Economic and Political Overview here in Melbourne.
And thank you to Peter [Fitzgerald, Victorian/Tasmania State Director] for your opening comments - and what a year to be delivering the 2010 Economic and Political Overview, a series that has cut for itself a role as one of the premier forums for discussion of politics and the economy in the year ahead.
As I am sure most in this room would appreciate, 2010 is a special year for the Committee for Economic Development of Australia, CEDA's. That's because 2010 is CEDA's 50th anniversary.
Fifty years ago CEDA was founded by Sir Douglas Coplan, one of Australia's best known economists, and its mission was clear from the beginning - to undertake objective economic research on national growth.
And I would argue you have done that across fifty years of making an important contribution to Australian public and economic policy.
So, to Peter, David Byers [CEDA CEO], Geoff Allen [CEDA Chairman], and all others involved, on behalf of the Commonwealth Government, I congratulate you on your milestone.
Now, to the task at hand - an economic and political overview of the year ahead.
Well, that's no small task.
We have before us in 2010 at least three state elections, one federal election, a tough federal Budget in challenging fiscal times, setting out the plans for the long-term as highlighted in the recent Intergenerational Report, and all of this in a global economic environment that is, whilst recovering, still marked by considerable fragility.
So, not too much to discuss then! Have we also booked for lunch?
Political outlook
My comments today will focus primarily on the economic front - of course, as Assistant Treasurer and as part of the Rudd Government's economic team, led by the Treasurer Wayne Swan and including Lindsay Tanner, Chris Bowen and Craig Emerson, that is naturally the space in which I spend most of my time.
Yet, I am after all also a politician!
And on top of that, I am also a member of the Senate to boot!
My observations on the political front are straightforward and match closely with those expressed elsewhere by the Prime Minister.
This election year will be one of contrasts - one in which the commitment of the Government to very tight fiscal discipline will be contrasted to a growing list of uncosted promises from the new Leader of the Opposition.
It will be the contrast between the Government thinking through policy as opposed to the Abbott habit of talk first, think later;
… the Abbott habit of make an allegation, look for proof later;
… and the Abbott habit of make an extreme statement, roll out excuses for them later.
But let's be clear - it will be a tight election, the nature of the Australian electorate means this is always the case - but the Rudd Labor Government will approach the election with a record of achievement on infrastructure, on schools and education, on health and hospitals and on securing the Australian community against international threats such as terrorism.
And all of this in face of a preceding decade in which, in many areas, we saw serious underinvestment and neglect.
And of course there is one vital issue that will sharply and distinctly define the two alternatives, and that is the economy and its management.
It is the sharp distinction between Kevin Rudd, Wayne Swan and Lindsay Tanner, versus the Opposition Leader who thinks economics is boring, a Shadow Treasurer who spends Sunday nights on light TV with a tutu, and a Shadow Finance Minister who thinks foreign investment is bad, who doesn't know the distinction between million, billion and trillion and who is happy to trash our sovereign debt position in a reckless and dangerous way.
That's the team vs team breakdown.
But don't just look at the team, let's look at the results.
Let's now look at the outcomes we have delivered over the last two years and where this places us at the start of 2010 and the start of the second decade of this century.
The Australian economy in the wake of the global financial crisis
I was interested to read your flier for this meeting - especially as it recognises that:
- Australia has navigated through the global economic crisis better than most nations in the world.
- Our regulatory environment and banking system have proved to be robust.
- The Federal Government intervention with large stimulus programs has significantly helped.
I strongly agree with all three points.
As your flier put it, these actions, along with our links to China, India and Asia more broadly, protected us against to the worst of the global economic ‘chill'.
Again, I agree but from where I was sitting in Government, working on policy responses, it felt a like more like global pneumonia than a chill, and I believe we've done a pretty good job of saving the patient.
It is indeed interesting to reflect just how much has changed over the past 12 months for the global and Australian economies.
This time last year, the Government had just announced its $42 billion Nation Building Economic Stimulus Plan, providing further critical public support to both households and businesses at a time when the outlook for the international economy was at its lowest.
Both arms of macroeconomic policy were in full swing, with the Reserve Bank cutting the cash rate by a total of 425 basis points from September 2008 to April 2009, providing immediate financial relief to households and businesses.
Many of you are aware how the Australian economy has responded over the last 12 months.
A good example is the retail sector, which employs around 1 million Australians. A year on from the first receipt of the timely and temporary income support as part of the Government's Economic Security Strategy, retail trade values remain 6.4 per cent higher than their pre-stimulus level in November 2008.
Furthermore, recent data highlights the remarkable resilience of the Australian labour market. The unemployment rate in January was 5.3 per cent, around the same level as at the beginning of 2009.
What does this mean in numbers of jobs for Australians? It means more than 180,000 new jobs right here, whilst right across the developed world we have seen job shedding - that's the contrast: job creation versus job destruction.
Perhaps the defining point for the Australian economy, when looking at our overseas counterparts, is that Australia was one of only three advanced economies to record positive growth through the year to the September quarter 2009.
The improving outlook reflects the success of stimulus in Australia, which has had a greater than expected impact on confidence; and concerted global action, which has had a greater than expected impact on global growth.
In particular, the Chinese Government's fiscal expansion has helped increase the demand for Australian commodities and contributed to an improved outlook for domestic mining‑related investment.
Tackling the fiscal pressures
This improved outlook has prompted calls that the fiscal stimulus should be unwound.
By design, the Government's fiscal stimulus is gradually withdrawing as the economic recovery unfolds. It peaked in the middle of last year. In fact, it is estimated to start detracting from GDP growth from the current quarter and will detract over 2010‑11.
The Government remains committed to ensure fiscal sustainability and responsible economic management through adhering to our medium-term fiscal strategy, which includes:
- achieving budget surpluses, on average, over the course of the economic cycle;
- the Government remains committed to keeping taxation as a share of GDP below the level it inherited, on average. That is 23.6% of GDP in 2007-08; and
- improving the Government's net financial worth over the medium term.
To be consistent with the medium-term fiscal strategy, particularly in the context of the fiscal response to the global financial crisis, the Government committed to a two‑stage fiscal strategy.
First, supporting the economy during the global financial crisis through the use of the automatic stabilisers and stimulus spending, while achieving other reforms through the reprioritisation of existing expenditure.
Second, is the deficit exit strategy. As the economy recovers, we have outlined a clear plan for returning the Budget to surplus as soon as possible. This includes a commitment to hold real growth in spending to 2 per cent in years when the economy grows above trend and ‘banking' upward revisions to tax receipts.
The Government has already begun to deliver on the deficit exit strategy - all new spending decisions taken since the 2009-10 Budget have been more than offset by savings, real spending growth has been restrained to below 2 per cent in those years where the economy is projected to grow above trend, and the Government will continue to demonstrate fiscal responsibility by ‘banking' upward revisions to tax receipts due to the strengthening economy, and as I said earlier, this sits in very stark contrast to the Opposition's uncosted policy pile-up.
Because of this fiscal discipline, the latest MYEFO projects the budget to return to surplus by 2015-16, with net debt to peak at 9.6 per cent of GDP in 2013-14.
Australia will continue to have lower deficits and lower debt than the major advanced economies. The net debt of these countries will be an average 93 per cent of GDP in 2014 - in other words, Australia has one-tenth the average net debt of the major advanced economies.
Australia to 2050: future challenges
So that is the immediate state of macroeconomic affairs as we move into 2010.
This degree of fiscal strength is essential if Australia is to face the challenges we know we will confront over the coming four decades through to mid-century.
And how do we know of these challenges?
We know because, whilst the Rudd Government has been working hard to face today's issues, we have also drawn together the most comprehensive Intergenerational Report (IGR) yet published.
The IGR, which was released by the Treasurer on February 1, and was appropriately titled Australia to 2050: future challenges. The IGR lays out a complex mix of challenges for living standards, well-being and government finances over the next 40 years. These include a growing and ageing population, escalating pressures in the health system and climate change.
For example, the IGR concludes that an ageing population will place pressure on future living standards and the sustainability of government finances.
In this regard, it projects that:
- by 2050, there will be only 2.7 people of working age to support each Australian aged 65 and over, compared to 5 people now; and
- the number of people aged 65 and over will more than double within the same time period,
Over the next 40 years, real GDP per person is projected to grow at an average annual rate of 1.5 per cent, compared with 1.9 per cent over the past 40 years.
Productivity growth is assumed to be lower over the next 40 years than the past 40 years; however, it will still be the main driver of growth in real GDP per person.
Slower economic growth, combined with the challenges of an ageing population, is expected to place significant pressure on Australian government spending, particularly in the areas of health, age-related pensions and aged care.
A couple of facts about Australian government spending from the IGR:
- around a quarter of total Australian government spending is currently directed to health, age-related pensions and aged care;
- by 2049-50, these areas of spending are projected to account for around half of total Australian government spending;
- spending on health is projected to increase from 4 per cent of GDP today to over 7 per cent of GDP in 2049-50;
- spending on age-related pensions is projected to increase from 2.7 per cent of GDP today to 3.9 per cent of GDP in 2049-50; and
- spending on aged care is projected to increase from 0.8 per cent of GDP today to 1.8 per cent of GDP by 2049-50.
These spending projections show there will be significant pressures on the health and welfare systems, and the budget more broadly, over the long term.
If left unaddressed, the combination of future spending pressures and slower projected economic growth will lead to a reduced capacity to raise revenue to fund growing expenditure.
Responding to the pressures highlighted in IGR
The Government has already begun to take steps to address some of these fiscal challenges.
The Pension Reforms announced in the 2009‑10 Budget are an excellent example.
As you would all be aware, the Government delivered on its commitment to pensioners in its most recent Budget through an historic increase in the rate of pension and more support for carers.
These reforms were necessary and deliver greater financial security to Australia's age, carer, disability and service pensioners, particularly single pensioners. But the reforms were also designed to be sustainable.
A central feature of the Government's pension reform package was a review of the qualifying age for the Age Pension. To reflect improvements in life expectancy and to respond to the long‑term costs of demographic change, the Government will progressively increase the qualifying age for the Age Pension from 65 to 67 years, beginning in 2017.
By taking these tough decisions, this Government is working to ensure the pension system remains sustainable into the future.
The pressures on the health system to deliver more medical services to a larger number of older Australians will be accentuated by better - and more expensive - technology and drugs.
The Government is committed to reforming our health system and hospitals so every health dollar goes further and delivers better quality.
The Private Health Insurance Rebate is now the fastest growing component of Australian Government spending, over the medium term.
The Government will better balance the incentives for private health insurance, so those with a greater capacity to provide for their own private health insurance do so. This is expected to save $2 billion over five years and a staggering $100 billion over the IGR projection period.
And coming back to the politics once more - we now have a complete disregard for these fiscal realities as the Abbott-Hockey-Joyce powerhouse again this week rejected this measure in the Senate.
I would observe however, in the broader policy context of a larger and older population, one could easily forget that it is actually a pretty good thing that we are living longer and healthier lives.
I hope to live to a hundred!
I also hope that my children will live even longer!
It is a natural part of our economic and social progression.
When I was a teenager in the 1970s, Australia's population was 11 million, and now we've more than doubled to 22 million and, if I do say so, we've done a good job at managing that reality.
Australia is a damn good place to live and I personally think we can accommodate the future growth predicted by the Intergenerational Report.
Yes, there are and will be major challenges - environmental, water, city planning and sustainability - but we've done it before and with focus, responsibility, creativity and good will, I am confident we'll do it again.
And of course, population growth assists in dealing with the core pressures of an ageing population.
And this variable places Australia in a comparatively even stronger position than other advanced economies. This has not had significant focus.
For example, most advanced countries have very low or static population growth - some actually have declining populations.
According to the latest data from the US Population Reference Bureau, there are twenty countries in the world with negative or zero natural population growth - 19 of the 20 are European countries, the other is Japan. This trend is unprecedented in modern human history.
Population decline in these countries, particularly in those with a population that is ageing at the same time, is a very serious public policy issue, and of course economic, problem.
I am pleased to say it is not one we share.
Australia is also in a very strong comparative position because of our strong mixed retirement income system, including a means tested (and now respectable) government pension and a large pool of savings, driven by our compulsory superannuation system.
Superannuation is a special feature of Australia's system, and makes us better placed than many other countries to meet our demographic challenges. Many other countries face great challenges driven by their defined benefit schemes.
I know where I would rather live, and as I've said, hopefully continue to do so until I hit at least 100.
Other key agenda items for 2010
I'd like now to mention two or three further key areas of economic focus for the year, and indeed decade, ahead.
Productivity
First up is another issue that the IGR stressed as of critical importance, and that's productivity.
Governments play an important role in improving productivity growth, through investing in infrastructure and skills, promoting macroeconomic stability and providing appropriate microeconomic frameworks.
However, Australia's recent productivity performance has slowed over the last decade to average only 1.4 per cent annual labour productivity growth compared with 2.1 per cent annual growth during the 1990s.
In order to meet the challenges of an ageing population, the Government is committed to raising Australia's productivity. The rates we have experienced over the last decade are simply not good enough to meet the challenges we face as a nation.
By doing so, our economy would be bigger, living standards would be higher and the fiscal pressure from ageing would be reduced.
In building a more competitive economy for the future, the Government has targeted five key areas to boost productivity. We are investing in:
- the infrastructure of the future;
- the skills of the future;
- the competitive tax system we need for the future;
- an ambitious agenda for competition and regulatory reform; and
- targeting innovation.
As the Prime Minister has said, we are now in Australia's ‘Building Decade'.
Infrastructure investment is the largest component of the Government's stimulus packages and comprises investment in telecommunications via the National Broadband Network, freight and export infrastructure, a national road network, health and hospitals, and education.
Infrastructure investment boosts productivity encourages innovation, creates better economies of scale and increases the efficiency of the way private sector resources can be used.
The Government established Infrastructure Australia to provide advice to governments, investors and owners of infrastructure on Australia's current and future needs and priorities relating to nationally significant infrastructure.
Infrastructure Australia released a list of priority infrastructure projects to help inform planning and coordination of long-term infrastructure investment priorities on a national basis.
In selecting projects to fund, the Government chose initiatives that demonstrated high benefit-cost ratios.
We are also committed to improving the competitiveness and efficiency of key infrastructure markets.
Before moving onto the second agenda item I want to focus on this morning and while we're talking about investment in Australia's future, I'd like to say a couple of words about the importance of foreign investment to the Australian economy.
There are some in the community, indeed there are some in the Opposition economic team, who think foreign investment is a bad thing.
As the Treasurer and I have both made clear on a number of occasions, hundreds of thousands of jobs in our country and significant amounts of productive investment, often concentrated in rural and regional areas and in important sectors such as resources, rely in some part on international investment.
The total level of foreign investment in our national economy has reached some $1900 billion [September 2009].
As the public debate on the issue of foreign investment develops, I would take this opportunity this morning with an audience such as yourselves to call on you to participate and advocate a balanced and mature community discussion about the vital importance of such investment to our economy, business and jobs.
The Johnson Report
The second area I wanted to highlight was the Johnson Report, and I want to focus particularly on the aspects of the report hat fall within my tax portfolio responsibilities.
This report, which was released by my colleague Chris Bowen and I on 15 January, is a key step in furthering our commitment to developing Australia as a leading financial services centre in the Asia‑Pacific region.
Australia already possesses many of the characteristics of a leading financial centre.
Australia offers investors a politically stable environment, a robust regulatory system with world's best corporate governance standards, and a highly skilled workforce. But if we are to be recognised as the leading financial centre in the region, we can't afford to take these advantages for granted.
This is why, in 2008, we established the Australian Financial Centre Forum. Chaired by Mark Johnson, the Forum was asked to examine Australia's current policy settings and identify what needed to be done to improve the performance of Australia's financial services sector within the region.
The Johnson report has been well‑received by the financial services sector. It contains 19 recommendations, many of which, as I've said, relate to taxation.
These include recommendations to remove interest withholding tax on borrowings by financial institutions, to abolish state insurance taxes and to introduce an investment manager regime.
Securing Australia's position as a regional financial services centre means ensuring we have an internationally competitive tax system.
But achieving international competitiveness is not about reducing our tax rates to the lowest in the world. Rather, as indicated by the report, the focus should be on identifying and removing barriers to the internationalisation of our financial services sectors. It should also be on striving towards a system that is open and transparent and provides clarity and certainty, while maintaining integrity.
The Government is looking closely at all of the report's recommendations, and a number of them will need to be considered in the context of the recommendations contained in the independent tax review.
Independent tax review
And that leads me to my final topic, the issue of tax reform.
Of course, many here today, as with all those of most of my public engagements of late, are very keen to discuss the topic of taxation and tax reform.
In particular, I suspect you would like to hear my views on the independent tax review.
Unfortunately, as you would understand, I can't say much right now about the report, its recommendations, or the Government's response.
As the Treasurer and I have both said - we simply won't speculate on the Review.
What I can say is simply to remind you all of why the Treasurer established the independent tax review in the first place, and was to identify the long-term directions needed to help us deal with the same demographic, social, economic and environmental challenges that I mentioned earlier ahead.
As the tax system is fundamental to Australia's productivity and competitiveness, tax reform will help us meet those challenges and sustain the standard of living and social cohesion we expect.
The Government will release the report of the independent tax review in early 2010, along with our initial response.
Conclusion
So, to conclude, I'll come full circle back to a prognosis for 2010 - in a word?
Busy!
But let's take a moment to think about the kind of “busy” it will be.
It will be busy, not with a focus on how to dig our economy out of recession, not with seeking urgent solutions to end double-digit national unemployment and not with depressing naval gazing as to what might have been.
No, what will make us busy in 2010 is an intense focus on what's to come for Australia, what's in our future and how as a nation of hard-working, dedicated people, we can shape solutions to confront the big issues.
Our economy has demonstrated truly immense resilience over the past 12 to 18 months in the face of the global recession.
Australians - workers, families and business owners alike - can be proud for making the sacrifices that have helped us pull through.
But as I said earlier, I believe there is a clear political and economic choice ahead.
The Coalition's main contribution in economic policy this past year has been to criticise the Rudd Government for saving too many jobs and too many businesses.
They got it wrong in voting against the stimulus and if they had their way, Australia would be in recession right now and tens of thousands more Australians would be out of work.
The global financial crisis may be largely over and it may not in the end have caused us here to catch pneumonia, but that wasn't an outcome of chance.
The Government stands by its early diagnosis and we stand by the medicine prescribed.
There is a big national agenda ahead and 2010 is a litmus test year for both sides of the political aisle.
This Government is also about meeting the significant challenges ahead and I look forward to working with bodies like CEDA to ensure that we meet them.
Thank you.