Good morning.
I'd like to thank CEDA and in particular Geoff Allen AO, for inviting me to address the 31st State of the Nation Conference.
This is of course a particularly special forum given that it is CEDA's 50th year.
Fifty years is a long time in any field and I congratulate CEDA on its achievements over the past half-century.
Australia benefits from institutions that articulate and provide independent analysis on issues confronting the nation.
CEDA has consistently encouraged and contributed to the public debate on key issues that impact Australia.
Continued public debate is crucial to developing a comprehensive understanding of the challenges we face and in developing policies and frameworks to address these challenges going forward.
Today I would like to take you through the Government's economic agenda, to outline how we are making the necessary moves to ensure Australia will be able to tackle future challenges from a position of strength.
Australia's economic position
As highlighted in the 2010-11 Budget, the recovery in the world economy is patchy and uneven.
Emerging countries are experiencing a robust recovery, while the recovery in advanced economies has been typically more sluggish.
Downside risks from global financial market turbulence and banking sector weaknesses have grown in the wake of concerns over some European economies.
However, the outlook for the Australian economy is upbeat.
The latest National Accounts data, released this month, showed GDP grew by 0.5 per cent in the March quarter to be 2.7 per cent higher through the year.
Much of this growth is due to strong growth in public investment - but another positive outcome for the quarter is that a self‑sustaining private sector recovery is in the making.
As we look forward with more optimism, the economy is expected to grow by 3¼ per cent in 2010-11 and 4 per cent in 2011-12, which will return the economy to full capacity in that year. It appears likely the unemployment rate, currently at 5.2%, peaked in the middle of last year at 5.8 per cent and it is forecast to fall to 4¾ per cent in late 2011-12.
The much improved outlook reflects a number of key factors. While growth did indeed slow last year, we escaped recession and avoided large scale job losses and sharp declines in investment.
This result had much to do with the early and decisive policy actions taken by this Government and the Reserve Bank of Australia.
I should also point out that almost 280,000 jobs have been created in the past year to May.
Hours worked have also increased with trend aggregate hours worked increasing for eleven consecutive months.
In fact, in May aggregate hours worked rose by 2.9%, with the 26,900 jobs created last month representing an overwhelming shift back to full-time employment.
It's also important to note inflation remains contained.
And Australia is set to benefit greatly from the global economic recovery.
Ongoing strong demand for bulk commodities from emerging Asia, and recovering demand from advanced economies is expected to deliver higher export volumes and prices for Australia, contributing to growth and boosting the terms of trade.
Despite this much more positive economic outlook, it is important to look to the challenges still ahead.
Demographic challenges
The 2010 Intergenerational Report tells us in stark terms just how significant these challenges are. The report's forecasts are worth repeating.
Between now and 2050:
- the number of people aged 65 to 84 years will more than double;
- the number of people aged 85 and over will more than quadruple.
Nearly one-quarter of the population will be aged 65 and over, compared to 13 per cent today.
This means there will be only 2.7 people of traditional working age (15‑64) for every person aged 65 and over, compared with 5 today.
The impact of the ageing population will be felt throughout the economy.
In terms of our living standards, real GDP per capita is projected to grow at 1.5 per cent annually over the next 40 years, compared with 1.9 per cent over the past 40 years.
At the same time, future governments will face even greater budget pressures.
The ageing population will contribute to rising health costs, pension and aged care. Demand for our exports, ageing infrastructure and strong population growth are also putting pressure on our existing infrastructure stock, posing a major long-term fiscal challenge for Australia.
Strong economic and fiscal management today is crucial to meeting the challenges of tomorrow.
Responsible budget
We can proudly say Australia has one of the strongest fiscal positions among the developed world.
The 2010-11 Budget estimates a tightening of the fiscal stance of an average of 1½ per cent of GDP a year over the next three years. This represents the most substantial fiscal consolidation in Australia's modern history.
The Government's fiscal strategy will see the Budget return to surplus in three years time, three years ahead of schedule in 2012-13 — well ahead of any major advanced economies.
Net debt is now expected to peak at 6.1 per cent of GDP in 2011-12, half the level expected a year ago. This is in stark contrast to the expected average peak net debt position of major advanced economies of 93.9 per cent.
The focus of the fiscal strategy in future years will remain on returning the Budget to surplus. At the same time the Government is committed to investing in Australia's future.
Real national tax reform
The Government's tax reform agenda will build a stronger economy and a fairer, simpler tax system.
These reforms have been designed to maximise Australia's opportunities while also meeting the challenges posed by the ageing of our population and shifts in the global economy that will see the return of boom conditions in our mining sector.
The Government' tax reform agenda includes:
- increasing the super guarantee from 9 to 12 per cent;
- contributing up to $500 in an annual super top-up for those on incomes up to $37,000 to boost superannuation savings;
- extending the $50,000 superannuation contributions cap for over 50s with balances below $500,000;
- extending, for the first time, the Superannuation Guarantee to people aged between 70 & 75, if they choose to stay in work;
- simplifying the tax affairs of 6.4 million Australians through a standard deduction for work related and tax return preparation expenses;
- cutting the tax on savings through a 50 per cent discount on up to $1,000 on interest income;
- reducing the company income tax rate to 29 per cent for the 2013-14 income year and to 28 per cent from the 2014-15 income year with a more rapid cut for small businesses from from the 2012-13 income year;
- a generous new accelerated depreciation arrangement for small businesses through a $5,000 write-off measure; and
- boosting bank competition by slashing interest withholding tax rates on offshore borrowings of financial institutions from 10 per cent to 5 per cent by 2014-15 and we will try to reduce this rate to zero, subject to our medium term fiscal objectives.
These will all be funded by reforming the way we collect tax for the Australian people for the use of our non-renewable resources, through the Resource Super Profits Tax (RSPT).
There have been many things said over the past weeks about the RSPT.
I would like to take a moment here to explain why the RSPT is such an important reform.
Sustained global demand for our resources leads to strong growth in the mining sector and related parts of the economy.
Australia is experiencing another mining boom – what the Treasurer has referred to as the Commodity Boom Mark II. This Government doesn't want to repeat the mistakes of the past and squander the opportunities of this mining boom.
We need to ensure that the community gets a fair price for our non-renewable resources.
This Government has a plan for sharing the wealth from the mining boom to benefit all Australians, to allow all sectors of the economy to grow and ensure when the boom ends we have something to show for it.
We're introducing the RSPT to ensure the Australian community receives a fair share of the increased value of Australia's resources.
Australia's non-renewable resources are expected to continue to command high prices driven by increased demand, particularly from China and India.
The current method of charging, largely through royalties, has meant the amounts miners have paid for resources have not kept pace with the prices of these resources.
As mining companies' profits have risen, the Australian people's share of those profits has fallen.
Royalties are usually charged as an amount per quantity extracted or a percentage of revenue received.
They are a high proportion of lower-value deposits and a small proportion of high-value deposits. They discourage miners from developing viable but lower-value mines.
They do not adjust immediately or accurately with changes in the value of resources extracted.
The RSPT however automatically adjusts to changes in the value of deposits.
Taxing a fixed proportion of profits from extraction and sale means the resource charge increases as the value of resources rises. But also means that the proportion of tax falls as the price of the resource falls. The charge is also higher for high-profit deposits than it is low‑profit deposits.
So the community will benefit from getting a higher proportion of high‑value deposits, while impediments to development of lower-value deposits will be removed.
Of course, the mining sector has not universally accepted the prospect of the RSPT.
Some of this, unfortunately, has been due to misunderstanding and in some cases misrepresentation of the scheme.
The Government will not back away from securing the central objectives of the scheme. However, the Government announced on day one that it was committed to getting the transitional arrangements right. Indeed, we have established a consultative panel and we're serious about carefully and maturely working through transitional issues.
Building future capacity
In addition to tax reform, there are two other key policy reforms that seek to deliver sustained economic growth and expand economic capacity – health reform and infrastructure development.
Both of these issues go to the core theme of today's State of the Nation CEDA's event – that is assessing policy settings in the context of demographic change.
Fundamental health reform
As I noted earlier, the ageing of our population and rising health costs pose a significant long-term challenge. This is why reform to our health and hospital system is so important.
My colleague, Health Minister Nicola Roxon, spoke to you in April about our plans for fundamental health reform through a National Health and Hospitals Network.
Since then, we have negotiated an historic agreement through COAG to make this network a reality for all but one of the States and the Territories. Negotiations are ongoing with WA.
This represents the most significant reform to Australia's health and hospitals system since the introduction of Medicare and one of the largest reforms to service delivery in the history of the Federation.
These reforms will help ensure future generations of Australians can enjoy affordable and universally accessible health care.
I draw your attention to three key elements of the reforms.
First, we are changing the way health care is financed with the Australian Government becoming the dominant funder of public hospital services and taking full policy and funding responsibility for GP, primary health and aged care.
From 2014-15, we will also fund the lion's share of growth in health and hospital costs directly from our own budget — with guaranteed benefits to the States of at least $15.6 billion between 2014-15 to 2019-20.
Without these reforms, the States will be required to raise significantly more revenue from their taxes. Many of these State taxes are inefficient and increasing them would affect the financial sustainability of the health system and be a drag on broader productivity growth across the economy.
Second, in return for providing a secure funding base into the future, we will require the states to commit to system-wide reforms. These will set national quality and safety standards and ensure transparent reporting on performance.
These new requirements will provide Australians with more information than ever before about the performance of their hospitals and their health system generally and help drive continuous improvements within the sector.
Third, we are making a $7.4 billion investment to deliver immediate health and hospital service improvements and to support the new health network including:
- $3.5 billion to improve hospital performance through reduced waiting times in emergency departments and improved access to elective surgery;
- $1.2 billion to train more doctors, nurses and allied health professionals;
- $1.2 billion to improve GP and primary health care services;
- $467 million to introduce personally controlled electronic health records to improve safety and care delivery and slash waste and duplication; and
- $237 million to improve how the system works through the national standards and performance framework.
We have also just announced funding of $58 million to establish Lead Clinicians Groups in Local Hospital Networks and at a national level.
Lead Clinicians Groups will give local doctors, nurses and allied health professionals a permanent and influential voice in how national best practice is delivered locally and how to improve quality and safety.
These investments are fully funded over the forward estimates, wholly consistent with our fiscal strategy and do not add to the budget deficit.
These reforms will deliver better health care and better hospitals for all Australians. They will boost the efficiency and sustainability of the health sector and, through this, contribute towards growing the productive capacity of the economy as a whole.
Infrastructure development
Forward-looking microeconomic reforms led to high productivity levels in Australia during the mid-1980s through to the 1990s.
If we are to enjoy a similar achievement, then infrastructure and regulatory reform must play a major role in meeting the challenges of capacity constraints.
Addressing the ongoing challenges of the infrastructure deficit is a high priority for the Government.
Infrastructure investment is a key policy priority on the Government's agenda to build capacity and deliver sustained growth.
On coming to office, we established a new national advisory body, Infrastructure Australia (IA), to provide advice to governments, investors and owners of infrastructure, and to assist their decision-making for Australia's current and future needs and priorities relating to nationally significant infrastructure.
IA has already undertaken a national audit of infrastructure and identified a national infrastructure priority list and pipeline of projects to inform public and private sector investment decisions.
We also set up the Building Australia Fund and rolled out the Nation Building Program, spending around $37 billion over six years in capacity‑building road, rail and port infrastructure.
In the 2010-11 Budget, the Government continued its commitment to tackle bottlenecks and supply constraints through modernisation of the interstate rail network and investment in transforming the movement of freight into and out of Port Botany and through the Sydney Basin.
The Government made an equity investment of almost $1 billion in the Australian Rail Track Corporation (ARTC) in the 2010-11 Budget, to fund a productivity-enhancing package of rail freight works.
In addition, as part of our tax plan for the future, we announced a new ongoing $6 billion Regional Infrastructure Fund.
This Fund comprises $5.6 billion of revenue from the Resources Super Profits Tax, commencing in 2012-13, and an additional $400 million between 2010-11 and 2013-14.
The majority of funds will be directed to the resource-rich states of WA and Queensland to support investment in capacity building infrastructure necessary for the ongoing development of the resource industry, recognising that these states face large associated infrastructure demands.
Conclusion
When Sir Douglas Copland founded CEDA in 1960, Australia's population was around 10 million.
It is now 22 million – more than doubling in 50 years.
The Intergenerational Report projects that in the next 40 years, it will increase to 36 million.
This is a projection – it is not a target, but a responsible Government has to take the tough decisions now to prepare for the future.
I believe we can accommodate the future growth predicted by the Intergenerational Report and deal with the major challenges – including environmental, water, health challenges, urban planning and sustainability.
Through all the changes and reforms of the past 50 years, we have developed into a modern and vibrant nation.
On a personal note, there is no other place where I'd want to live.
On any measure, the state of our nation compares better to almost all other advanced economies.
As you can see from what I've outlined here today, the Rudd Government has developed a big picture strategy for securing our economic future.
We are paving the way for a better tomorrow by tackling, head‑on, the big economic challenges facing the country.
We are removing barriers and constraints to economic growth and investing in key areas to increase our productive capacity.
We have an economic reform agenda for securing Australia's long term future.
I personally am looking forward to the exciting time ahead.
Thank you.