Introduction
Last week the Annual Meetings of the International Monetary Fund, the world forum of central bankers and finance ministers, were held in Hong Kong.
The keynote speech by Premier Li Peng of China referred to historic decisions of the 15th Congress of the Communist Party of China to advance a "socialist market economy with Chinese characteristics" - a policy of opening trade, reducing government ownership, accession to the World Trade Organisation, and a commitment to market reform.
National differences on economic policy were largely questions of degree as the former communist world, the developed and developing nations alike, detailed plans for market liberalisation, fiscal consolidation, sound monetary policy and structural reform.
Tonight I want to make some comments on all these areas - fiscal, monetary and structural policy- to assess our comparative position in Australia and map out the future challenges.
Fiscal Policy
When the Government took office in March 1996 the deterioration in the Commonwealth budget that occurred in the first half of the 1990s required swift and decisive action.
The Commonwealths budget position has been unsatisfactory for the past two decades or so with the deficit, on average, around 1 per cent of GDP. This compares with an average surplus of around 2 per cent in the 1960s and early 1970s.
This deterioration is a major factor explaining the decline in public and national saving observed over this same period. It is this decline in national saving which in turn is reflected in the structural deterioration in Australias external balance.
By the time of our election, some five years into recovery, the Commonwealth underlying budget deficit remained at over $10 billion. Budget deficits over the last five years of the previous government totalled $70 billion, driving Commonwealth general government net debt from $17 billion in 1990-91 to $93 billion five years later.
The Government addressed this weakness with a fiscal consolidation programme that put in place a medium term fiscal strategy of achieving underlying balance, on average, over the course of the economic cycle.
These measures were set out in the 1996-97 Budget and built upon in the 1997-98 Budget.
Measures now in place provide for the budget to move into underlying surplus by 1998-99 and contribute to an improvement in the underlying budget balance of around 3- per cent of GDP between 1995-96 and 2000-01. Over this period the Commonwealth general government net debt to GDP ratio will fall from almost 20% to 10%.
The European Monetary Union targets are a general government budget deficit no greater than 3% of GDP; gross general government debt no greater than 60% of GDP; inflation no greater than 1.5 percentage points above the three lowest inflation countries; long term interest rates no greater than 2 percentage points above the three lowest inflation countries; and exchange rate stability within the ERM. Apart from the last point, which is not relevant to Australia, we are one of the few countries to meet all these criteria - along with Finland and Luxembourg.
To ensure that the improvement in Commonwealth saving is sustained, the Government is undertaking a fundamental reform of fiscal processes through the Charter of Budget Honesty. The Charter of Budget Honesty Bill, which is currently before Parliament, will substantially increase the accountability of government through improved disclosure of fiscal policy intentions and information on fiscal developments.
To achieve its objectives, the Charter of Budget Honesty requires the Government to produce a number of reports, including an annual fiscal strategy statement, budget and mid-year economic and fiscal outlook reports and a final budget outcome report. It also requires the Government to produce an intergenerational report every five years.
Moreover, by helping to reduce and maintain prudent levels of public debt, the Governments fiscal strategy should assist the Government to cope with longer-term fiscal pressures such as those stemming from the ageing of the population.
In addition to the Charter framework, the Government has announced that it will introduce an integrated accrual accounting and budgeting framework by 1999-2000. The accrual budgeting framework will incorporate planning, decision making and reporting on the basis of outputs and related outcomes.
It will provide better understanding of the full costs of policies, including those that may be deferred, and their economic impact. This, in turn, should promote better budget decision making.
Monetary Policy
The achievement of macroeconomic stability will also be assisted by the forward looking setting of monetary policy by the Reserve Bank. Monetary policy is being conducted by the Reserve Bank with the objective of maintaining the underlying inflation rate between 2 and 3 per cent on average over the course of the cycle. A new framework for the conduct of monetary policy has been introduced by agreement between the Government and the Reserve Bank setting out an inflation objective and enhancing the independence of the Bank.
Rapid capital flows have also made currencies more sensitive to perceptions about the credibility of economic policies. As such, the international financial markets have been an important barometer of the success of Australias economic reforms.
This success is reflected in the fact that Australian ten year bonds are currently trading at yields less than 0.1 of a percentage point away from US yields, down from a differential of well over two percentage points at the time of the election last year. The last time such a narrow spread occurred was in 1980 before financial deregulation. This is an acknowledgment of Australias return to the ranks of the low inflation countries and a reflection of our commitment to keeping inflation low.
But low inflation is not an objective in its own right. We are committed to low inflation because it gives savers and investors the confidence to make long term decisions and provides clearer signals on the best allocation of resources. It also assists businesses to make sound investment decisions and underpins the creation of new and lasting employment opportunities.
The Government is keenly aware of the need for investment in the Australian economy in order for us to grow at a rate which increases living standards and reduces unemployment.
It is interesting to compare our macroeconomic settings with forecasts for the world over the next two years.
Despite risks to the world economic outlook from instability in emerging market economies, uncertainties about the effect of European Monetary Union, the possible re-emergence of inflationary pressures, and signs of unexpected weakness in the Japanese economy, the overall outlook is generally positive. The IMF predicts US growth of 2.6% in 1998, European growth of 2.8% and growth in the developed world of 2.7%. Australia is expected to be at the top of this table with growth of 4.0% (IMF forecasts). Because growth is likely to be accompanied by unusually low inflation, it should be much more sustainable than previous episodes of relatively rapid world growth.
I would also like to take this opportunity to address an issue which dominated discussion at last weeks IMF meeting - the instability in South East Asia.
Events there show how governments need to be careful in setting macroeconomic and structural policy. While South East Asian economies continue to have good medium term growth prospects, there will inevitably be a short term loss of national income as a result of the capital outflow. While the problems in South East Asia may have some slight effect on Australias exports, we believe that, as in Mexico, the crisis will be a catalyst for constructive change. Indeed, the IMF structural reform package for Thailand, in which Australia was an important participant, is a key element in maintaining the momentum of reform in Thailand.
The fact that Australia has been immune to the instability that spread through South East Asia is an important illustration of how the reforms in Australia are bearing fruit. Australia has a freely traded currency, a sophisticated financial system with effective prudential controls, healthy economic growth, and a government which is now repaying debt. We also have one of the most informative budget reporting processes in the world.
Productivity
The economic reform agenda in Australia is about generating wealth and jobs through higher productivity. Competitiveness should be directed at boosting the income generated from given inputs of labour and capital. This is the basis of higher living standards. Competitiveness is also interpreted by some to indicate a focus on the traded goods and services sectors, but wealth creation should also be achieved by higher productivity in non tradeables.
Our reform agenda is about boosting productivity and generating wealth. This is the only way that job growth can be sustained. Encouraging inefficient production methods does not create secure jobs.
The Industry Commission research paper on Australias productivity performance released earlier this month shows that underlying annual productivity growth, now around 2%, appears to have lifted recently above the long term trend of 1.5%. While there are a number of factors contributing to this, there can be little doubt that microeconomic reform is bearing fruit.
Productivity is not something that simply happens. Governments need to establish competitive and flexible markets as the essential basis for on-going productivity improvements. We cannot take these things for granted.
Australia must make its way in a world which is rapidly changing and where the greatest rewards will go to those economies with the flexibility to adapt to these changes.
In such a world it is critical that economic policies encourage flexibility, a task that the Government has treated with the highest priority since coming to office.
The need for flexibility to cope with economic shocks, such as the oil price shocks of the mid-1970s and early 1980s, is obvious.
In many respects we continue to bear the legacy of not adequately responding to these shocks. For example the ratcheting up of Australias structural unemployment rate over the last 20 years began with these oil price shocks.
But no less important is the need to adjust to constantly changing underlying structural forces, such as globalisation and technological advancements - changes that create both immense challenges and great opportunities for the Australian economy.
Global influences and technological innovation have always influenced the Australian economy - since the introduction of the first Spanish Merino sheep. But the pace of change over recent years has arguably been the most dramatic since Federation. I suspect that it is only a taste of things to come.
Historically, Australias main trading partners were distant and grew relatively slowly. Globalisation of world trade and the proximity of the fast growing Asian economies has provided opportunities and challenges unavailable 30 years ago.
- Australias export experience is a good indicator of these changes. Total exports of goods and services as a percentage of GDP have rapidly increased over the last decade or so. For the 14 years to 1983-84, exports as a percentage of GDP were relatively stable and averaged 15.2 per cent. In 1996-97, they were 20.6 per cent of GDP.
- Another indicator is the composition of those exports. In 1969-70 rural exports - at 45 per cent - accounted for by far the largest proportion of our total exports of goods and services. Today they account for just under 22 per cent, on a par with exports of manufactures and services.
The increased integration of the Australian economy with the world economy is one that has far reaching implications, which I assume may well be covered in a number of papers being presented at this conference.
The revolution in communication technology has meant that world financial markets are now enmeshed in a way that would have seemed fanciful 30 years ago.
Combined with an ever accelerating pace of technological innovation - in industries as diverse as medical technology and viticulture - we get a picture of a world where adaptability is the key to success.
And this must be not only the objective but also the characteristic of economic policy as we move into the next century.
Change can, however, be fearful and for some threatening. But as a nation we must resist simplistic and populist solutions that seek to turn the clock back to the economic policies of the past. Such calls ignore the fact that the world, including Australia, is a much different place today, and will be a different place again tomorrow.
This is the basic theme I wish to elaborate upon today, namely, by identifying some of the specific areas where the Government is committed to policies and reforms that will provide Australia with the economic flexibility necessary to ensure we can benefit from the opportunities that the 21st Century will bring.
I will touch upon a number of specific policy areas, but in doing so a basic point I will make is that the Government recognises the complementarity and mutually reinforcing nature of policy reforms and hence, the need for progress across all fronts.
Moreover, while we recognise the need for policy settings to be forward looking so as to address the many challenges of the future, we are also highly conscious of the needs, costs, and apprehensions that change inevitably brings. We recognise the need for policy to not only be ambitious, but also pragmatic.
Reform of the Australian Financial System
Let me turn to the financial system - the lifeblood of the economy.
The recent Wallis Inquiry into the financial sector provides an excellent example of how change forces both industry participants and policy makers to adapt. It also represents an example of policy not simply responding to the developments of the past but anticipating the challenges of the future.
In essence, the need for the Wallis Inquiry was twofold and reflected:
- the fact that the financial system has entered an era of accelerated change that is likely to continue into the next century; and
- the Governments recognition that the performance of the financial system - its stability, integrity and efficiency - and the cost effectiveness of its regulation, are critical to the performance of the entire economy.
Regulation of the banking system in the post-WWII era was detailed and highly prescriptive, which led to the growth of non-bank financial institutions. Almost all banks established subsidiaries to overcome regulatory constraints on bank borrowing and lending practices.
By the late 1970s pressure for regulatory reform was mounting through a combination of inflation, exogenous shocks to the economy - such as the collapse of the Bretton Woods system of fixed exchange rates and technological advances - and the declining effectiveness of monetary policy reliant on control of banks balance sheets.
The Campbell Committee, established in 1979, was given a wide ranging brief to recommend changes to the regulatory structure of the financial system so as to promote efficiency and stability.
Many of those recommendations were subsequently adopted.
But the world has continued to undergo significant change and the financial system has not been immune to such developments.
While there are a range of factors contributing to the changing structure of financial service industries, two key ones are technological change and globalisation.
Against that background, the Wallis Inquiry identified three main reasons for further reform.
- First, Australias financial sector performance was assessed to be close to the world average rather than among the worlds best.
- Second, existing regulatory arrangements do not treat all new market structures and activities equally, and do not always ensure that we get the maximum benefits from change.
- Third, there are a number of areas of the financial system which could be more competitive.
The Governments response to the Wallis Report seeks significant improvements.
It is directed at the fundamental goals of increasing competition and improving efficiency, while at the same time preserving the integrity, security and fairness of the financial system.
The Government wants to ensure that regulation does not hamper the innovation and development of the financial sector because of its significant impact on all facets of the Australian economy.
Detailed statutory requirements, while perhaps appropriate in the past, are not capable of keeping pace with the rapid developments in products and service delivery methods.
The Government has sought to adopt a functional or objectives-based approach to regulation which will provide the flexibility in regulation to deal with future eventualities. It is better focused, more consistent and more responsive regulation.
By implementing microeconomic reform of this nature, Australia will have a more competitive and efficient financial system that will not only be positioned to compete strongly in the global economy, but will result in lower costs and an increased range of products and services on offer for those seeking to do business in Australia.
Corporate Regulatory Reform
Corporate law reform in Australia has entered a new phase under this Government. On taking office we recognised the impact that business regulation has on economic activity and hence the importance of a modern and responsive corporate regulatory regime.
Innovation and flexibility in Australias businesses, large and small, is crucial to securing economic growth and job creation. Furthermore, providing flexibility and certainty in the regulatory environment in which business operates must be a key objective of economic policy. This is all the more so given the rapidly changing and increasingly global commercial environment in which business operates.
We must therefore strive to achieve best practice in business regulation. Too stringent standards could see capital move overseas to seek higher returns, while too lax standards could have the same effect as investors lose confidence in the domestic market and move their investments offshore.
With these considerations in mind we have moved to integrate business regulatory policy within the Treasury portfolio enabling policy to be considered within the wider framework of overall economic management.
In March, I announced a comprehensive programme of reform of Australias business laws - the Corporate Law Economic Reform Programme.
The Reform Programme involves a fundamental rethink of the direction of corporate law reform. This initiative fits squarely within and complements the Governments wider mandate of promoting business and economic activity - in particular - job creation.
The fundamental objective of corporate regulation should be to facilitate investment, employment and wealth creation whilst protecting investors and maintaining confidence in the business environment.
However, this objective has sometimes been lost in the implementation of reform proposals in the past. We intend to re-focus regulation back on this objective.
Earlier this month I released the first of six papers canvassing proposals for reform of corporate regulation. The Government intends moving to implement reforms following public comment on the proposals and on draft legislation to be released later this year.
Taxation Reform
Reforming the Australian taxation system is one of the most important challenges facing the Government.
The growth in international trade and investment, better communications, faster information processing, reduced regulatory barriers and more efficient capital markets have made it much simpler to undertake cross-border trade and investment.
This has encouraged countries to compete for foreign investment by offering lower effective tax rates.
At the same time, technological advances have provided new ways of doing business, helping to undermine traditional tax concepts and approaches.
The conduct of business and sales through electronic networks have implications for tax avoidance in relation both to physical goods and financial and other services.
It can now be much more difficult to identify the physical location (or source) of an economic transaction and/or the physical location (or residence) of parties to the transaction.
This makes it difficult, under traditional international tax concepts, to identify the relevant national tax jurisdictions and to share revenue between them.
Apart from eroding the potential tax base, this can also greatly enhance the scope for tax avoidance and evasion as well as reducing the efficacy of compliance enforcement.
Failure to respond to tax competition and globalisation could see the tax base eroded further and companies shifting their investments and other transactions to countries with more attractive tax regimes.
The robustness of the tax system in its ability to cope with technological change and the influence of the tax system on Australias attractiveness as a location from which to do business will be key considerations in the development of the Governments proposals for tax reform.
There is an underlying fragility in the indirect tax base, particularly the Wholesale Sales Tax, which is reflected in the trend toward increased consumption of services as opposed to goods, and the consumption of goods that are tax exempt.
As we move towards the 21st century, Australia and Botswana are the only two countries with wholesale or manufacturers taxes that impose such taxes while not taxing services.
The narrowness of the base also means that the WST system, which was introduced in the 1930s, cannot cope well with a range of modern challenges arising from the growth in the value added by providing services rather than goods alone.
- For example, there are major difficulties in taxing goods, such as mobile phones, which also include a service component, as determining the separate value of the service and good part of the product can be problematical. Such problems are increasing as the service component of products becomes crucial to value of the total product.
- The system also has difficulty in addressing new technology such as where a computer (which is taxed at 22 per cent) is sold as part of the same unit as a TV and stereo (which are taxed at 32 per cent).
Establishing an indirect tax system which does not unnecessarily distort production and consumption decisions and provides a robust and stable revenue base into the future will be an important goal in the tax reform process.
The Commonwealth-State aspect of taxation must be addressed as part of the tax reform exercise which the Government has initiated.
Competition Policy Reform
The Government is determined to push ahead with industry and competition policy reforms.
The benefits from embracing the international economy have never been higher than they are in todays world of rapid technological change. Internationalisation of the economy, including through trade liberalisation, enables the spread of technology and encourages innovation to enhance competitiveness.
Competition policy reform also has an important role to play in creating a flexible and adaptable economy.
This is particularly the case where important and widely used infrastructure, such as electricity, gas, rail and telecommunications services, provide inputs into other production processes.
The focus of reform is to open up these sectors to competition while ensuring as much as possible that the resulting market structures are competition friendly.
For infrastructure with elements of a natural monopoly, one key to fostering greater competition is third party access arrangements.
- For example, the Government is working with the States and Territories to dismantle legislative and regulatory impediments to free and fair trade in gas and to establish a national gas access code.
- And we have recently announced proposals for establishing a body to coordinate improved private and public sector access to the Nations interstate rail network; a much needed reform if our rail transport operators are to efficiently undertake their long haulage tasks across the country.
- In the electricity area, reforms have included the corporatisation and privatisation of electricity businesses as well as the establishment of a competitive national electricity market. These reforms are delivering lower electricity prices for customers who are no longer locked in to purchasing their electricity from a single supplier.
- Legislation to facilitate the sale of one third of Telstra has been enacted and a new regulatory regime to facilitate open competition commenced on 1 July. Other reforms in the area of telecommunications have led to real price reductions, significant rises in profitability and improved quality and responsiveness of service.
The Government is also determined to reduce impediments to efficiency in the transport sector.
- We will shortly be addressing the issue of maritime reform with the aim of encouraging greater competition in coastal shipping and introducing much needed reforms to work practices.
It may come as a surprise to you to learn that the Commonwealth commenced around 20 legislation reviews last year aimed at ensuring there are no undue legislative restrictions to competition.
That illustrates that a lot of the finer detail in microeconomic reform is not newsworthy in our media, but it goes on nevertheless.
Labour Market Reform
An adaptable labour market is central to any countrys economic performance. But in periods of rapid change the flexibility of the labour market becomes critical.
Adaptability requires that resources be able to flow from contracting to expanding industries and it requires that our labour force can adapt to these changes.
Fundamental to taking full advantage of improved technology and freer trade is allowing employers and employees to choose mutually beneficial working arrangements.
A rigid centralised industrial relations system, of the sort Australia had up until the mid-1980s, can cope when little is changing in the economy. But when significant structural adjustment is required, such systems tend to deliver high unemployment. This is the legacy that the Government inherited when it came into office - an industrial relations system that was not only unable to meet the challenges of tomorrow but could not adapt to the needs of today.
It is no secret that those countries that have the most flexible labour markets are those countries which have the best employment outcomes. This is something that we have got to continue working towards in Australia.
The Workplace Relations Act 1996, which came into operation at the beginning of this year, represents a step forward in freeing up Australias labour market. By giving employers and employees primary responsibility for their workplace arrangements, the Act should facilitate a major change in workplace culture so that such arrangements reflect the needs of individual employers and employees rather than those of third parties.
The Government is encouraging employers and employees to take advantage of the opportunities created by the new Act to improve the productivity and competitiveness of Australian firms. This will encourage economic growth and increase employment.
Another key component of the Governments labour market strategy is ensuring that skill levels are relevant and flexible enough to meet the changing needs of industry.
Whatever the expanding industries of tomorrow are - be they design, fresh fruit exports or complex manufactures - we must ensure that the workforce has the skills, or can acquire the skills, required to be internationally competitive.
Ultimately, the provision of education and training should be more clearly determined by the needs of individuals and industries rather than by bureaucrats. Government training dollars should follow the consumer not vice-versa.
The Government has taken many steps to promote greater choice and competition within our education and training system.
The Government has also tackled one of the major impediments to enterprise-based training - the lack of an adequate training wage structure. Under the new apprenticeship system employers of apprentices and trainees pay wages only for the time actually worked.
To promote the development of a training culture throughout industry, Commonwealth and State Ministers have set up a working group of industry and government representatives to recommend an appropriate strategy by November 1997.
Future reforms will need to concentrate on improving linkages between the education and training sectors to facilitate more flexible approaches to learning.
In this regard, the Government has commissioned a Review of Higher Education Financing and Policy - the West Review - which will report in March 1998.
Also of critical importance to labour market flexibility is the need to ensure the unemployed maintain contact with the workforce and have both incentive and opportunity to find a job.
In pursuing these aims the Government has introduced a series of innovative reforms.
- By May 1998, the previous Governments labour market assistance programmes will have been completely overhauled and replaced with a new Employment Services Market. In this market employment placement enterprises will only receive full payment if they deliver results.
- We have also introduced a pilot Work for the Dole scheme to underline the mutual obligation that exists between the unemployed and society in general.
- Reforms to the activity testing of unemployment benefits have sought to target payments to those most in need and to ensure that those who can work have a strong incentive to do so.
Conclusion
In conclusion let me say that I view the future prospects of the Australian economy with great optimism.
The task for all of us is to ensure that the Australian economy is flexible enough to take advantage of the forces of change and the unthought of opportunities now opening in the international economy.
The Government is determined to give Australians every chance to make the most of these opportunities.
And all Australians, whether they be employers or employees, have key roles to play in this process.
The Government will continue to pursue forward looking economic reforms across a broad range of fronts to create the conditions for improved living standards based on sustained strong economic growth.