Ladies and gentlemen, distinguished guests of the CBI. I am delighted to be in London to have the opportunity to speak to you today.
Australia and Britain have strong, durable and close links. As our relationship has matured over the century, our economic, cultural and social ties have remained strong. And they will remain strong in the future.
Our trade and investment links are particularly strong. The UK is our sixth largest trading partner and is now the largest foreign investor in Australia - larger than Japan. Perhaps what is not appreciated is that Australia is the fifth largest foreign direct investor in the UK and that there are over 1000 Australian companies operating in the UK.
Apart from our close trade links, we also have common social, political and humanitarian goals. This is no more evident than in the rapid response of both the Australian and British Governments to the tragedy in East Timor.
Australia is leading an international peace keeping force in East Timor. We do this under UN authorisation in response to a humanitarian tragedy. We do this to protect lives and legitimate demands for safety and self-realisation. We do this because we have the capacity to do so. We do so because it is our responsibility in the region.
It is not an Australian operation but an international one, sponsored by the United Nations, and we are particularly appreciative of the rapid response by the United Kingdom in committing troops to East Timor. Our two countries support for basic human principles will never change.
In my talk today I want to focus on economic developments in Australia and its region. The last 2 years have been difficult ones for East Asia. We have seen a number of countries experience a severe economic and financial crisis. The resulting turmoil raised concerns about the overall stability of international capital markets. It challenged the roles of the international financial institutions, such as the IMF, and brought on efforts to improve the architecture of the international financial system. The eye of the crisis has passed but rebuilding for future crisis prevention must continue.
And during this severe crisis in our region, the Australian economy proved its strength.
The Strong Performance of the Australian Economy
Australia has been one of the stand-out economies of the world over the past few years. When Asia experienced its troubles, some thought that this would have a severe impact on Australia, since Asia was our largest export market. If Japan, Korea, Hong Kong and Singapore experienced recession, many forecasters thought Australia would follow suit. And the Australian economy of yesterday would have fallen victim to a crisis of this dimension.
For decades, the performance of the Australian economy was rather lacklustre when compared with its potential.
But the Australian economy of today is very different.
In the past, we had cycles of higher GDP growth, but they were typically short-lived and inflation prone. We were something of a boom-bust economy, heavily exposed to the fortunes of our commodity exports. Work practices and productivity lagged worlds best practice. By international standards we were in economic decline.
But we have changed.
We are now a high growth, low inflation, low interest rate economy. We have an efficient government sector, a flexible labour market and a very competitive business sector.
In Australia, year-average growth in 1998-99 was 4.5 per cent, similar to the 4.8 per cent growth recorded the previous year. Over the Governments first three-year term, growth averaged around 4 per cent. In that period, Britain averaged just under 3 per cent, Europe around 2- per cent, Japan around 1 per cent.
Unlike the Australian economy of the past, this strong growth has been accompanied by low inflation. Australian average inflation over the 1990s has been 2.2 per cent. This compares with average inflation in the EU of 2.8 per cent and 2.9 per cent in the US.
With low inflation comes low interest rates. Since mid 1996 official interest rates have fallen 2- percentage points, and over the past three years the premium over long term US interest rates has fallen from 350 basis points to around 50 basis points.
Public debt in Australia is about one third of UK and US levels and one quarter of that for the
Euro-average. Our net debt to GDP ratio will fall to under 11 per cent by the end of this fiscal year. Moreover, with continuing budget surpluses and the planned sale of the remaining government equity in Telstra, our public telecommunications company, Commonwealth government net debt could be eliminated within the next few years.
Underpinning this impressive economic performance has been a marked jump in productivity growth, which is now higher than the US. Annual growth in productivity has averaged 2 per cent in the 1990s expansion in Australia, accelerating to almost 3 per cent since the Government came to office. This compares to productivity growth of around 1- per cent in the same period for Europe, and 1 per cent for Britain.
Australia exceeds all the Maastricht requirements, some by considerable margins. This year will be the third surplus budget in a row.
Some lessons from the Asian crisis
There has been considerable academic discussion about the reasons for, and lessons to be drawn from, the Asian economic and financial crisis. I will not try to canvass them all today, but the events in Asia over the past few years and the performance of the Australian economy have reinforced to me some fundamental, and interrelated, principles of economic management.
The first overriding point is that policy matters. Good policy brings rewards. Policy shortcomings will ultimately lead to problems.
Secondly, institutions matter. The basic institutional structure which underpins the economy - the banking, financial, legal, accounting and corporate regulation system - must be sound if economic growth is to be maintained.
Thirdly, a flexible economy will adjust best to external shocks. We cannot take good times for granted. We live in a volatile, uncertain world.
For example, hardly anyone forecast the severe difficulties that most of the Asian economies experienced in 1997 and 1998. The best policy defence to this uncertainty is to ensure that the policy fundamentals are sound, to have a flexible and competitive economy and a margin for error.
I would particularly emphasise the need for a comprehensive framework. For example, there has been some speculation that the very strong productivity growth the US has experienced, and the even stronger growth recorded by Australia, is the result of the spread of new technology. But this cannot be the only reason, for many economies have experienced the similar up-take of technology but have not achieved the same productivity growth. I believe the reason for Australias very strong productivity growth lies in the reform initiatives we have undertaken over the past few years and the fact that they give added benefits when they cumulate.
For some time many were taken with the concept of the Asian model or what was being termed the Asian miracle. This approach to economic management involved considerable intervention and government support for the private sector. But the events of the past few years have exposed the weakness of such an approach. Directed lending from banks to corporations can expose the banking system as well as the corporate sector. The prescription to resolving Asias problems, generally accepted by the crisis-affected economies themselves, involves moving back to the
open-market system. Failing corporations must be allowed to fail. And transparency of private sector corporations is important just as it is for the government sector.
I think the experience of the past few years has firmly demonstrated the importance of policy transparency and stability in economic management. Business needs certainty in order to invest and plan. Those economies that have performed best had a transparent and stable approach to policy.
These are some of the lessons I have drawn from the Asian crisis. These are reasons why, notwithstanding that nearly every other country in our region was going into recession, the Australian economy grew and grew faster than practically any developed economy in the world.
Reasons for Australias strong performance
Australia has a comprehensive policy framework in place. We have vigorously pursued policy reforms, not in response to a crisis situation, but to ensure that our economy was sound and to reduce its vulnerability to sudden changes in the perceptions of international investors.
Our first priority on coming into office was to return the Budget to surplus. We inherited a budget deficit of 2 per cent of GDP, which we turned into surplus two years later. For the current year we are forecasting a surplus of just under 1 per cent of GDP and projecting further surpluses over the following three years. We have also committed ourselves to ongoing fiscal probity, with our Charter of Budget Honesty being used by the IMF as an international model for promoting fiscal transparency.
The repair of our fiscal position was an essential ingredient to our strong economic performance. We moved early to return the budget to surplus, not because we had great insight that financial problems would start in Thailand in 1997 then spread through Asia, but because we knew that if we did not have a sound fiscal policy we would be vulnerable.
And this applies today as much as it did in 1996 when we came into office. It is still vital to maintain the health of public sector finances. Australia will be required to take a leading role in restoring peace in East Timor, a role that will place considerable demands on the Australian economy. Because we took the steps to ensure that we had a strong economy we are in a position to respond to the tragedy in East Timor. And we must keep our economy strong to enable us to continue this work to completion.
We do not know what external shocks and what unanticipated events lie ahead. It is for this reason that we will not let the Australian Budget return to deficit while growth prospects remain sound.
Not only did the Coalition Government move early to restore the health of our budgetary position, we also ensured that we had a world class system of prudential regulation; that our corporate regulation and insolvency regimes were business orientated and strong; that there was substantial expansion of competition in key areas such as telecommunications, electricity and gas; that barriers to trade and foreign investment were reduced; and that our labour market was reformed, along with our tax system.
As I said earlier, institutions matter and Australia has a sound, stable and competitive institutional structure that provides certainty to business decisions that will support sustained growth.
I will say a few words about the reform of our tax system shortly, but before doing so I want to touch on the labour market.
The Australian economy of the past had an inflexible labour market, rigid wage setting arrangements, and a high degree of unionisation. But that was the economy of the past.
A key element of the Governments structural reform program since 1996 has been reforms to workplace relations arrangements and labour market regulation and assistance. Significant reforms to workplace relations have included a move from centralised wage fixing to enterprise bargaining - ensuring that wages and workplace practices are consistent with the circumstances faced by individual firms.
We have promoted freedom of association and put tighter limits on industrial action. Industrial disputes are now at record lows. The change in the structure of the economy to service industries and greater female participation meant that by the late 1990s, unionisation rates had fallen below 30 per cent of the workforce. On the other hand, over 40 per cent of the adult population owns shares. We are the second largest share-owning country in the world.
As a result of these changes we now have a labour market that is more responsive to changes in the economy and the impediments to job creation and productivity improvements have been reduced. Employment grew by 2.3 per cent over the year to August 1999 and our unemployment rate - still too high at around 7 per cent - is the lowest in around a decade.
Importantly, as a result of the reform to labour market and wage setting arrangements, the recent period of strong growth has not been associated with the emergence of unsustainable wage pressures that have contributed to increasing inflation at similar stages of past economic expansions.
Reform of Australias tax system
Just before leaving Australia, I announced a major restructuring of Australias business tax system. This was a further instalment of the Governments complete overhaul of the tax system. For many years our tax system had been unfair, complex, and unsustainable.
Our approach to tax reform has involved reducing taxes, reducing complexity, reducing distortions, and improving fairness.
We have dramatically reduced personal income taxes, with the largest personal income tax cuts in Australian history - $A12 billion per year commencing 1 July 2000. At that time we will also reduce welfare-induced distortions to choices about work, saving, spending and investment.
From 1 July 2000, we will abolish inefficient indirect taxes, including a wholesale sales tax, which amounted to a tax on exporters and manufacturers, and replace it with a broad-based value added tax. There will be no stamp duty on share transactions.
The result of these changes is that business costs will be reduced by between $A7 and $A8 billion annually and the costs to exporters will be reduced by over $A3.5 billion. All these measures have been already legislated.
Some of the key features of the New Business Tax System which I announced on 21 September will include:
- Company tax rates are to be reduced from 36 per cent to 34 per cent for the 2000-01 income tax year and to 30 per cent thereafter.
- In part, the reduction in company income tax will be funded by moving to effective life depreciation rather than the current system of accelerated depreciation for plant and equipment.
- Capital gains tax will be reduced. At present, individuals are taxed on real capital gains at their marginal tax rates, currently ranging between 20 per cent and 48.5 per cent. The reforms will tax 50 per cent of nominal gains, so that the top rate effectively falls to 24.25 per cent and the low rate to 10 per cent.
- There will also be capital gains tax rollover relief on scrip-for-scrip takeovers.
- Venture capital investments will be given a boost by allowing non-resident,
tax-exempt pension funds from countries, such as the UK, exemption from Australian income tax, including capital gains tax, on gains derived from the disposal of investments in new equity in eligible venture capital investments. - In addition, there will be substantial capital gains tax concessions for small business as well as a dramatic reduction in compliance for such businesses with the introduction of a simplified tax system.
The Australian economy of tomorrow
As I said, policy matters, and Australia will continue to work for the dividends of a sound and comprehensive policy framework.
In the period immediately ahead, there will be some moderation in growth, reflecting the impact on our exports and business investment of continued below trend growth in the world economy. As a result we expect growth to move towards a 3 per cent outlook in 1999-2000.
As we move into 2000 and beyond, growth in the economy is expected to pick up as the international economy improves and as we see the benefits of the introduction of the Governments tax reform package.
Around twelve months or so ago some commentators were saying that the Governments economic forecasts were far too optimistic and that Australia was heading for a period of much slower growth because of Asia. Things change:- now some are focusing on whether growth will slow as predicted and whether we will see even stronger growth coming from the Governments reforms and a strengthening in the world economic outlook.
While the world economic environment does appear to be stronger than when we framed the Budget in May, our outlook for the domestic economy is on track. However those commentators who are now expressing concern about the strength of our economy continue to repeat the mistake of using the Australian economy of the past as their reference point.
Because of the extent of the reforms undertaken, and the dramatic lift in productivity growth, Australia has the potential to sustain strong economic growth. I believe we can sustain non-inflationary growth of 3 to 4 per cent over the next decade. The aim is to sustain the highest possible rate of economic growth without the build up of inflationary pressures. And inflationary pressures are low. Australia has recorded its ninth consecutive quarter of real growth above 4 per cent, yet inflation is still below two per cent. We are no longer an inflation prone economy.
Our current account deficit has been a watchpoint for foreign investors. Australia has averaged a current account deficit of around 4 per cent of GDP over the past two decades. We expect a cyclical widening of the current account deficit this fiscal year to average 5 per cent of GDP. But again, our current account deficit must be seen in the context of the Australian economy of today, not of the past.
With the Government in a surplus position, the current account deficit is now totally the outcome of private sector transactions. This represents private investment and borrowings, which in turn are now more soundly based following our extensive reform initiatives.
I am extremely positive about the outlook for the Australian economy because of the policy reforms that have been undertaken. We now have a much more competitive, more flexible and more open economy compared with a decade ago. We have seen how our exports adjusted to the impact of the Asian crisis, assisted by a combination of favourable exchange rate adjustments and a low and stable interest rate environment.
The sweeping changes in technology and in our region will open up unprecedented opportunities for the Australian economy in the new century - opportunities we are well placed to capitalise on because of strong and continuing economic reforms.
This is the age of electronic commerce, the Internet and the World Wide Web. It is the age of global 24-hour financial markets. Services such as telecommunications, computing, education, financial services are now much more readily traded internationally. Australia will continue to be a major commodity exporter given our vast resources, but we also have many comparative advantages when it comes to services.
In particular, we have the potential to become a regional financial centre. Australia has a well-regulated and sophisticated financial system. We have deep, liquid and transparent markets offering a wide range of sophisticated products including equities, bonds and managed funds.
The Australian Stock Exchange is the second largest equity and options exchange in the region (after Tokyo) and the Sydney Futures Exchange remains the largest and most innovative in the region. We have world class telecommunications and a multilingual and highly skilled workforce.
With these attributes, combined with what is acknowledged as a world class system of financial regulation, Australia will increasingly become a location for financial service exports and a regional financial centre.
Conclusion
In May this year I presented our 1999-2000 Budget and concluded with the following assessment;
The next decade could be a special one for Australiaa step up in growth, in jobs, in our community infrastructure, in our services, for those in need, in our living standards, leading the region and, in many respects, leading the world.
What I meant was that the step-up in productivity could lift the long-run sustainable growth rate. And if that occurred, we could lift the long-run rate of employment and drop the long-run rate of unemployment.
As a result of good policy we have a strong, competitive and vibrant economy. We will not be complacent. We will ensure that the policy framework that has allowed us to shift up through the Asian crisis will be maintained, for it is the key by which we will achieve continued strong economic and jobs growth.