I was an undergraduate at Monash University in 1978, when the Liberal Club inaugurated this lecture to honour and perpetuate the name and memory of Sir Robert Menzies. It is an honour for me to return, after 20 years, to deliver the lecture - I believe the first student from that time and the first from this University to do so.
Sir Robert Menzies is the towering figure of Australian political history :- not only because he was Australia's longest-serving Prime Minister, but because he founded one of the two political parties that have dominated Australian politics. The Liberal Party of Australia is one of only two Australian political parties capable of forming National Government. Sir Robert's place in Australian politics is not just as a leader, but as a founder. He established an institution capable of continuing to pursue the aims and ideals which he had for the nation long after his career was completed. This puts him in a unique category of leaders who were able to establish then institutionalise their political movements in the democratic process - people such as de Gaulle and Adenauer. His period of Prime Ministership will never be equalled.
We are now familiar with the extraordinary achievements and the honours bestowed on Sir Robert in his later life. But another part of the Menzies story is how he came from a small country town, on a scholarship, to the city of Melbourne, and with diligence, intellect, and education rose to the leadership of the nation. Australia then was a place where anyone could succeed with hard work and application. And whatever its failings, it still is. I want to say this particularly to the young people of Australia. With hard work and application, in this country, you can achieve anything you set your mind to.
Some of you will think this is obvious and hardly worth saying. But there are others who will thoroughly disagree. And as a result, it is not said very often. Do young people often hear that with hard work and application they can achieve the most challenging of goals. Do they hear it at all?
In Australia you can expect to achieve anything you set your mind to.
As you look back at those who have delivered these lectures over 20 years - High Court Judges, Governors-General, Prime Ministers, Treasurers - nearly all have come from very modest beginnings.
And this reflects core Liberal values :- an open society, equality of opportunity, encouragement for initiative, reward for labour, and the chance to dream and succeed.
The life of Sir Robert Menzies intersected with the nation at many significant points in our political history. As a young barrister, he successfully argued the "Engineers Case" which overturned previous constitutional doctrine, and paved the way for building the reach of Commonwealth legislative power. In 1939 it was his melancholy duty to announce that Australia was at war. But I think one of the decisive moments for Australia was the 1949 election which swept the first Liberal Government into office. The outcome of that election set Australia's path for post-war reconstruction. Australia decisively repudiated the path of nationalisation. The 1949 election was a defeat for economic centralism and government controls. Australia set its course on a market economy and private ownership.
The Labor Party then (as now) had its objective as the "democratic socialisation of industry, production, distribution and exchange..." The Labor Party then (unlike now) tended to take its platform and principles quite seriously. The outcome of a Labor victory in 1949 would have meant quite a different Australia - an Australia of nationalisation and substantial central economic planning. The election of 1949 turned our course.
Of course in intellectual circles the argument between the market economy and nationalisation/socialism continued to rage long after 1949. It was certainly still a live argument when I was a student here in the mid 1970's. But the fall of the Berlin Wall in 1989 was the decisive end to the argument between the market economy and the command economy. It was the end of the Cold War and the end of the argument. Some went so far as to call it "The End of History" The Russian experiment was ended.
Today, Russia, the former Soviet Republics and the countries of Eastern Europe, are now all, with varying degrees of success, attempting to establish market-based economies. The International Monetary Fund, describe these as "countries in transition"; that is, countries in transition to the market economy.
The Chinese economy is undergoing similar changes. The process is more closely supervised and controlled but the direction is unmistakably clear. In his report to the 15th National Congress of the Communist Party of China in September this year, President Jiang Zemin observed that 'building socialism with Chinese characteristics' means 'developing a market economy under socialism' and allowing 'diverse forms of ownership [to] develop side by side' with 'socialist public ownership'. In China, this program involves market liberalisation, accession to the World Trade Organisation, allowing private ownership, and opening up price signals in the domestic economy.
With the exception of a few states such as North Korea and Cuba, the principal focus of economic decision makers around the world is :
- flexible domestic product and labour markets
- trade liberalisation
- reduced Government ownership
- sound fiscal and monetary policy
- opening capital markets.
In his address to the Annual Meeting in Hong Kong on 23 September 1997, the President of the World Bank observed; "....freedom is blossoming. Today nearly two-in-three countries use open elections to choose their national leadership, and 5 billion people live in a market economy - up from 1 billion ten years ago".
The decisive move to the market economy in Eastern Europe, Central and East Asia has been caused by the failure of the alternatives. The command economies were unable to supply the needs and the standards of living, that their citizens began to expect. And their citizens began to expect more as they became aware of higher standards of living in other countries with different economic systems. The truth is the command economy did not work. And as technology and communications advances made it harder to hide this fact from those that lived in them, these economic systems began to crumble from the bottom up. Even for those national leaders who want to do so, it is very hard to seal off a society in the modern world.
And the same is true of an economy.
Technology and communications advances mean that information can be broadcast from one part of the globe to another and flow across national borders. They also mean that capital investment can flow across time zones, frontiers and continents. A Japanese office worker, through a pension fund, may invest in an Australian food production company or a Chilean copper mine or a Thai property development.
The rapid shift of capital out of a number of South-East Asian countries is now being seen as a problem for those countries, but it should be remembered the shift of capital to those countries was one of the reasons for their rapid growth over the past decade or so. The economies of East Asia were able to substantially lift their growth rates by linking themselves to the world economy through trade, investment, capital flows and technology exchanges. Investment levels have been able to run well in excess of domestic savings through foreign capital inflow. Leaders around the world are now aware of the advantages investment and external capital can bring, and as a result, are liberalising capital flows.
This is globalisation; billions of dollars traded across screens, every word of policy makers flashed around the globe to inform buyers and sellers in capital markets operating in different time zones trading a nation's stock, bonds, or currency, and reacting to economic policy. We are now more conscious than ever that economic prospects can be affected not only by domestic events but by international perceptions. And a change in sentiment, such as has happened in relation to a number of countries in the South East Asian region recently, can have dramatic effects.
The inter-connectedness of the world economy means that such an effect is likely to also have knock-on effects amongst trading partners and investors. The old expression was that if America sneezes, the world catches cold. Today if anyone sneezes their neighbour is likely to sniffle ... at least.
And for that reason, prudent economic management dictates that a country should always have a little inoculation, a little margin (preferably a big one) for unforeseen developments.
When our Government was elected in 1996, notwithstanding over 4 years of economic growth, the Commonwealth was running a $10 billion deficit. Since the 90/91 recession, Government debt had increased more than five-fold. There was no end in sight to prospective budget deficits. Far from a plan to retire debt, Labor had no plan to even stabilize it. The truth is that by 1996 our predecessors should have had the Commonwealth budget in surplus and should have been retiring debt. In fact, they had Australia on a deficit-and-debt path into the next century. It was wanton irresponsibility.
Our fiscal strategy, one of the most ambitious ever in Australia, is to :-
- put the underlying budget into surplus in our first term (by 1998-9);
- reduce outlays to GDP to 24 per cent (pre-Whitlam levels); and
- halve the Commonwealth Debt to GDP ratio from 20 per cent to 10 per cent;
by the end of the century.
We do not know the full extent or the effect of the instability in our region, but we can say we will weather it stronger because our Government acted decisively to put Australia's house in order. As we are now coming within sight of our goals, the same people as caused the problem are now thinking up ways to throw the fiscal position into reverse again. They are simply recidivists. They can't deal with problems. They can only create them.
In describing investment decisions, it has now become fashionable to say that the market takes this view or the market takes that view, that the market thinks this or the market thinks that. And it is worth reminding ourselves that markets do not have personalities, markets do not have thoughts or views. A market is merely a place of exchange, where a willing buyer meets a willing seller. A market has no particular virtues. A market allows people to put a value on goods, services or resources and exchange them. It allows people to value things differently according to the uses to which they are able to put them. In markets some people make bad sales and some make silly purchases, but by and large, over the long run, a market is the best way of fixing a price. And the price signal is the most efficient way of developing efficient production.
Let us take a market most people are familiar with - the real estate market. Different people like different styles of homes and put different values on property which they put to different uses. The best way to fix a price is allow the buyer and the seller to fix it. And where prices rise because of short supply, builders build, and where they fall because of oversupply, builders slow down production. This is certainly better than having a government official determine the price, order the volume, or ration the delivery.
The American writer Irving Kristol wrote a book entitled "Two Cheers for Capitalism". It does not sound too enthusiastic. But it beats "no cheers" for the alternatives.
I am not addressing the argument here as to when and how the state should intervene in the market economy. This is an area for legitimate argument. And markets do not always work as intended. I am merely observing that overall, or in the long run, human experience is that the market is the best mechanism for allocating resources.
Perhaps it is worth reiterating that as we see more and more countries moving towards a market economy, we are also seeing more and more people enjoying a better standard of living. We are at a point of human history where more people enjoy a better standard of living than ever before. The President of the World Bank recently claimed that "life expectancy has risen more in the last 40 years than in the previous four thousand". We should remind ourselves that it is economic growth and development that pays for the improvement in health care and the extension of life expectancy, that pays for the education of children and provides for their housing, that opens travel and information for people who might never have known what lay beyond their village, their city, their country, their horizon. And our generation has access to information and knowledge of a kind unrivalled in human history. We are the most information-rich people in the history of the world.
I do not for a moment discount the fact that people have longings and feelings which are not filled by material progress. But I do not think we should be better off with lower standards of health care than better ones, or lower standards of housing than higher ones or lower incomes than higher ones.
What brings economic growth and improvements in our standard of living, is our ability to get better outputs for a given level of inputs. Another word for that process is productivity. Productivity is the basis for rising living standards and generating prosperity.
I restate this proposition because I believe it is not well understood. There is a widespread fear, I believe, in our community that increased productivity will make us poorer; that it will somehow lead to lost employment and lower living standards. There were similar fears when the Luddites began smashing wide-frame weaving looms. There were similar fears when the motor car started replacing the horse and buggy.
In the early 1980's the trade union movement resisted the introduction of new technology in the workplace on the grounds that it would lead to the loss of employment in secretarial work. In fact the advent of word processors and personal computers, a comparatively recent development in our economy, led to an explosion in keyboard work. Jobs that involved routine typing became more scarce, but employment in information processing and data entry multiplied. The outcome was the demand for higher skills, higher training, and the creation of better jobs. But the economic effect was much wider than just the industry concerned. The efficiencies deriving from the revolution in information technology led to productivity improvements in practically every industry leading to better outputs from our inputs of capital and labour. This is the process for generating wealth.
The advent of the car might have led to the end of employment opportunities for blacksmiths and coachmen, but it led to new jobs for mechanics and taxi drivers. More importantly, every business that relied on transport became more efficient as a result, that is, wealth and living standards improved.
There are some silly people in the Opposition who today say they want a high-growth economy whilst at the same time opposing productivity changes which increase efficiency It is like trying to fuel a fire with a garden hose. Where do they think economic growth comes from? It comes from better outputs from labour and capital, that is, increased productivity and improved efficiency.
We are now very conscious, in an international sense, of the competition for both labour and capital. People with high skills are in international demand. There is a very real, competitive, international market for capital. And because capital is mobile we are conscious that in Australia we must have a competitive environment to attract it. Investors will look at all the conditions before making their investment. Obviously, one is the rate of return. Another is the sovereign risk. Another is the taxation regime. We are becoming more conscious in Australia that we are in tax competition in our immediate region.
Although the Australian tax to GDP ratio is not high by the standards of industrialised countries (certainly by European standards) it is high by regional standards. On average, tax revenue is around 16 per cent of GDP in our major East Asian trading partners. In Australia, Commonwealth tax to GDP is around 24 per cent.
On a straight taxation basis this would show Australia at a significant disadvantage.
But there is another side of the tax story which is expenditure side. We only raise taxes in order to pay for outlays. In Australia the central Government social security spending is over 9 per cent of GDP. On average, the central Government social security spending to GDP in our major East Asian trading partners is less than 1 per cent. This is the tax differential reflected on the outlays side. Those countries do not provide universal medical care, or access to age pensions at rates payable in Australia. People speak of mobile capital. People with skills are internationally mobile. But the poor are not. And the poor are entitled to a decent level of income support that is going to require Australia to set aside much more than one per cent of GDP.
The Australian public is going to demand a level of social security spending much greater than that in our East Asian neighbours. And they are right to do so. This is one of the hallmarks of a developed country.
So here is the vexing question for Australia - how to maintain the social security system of an advanced industrial country whilst being tax competitive in our region. It will mean that overall we will have a higher tax/GDP ratio and higher social security/GDP ratio than our immediate neighbours. That being the case, we will have to turn it to our advantage. We must make the tax differential a positive - a positive because it brings benefits that represent value - benefits in terms of social stability, an efficient and well-regarded legal system, a well-educated professional workforce, a wonderful natural environment, a much better lifestyle. And we must remember we live in a competitive region. We must keep on working to make the tax differential marginal.
We are lucky that Australia never progressed down the road of the welfare state to the extent of the European countries. This has meant that in overall tax take we are more competitive than nearly all of the European developed countries. Those countries are now trying to roll back parts of the welfare state to enhance their competitiveness. It is easier said than done. The road to the welfare state was seductively easy, and the journey out painfully difficult.
Here at the end of the 1990's we can say one of the great legacies of Menzies is that under his leadership Australia avoided the excesses of the welfare state as it developed in Europe during the '50s and '60s. It means that our economy is somewhere between the European and East Asian model in terms of tax and social security expenditure. This will always be the case for an advanced country in the Asia Pacific region. We cannot follow the European model or the East Asian model in terms of overall tax take and social security expenditure. We will have to be distinctively Australian.
But overall tax rates are one thing. The way in which we raise our taxes is quite another. Our current tax regime was designed in the 1930's and is reasonably suitable for a 1930's-type economy. The changes in the last 60 years mean our economy is unrecognisable from that of the 1930's. In the 1930's we were principally a goods-based economy. Now, like all developed economies, we are predominantly a service-based economy. We tax a narrow, and narrowing indirect tax base on which we impose ever-higher rates. We have extremely high marginal income tax rates on average earnings. The system will not last and it will not equip Australia for the modern era. We need major tax reform.
Major tax reform, reform that enhances our attractiveness for investment and skills, that lowers transaction costs and promotes efficiency, that secures a decent base for a decent level of social security support should be a matter of bi-partisan agreement in the national interest. The Opposition cannot differentiate itself from opportunism on an issue like this. We are on our last best chance. If we fail on a big issue like this, it will be no consolation to spend our time on small policy challenges in the future.
Nor should we console ourselves with the wish that if the tax system is generally uncompetitive we can cash out selected beneficiaries or beneficiaries in selected respects. We should aim for a generally-applicable more competitive tax system.
The events in our region in recent months should remind us again of the importance of economic fundamentals - sound budget settings, a prudent debt position, a sustainable current account, a transparent and well-managed financial system. Some of our neighbours have experienced financial instability and massive currency devaluations in recent months. Three are now in structural adjustment programs with the International Monetary Fund. It is too early to say how long the currency instability and stock market and volatility will last. But we can say with some certainty that there will at least be a pause in growth rates in the countries in our immediate region.
A pause in growth amongst the countries of our immediate region will affect Australian exports and Australian growth. A downturn in growth in our immediate neighbours will be unhelpful for Australia. I make this point to underscore in the public mind the benefit to Australia of strong growth in our regional neighbours. If a downturn in our neighbours has an adverse effect, then the converse must be true :- an upturn in growth has a positive effect. It is not in Australia's interests to have poor neighbours, but rich ones.
This is why Australia has made a commitment to join IMF packages for both Thailand and Indonesia. These packages require those countries to engage in very significant economic restructuring that will, in the long term, set them up for sustainable growth. Australia's contribution will assist in the adjustment process and, when it is completed, be repaid. Apart from the importance for those countries themselves, there is an undeniable advantage for Australia for those economies to be stabilised and returned to strong growth.
Strong economic growth in the region should not be seen as threatening. It is of benefit to our country. Just as the economic development of Japan through the '50s and the '60s gave Australia unthought-of trade opportunities, so too the development of economies in South East Asia and the opening of China will be of benefit to Australian economic growth and rising living standards. It is not economically threatening. I want to bring this notion out into the open and expose it as false.
If people think that growth amongst our neighbours is threatening, they will be more open to the prescriptions of the Economic Nationalists - of both right and left - who argue for policy that would close or isolate the Australian economy from international exposure. Some want to isolate it from open trade, some from foreign capital investment, and some (particularly on the left) from international competitiveness. But at the end of the day these are prescriptions to isolate Australia, not from negative but from positive forces. And these are not presciptions for prosperity but for impoverishment. We should oppose these prescriptions because they will make our country poorer. There are degrees here, but the ultimate practitioners of these policies can be found in Havana or Pyongyang.
Others advance divisive social policies as an answer to these economic fears. It is no surprise that the loudest voices for discriminatory immigration policy are also the loudest against our participation in stabilising regional currencies and the loudest on erecting trade barriers against the outside world. We must repudiate the proponents of such social policies on moral grounds. They are morally wrong. But they are economically wrong too. Their prescriptions threaten economic development and are likely to worsen social divisions leading to ever-descending and self-fulfilling prescriptions.
Just as we must constantly affirm the value of openness and tolerance as an antidote to social insecurity, so too it is important to constantly expound the benefits of trade, regional development and productivity improvements as an antidote to economic insecurity.
Economic change is not a new nor is it a temporary phenomenon. Economic insecurity accompanied the advent of the wide-frame weaving loom, the motor car, the word processor. The fears and insecurity of those affected by change are natural and understandable.
People of the right and left will play on them for their political advantage.
We could try to resist or slow change and productivity improvements. But if we did, who would be the winners? We are unlikely to stop such changes. We are merely likely to delay the benefits they bring. Change is a given. What is not given is the extent to which we will capture its benefits.
And an economy which is open, flexible, and adjustable will allow Australia to capture those benefits :- the benefits of increased prosperity and rising living standards. This is the kind of economy we should work to create.
In 1949 when Australia faced the fork in the road, it took the right path. Fifty years on our choice will be no less important. But in many respects it is much clearer. It would be inexcusable through fear or ignorance to get this one wrong.