Thank you very much Michael Stutchbury — it's great to be here with you all this morning and to take the opportunity to come and share with you our thoughts on growth and jobs and on 'risk taking and growth making'.
It's also a good opportunity to get some time away from the Budget preparations which are very much now in the earnest phase and the meetings are happening rapidly and don't change the booking, Joe, for the 10th of May. I wouldn't want you to miss it. I think that is the planning that we have in place and that is the normal course of events.
Over the course of this year I think there's been some speculation that we were going to bring the Budget forward to February. There's been a lot of expectation, a lot of interest in hearing the Government's Budget plans. They will be outlined in May as is always the case. But today I can take you through some more of our thinking about how that Budget is coming together and what are the important policy settings that sit around that Budget, particularly in relation to economic policy.
Now, this conference theme of risk taking and growth making, I think, is credibly timely as the others have said.
It speaks not only of the need to focus on growth, and I should stress you shouldn't take that for granted – that everyone agrees with that. I certainly do. But you can't agree that outside of this place or outside of your business that growth is actually the objective when it comes to government policy.
There are others who have very different views about this and they have very different views about how that growth, if they were to agree with that as an objective, can be achieved.
The idea behind risk taking and growth making is that it highlights the core roles that entrepreneurialism and private investment must play in driving that growth and the jobs that will come from that growth.
These themes are also critical if we wish to see what is occurring in our national economy which is positive, continuing.
Our economy, I think this is not just a national consensus but I think it is an emerging global consensus, and my time at the G20 recently reaffirmed this. Our economy is successfully transitioning in a time of significant global uncertainty and volatility.
Maintaining the success of this transition is the single greatest economic challenge facing this country today.
That is what the election will be about later this year – who is better placed to successfully manage the ongoing positive transition in our economy.
Globally, after seven years of QE rates remain at record lows, and indeed negative in some economies – boastfully so. Growth is subdued. The pulse of inflation is weak. Trade is stalled. Markets are edgy and often disconnected from real economies and commodity price, as Andrew knows, is anyone's guess.
Despite this, the Australian economy is growing, and growing well, and we have many reasons to be optimistic as we are as a Government.
Real GDP grew in the December quarter by 0.6 per cent, and by a strong 3 per cent in real terms compared to a year ago.
Anyone sitting around the G20 table a few weeks ago would have loved to have read out numbers like that – the vast majority of them – but they can't.
We're growing faster than every economy in the G7 and growing well above the OECD average. We're growing faster than the United States and the United Kingdom and more than twice the pace of Canada, a comparable resource rich advanced economy, and we're matching growth rates with economies like South Korea.
The key drivers of economic growth, as you would have seen in the December numbers, were household consumption, new housing construction, particularly in the apartment sector, services exports and public investment, more than offsetting the continued and expected declines in resources investment.
Last year, more than 300,000 jobs were created. The strongest calendar jobs growth we have had since 2006. Not long before the Howard and Costello Government completed its run.
The changing composition of our drivers of growth demonstrates the transition to broader based growth underway in our economy and the increases in consumer confidence and business conditions.
Consumer confidence is up some nine points since the change in September. Business conditions are strong. Balance sheets are strong. Service exports are up 8.3 per cent.
Chinese visitors are arriving at a rate of more than 100,000 per month and recently passed one million in a year. And resource export volumes to China continue to grow, as does the market share of our world-class producers.
So why would we be gloomy? And in particular why would we be necessarily gloomy about the China picture? As a Government we haven't been drawn into the global group think about the slowdown in China. I made this point when I was up in Shanghai.
The slowdown was not a surprised, it was entirely predictable that it would eventually occur but the commentary fails to appreciate the simple math. It also fails to appreciate the synchronicity of our economic engagement with China in assessing the impact on Australia.
Our relationship with China is not one dimensional. China remains one of the fastest growing economies in the world with a growth target of 6.5 to 7 per cent for 2016 as the Premier recently announced. This means its purchasing power is 50 per cent more than six years ago when it was growing at 10 per cent. Like Australia, China is going under transition, a necessary transition I would say from investment-led growth to greater reliance on consumption and services.
The services sector for instance currently now represents more than half of China's total GDP. This means the expanding parts of the Australian economy are also feeding into the expanding parts of the Chinese economy – their consumer economy.
China is already the largest services market worth $8.8 billion. In the last 15 years China's share of Australia's services exports has gone from 3 per cent to 14 per cent. With China's middle class estimated to grow to around a billion by 2030, demand will only continue to increase.
This synchronisation represents a huge opportunity for Australia. An opportunity for education, for tourism, for financial services exports, for health and ageing services, for human services, for businesses large and small.
It also means that our more traditional sectors continue to have the opportunities there as they demonstrate every day.
The next phase of this transition we're seeing under way in our economy is to drive investment. That is the next step, in particular in the non-mining sector.
To succeed in our post mining investment boom we must continue to diversify and we need to earn more from everything we do.
In the absence of the terms of trade boom, the terms of trade now returning to its long run average, falling some 30 per cent from the peaks. The terms of trade that previously, in many respects, underwrote our national income, our ability to earn our way in the future must come from productivity growth.
This means there has never been a more important time to focus on innovation, infrastructure and incentive in our economy – to support the investment that will drive jobs and growth.
This is critical to backing Australians because Australians are actually making this transition take place; Australians in the room today, Australians in their businesses out there today, the Australians who are working and saving and investing every day – they are making this transition actually happen.
And our job is to back them in.
That is why we're implementing the $50 billion national infrastructure rollout to unlock the economic potential, particularly in our cities and the Prime Minister will have more to say about that cities agenda in the weeks and months ahead; an agenda that connects customers and businesses, products and markets, services and the users of those services, researchers and their collaborators, friends and families.
It is why we are continuing to align our economy with the fastest growing, the largest economies in the world through the most ambitious trade push we have seen in generations – and I would add the most successful.
Through our response to the Financial System Inquiry, we are continuing to enhance the strength and resilience of our banking and financial systems, to provide the surety in a dynamic and volatile global economy, providing that necessary stability and certainty as well as choice and protection.
In our response to the Harper Report, we have embraced and are embarking on a new regime with the states and territories to mirror the competition reforms of what was seen under the Hilmer process many years ago which saw GDP rise by 2.5 per cent as a result of those transformational changings in how governments go about what they do; how they deliver service, what areas they are involved in.
The Harper Report outlines numerous areas whether it's in human services, whether it's in state and territory planning regulation, all of these areas which will hold back growth if they're not addressed. These are the issue, in addition obviously to tax, that have been a key focus of the discussions that have been held between myself and state and territory Treasurers over the last six months.
Above all, it's why we have placed innovation at the centre of our economic agenda because it's innovation that will drive that productivity growth that is needed to set up the next phase of our prosperity and the next phase of our transition.
That is why the Government launched last year the $1.1 billion National Innovation and Science Agenda.
Central to the NISA, as Christopher refers to it, is the plan to back entrepreneurship and in there you will note, specifically measures in relation to tax, that were brought forward by my own portfolio. We're making it easier for up and coming businesses to raise equity finances with a 20 per cent non-refundable tax offset of investments.
This will be teamed with a ten year exemption on capital gains tax if investments are held for at least three years.
We're also tackling the stigma that comes with business failure. Risk taking that has led to business failure by reforming insolvency and bankruptcy laws.
As a Government we're also engaging the opportunities in financial services technology or FinTech.
At the recent World Economic Forum, which Mathias went to, I stayed at home and worked on the Budget. At that forum it was noted that 90 per cent of the data that we used today was created in just the past two years and the ability of new technology to capture and process big data is changing how we all do business and how we operate and the way consumers and products and services interact.
Just as the Internet has empowered people around the globe through access to information, FinTech is reducing the information asymmetry in the marketplace and helping to mitigate the risk and promote the efficient allocation of scarce resources and capital.
FinTech is all about stimulating technological innovation so that financial markets and systems can become more efficient and consumer focused. This can help drive improvements in traditional financial services but even more importantly it can promote disruption through innovative new products and services which can offer benefits to consumers and other sectors of the economy.
FinTech is just not something we're excited about because it's shiny. It is shiny. A lot of the people involved in it are quite shiny too. It's an exciting industry. It's a dynamic industry. If you want to get involved in it you get a better T-shirt and you better lose the tie.
That is not the exciting part of FinTech, for me the exciting part of FinTech is it can usher in a new wave of competition in this country in the way our economy operates that we've never seen before. At the moment it's still a promise, it's still a promise, but we have to give it a go. We have to give it the room and space to develop and grow in this country so it can have the opportunity to truly assist our economy as it goes through its transition.
As Treasurer, I want to help create an environment for Australia's FinTech sector where it can be both internationally competitive and play a central role in aiding this transformation in our economy. That is why we have established a FinTech advisory group to help identify the way forward and the areas that need changing and the areas that need support.
I recently returned from Hong Kong and also Shanghai where apart from holding some pretty high level round tables with some of the best FinTech operators in that space and some of those interacting with that space like Baidu and Lufax and others.
We were also there to announce a new Australian FinTech hub operating in the region and we announced the Government's intention to establish a landing pad in Shanghai to support the NISA and help our innovators access talent and opportunities globally.
Beyond this the China free trade agreement secures a wide range of financial services commitments from China in this area, some of the best for any nation.
Among them are provisions on transparency, regulatory decision making and streamlining of financial service licence application requirements. When it comes to all of these issues we need to ensure that the regulators are working collaboratively with the sector itself.
Last week, I brought together all of our key regulators who are engaged in collaborating with the FinTech sector so we can ensure that the regulation means that over a normal start-up period of six to nine months those start-ups will get to try four ideas rather than trying one idea and spending the rest of the time filling out paperwork and licenses and things of that nature.
It is important if we're going to drive that they get the opportunity to have that crack. They have a window of opportunity to make something happen and they will take risks and they will get some of them wrong and we can provide an environment where they can do that which is safe for the public as well. That is necessary, the experimentation and the trialing of these new technologies.
Turning now to the Budget, when it comes to managing a Budget, we need to understand that like the businesses who are successfully transitioning our economy, the Government also has to become more innovative. We need to do better and it needs to cost less.
A prudent, responsible Budget approach that focuses on keeping expenditure under control is not an end in itself. It is a key economic tool to drive innovation in the delivery of public services and to free up earnings that are better used in the hands of those who generated them – the risk takers – through lower taxes.
Budget policy must drive innovation in the public sector. Fiscal policy cannot provide a leave pass for higher spending that refuses to consider how services can be better delivered in more innovative ways – which also ties in with the Harper agenda.
Innovation is borne of necessity. Strong and disciplined Budgeting places the necessary constraints that in the private sector breed innovation and must also in the public sector.
Lax fiscal policy and public finances passively accepts higher and higher costs of delivering services. This fails taxpayers and ultimately those who rely on those services, the services that taxpayers fund.
Controlling future expenditure growth is as critical as addressing the base and we continue to do both.
As a Government we have taken decisions that achieved savings of over $80 billion through more than 400 separate measures. Almost 85 per cent of these savings have now been implemented. At the time we have cut taxes in net terms by almost $20 billion.
All new spending has been more than offset by the savings we put in place. Based on our saving measures over the Budget and forward estimates, as announced in MYEFO, government spending as a share of the economy will fall to just over a quarter – 25.3 per cent.
In MYEFO this represented a reduction in the rate of growth and expenditure from 2 per cent in the final year outcome in 14-15 to 1.8 per cent.
Now that compares to an average real growth in payments under the previous government of 3.6 per cent.
This outcome, as confirmed in MYEFO, was well received by rating agencies and demonstrated the Government's plan and commitment to keeping expenditure under control and stay on the path of fiscal consolidation.
There remain, it's true, outstanding savings measures totaling more than $13 billion. These are opposed by the Labor Party. In addition, there is almost $35 billion worth of savings which we have successfully put through the Parliament and based on the public statements of our opponents they will seek to reverse these measures.
In addition they have also announced new spending measures of more than $11 billion since last year's Budget. This means they will start some $60 billion behind the fiscal estimates contained in MYEFO.
To cover this expenditure, they have proposed just $1.1 billion in savings to payments but over $7 billion in new taxes.
One of the key drivers of our Budget policy is that spending and taxation must have a purpose, be fit for that purpose and be accountable to that purpose.
This is the ruler we put across every line in the Budget. Every dollar has to do its job, every tax raised and incentive afforded must stick to its brief.
Last year we successfully legislated the first phase of our reforms to retirement incomes with our changes to the pension assets test. Reversing the taper rate changes of the Howard-Costello Government in their final year, they had extended access to the part pension to those with assets in addition to the family home of more than $1 million and led to an increase in the cost of the pension of over a billion dollars a year.
That was done when the Budget was $20 billion in surplus. That is unsustainable and unachievable in today's fiscal environment.
These changes were based on the simple principle that the pension is a welfare payment for those who are not in a position to support themselves independently in retirement.
After the changes of leadership last year, in September, we embarked on the second phase of retirement incomes review which addressing the various incentives and arrangements associated with superannuation and Jennifer will remember at the time that was a key argument and discussion that was happening with BCA and ACOSS and COTA and other groups that wanted to see the entire retirement income systems, for us to have a good look at that.
That is what we have done, post September. We have opened up that other area of retirement incomes to this process.
The outcome of this process will be announced in this year's Budget, at the latest, and will be designed to reflect our clear statement or purpose that will be enshrined in legislation as recommended by the Murray Review.
This is currently proposed to provide income in retirement to substitute or supplement the age pension. I think it's a very clear and very concise statement of purpose.
This draft statement will be finalised following the completion of our consultative process over the next few weeks. The point is that any changes that we make to superannuation will be about that purpose and making it fit for that purpose. Any and every change should be assessed against that purpose. How tax incentives are structured will no doubt form part of these changes but the changes will be about delivering a fairer and more sustainable retirement income system for our 21st century economy building on the pension reforms in last year's Budget.
It's not about revenue raising. It is not about higher taxes to fund higher spending. It's about a better retirement incomes system.
Finally, controlling expenditure is the best way in the short and the long run to lower tax, which we consider is crucial to any plan to drive jobs and growth. If you are not talking about trying to reduce the tax burden on this country and for those who are taking risks, then you are not serious about jobs and growth.
Our principal Budget challenge remains expenditure, not to chase higher levels of spending with higher taxes as our opponents propose.
This path to lower taxes and keeping taxes low is paved with lower spending. This is also the path to jobs and growth. That is why when changes are made to any taxes or where revenues are increased as a result of any policy decisions, the priority for our Government is that such revenues will be used to reduce the burden of taxation in other areas.
There have always been those who have been happy to spend money that other people have earned. When you haven't earned it, you don't really appreciate its value. That is one of the things we try to teach our kids. When you do appreciate it, you understand that a dollar is typically better off in the hands of someone who earned it if it is your objective to turn it into $2. That is the type of Budget policy that is driving our views on how to drive investment in this country at this critical time.
The high tax club, as Peter Costello refers to it with some enthusiasm and a lot of derision, is always happy to spend money that other people have earned.
We don't share that view.
We need to back the earners in our economy to drive growth and ensure that there is greater compensation for their investment, allowing them to realise more from their own efforts so they will in turn invest more.
In other words, rewarding the risk takers, for being the growth makers.
That is the next critical step in managing the successful transition in our economy.
This is the objective that has and will continue to drive our consideration of tax measures in this year's Budget – the need to drive investment.
Tax and spend is not a plan in our view that will deliver the investment that is needed to drive jobs and growth. It is not a plan to successfully manage our transitioning economy.
That is why we will continue our careful analysis to ensure that in this Budget we do all we can to support lower taxes to ensure expenditure remains as low as it can be to deliver the services that are necessary and not to indulge higher spending both now and into the future.
There is no simple answer. There is no glib promise that magically deals with all the issues and challenges that we face. The right plan is just to do the work, budget after budget after budget after budget.
To apply the discipline and determination that is needed to consolidate the budget by getting expenditure under control and lifting revenues the old school way by implementing policies that drive productivity, that drive investment, that drive jobs and that drives growth.
Thank you for your attention.