Thank you Dean [Chris] Styles for that kind introduction.
I appreciate the invitation extended to me by the University of New South Wales Business School and Institute of Global Finance to address you today.
This is a timely conference. The World Bank’s Doing Business report, the launch of which we mark today, reminds us of the need to relentlessly pursue policy that delivers on economic growth.
This is the Turnbull Government’s core agenda.
Last week’s National Accounts reinforced the need for our jobs and growth agenda in stark detail, showing a contraction in GDP of 0.5 per cent in the September quarter highlighted by continued weak business investment.
As I said at the time, this contraction was not just a warning but a demand that the Australian Parliament support the Government’s economic policies to drive investment. This investment is needed to support job security and increase the hours and wages of hard-working Australians so they can deal with their rising costs of living. This investment will also help drive the increased productivity that businesses need to survive in a tough and competitive environment.
It’s why this year I did not just hand down another Budget but set out a national economic plan for growth and jobs. A plan we are now implementing.
This plan is calibrated to our budgetary realities and the global economic context. That is, our responses to driving this investment are conscious of the need to protect our Budget bottom line and ensure Australia remains internationally competitive – not just in the fight for market share in our export industries, but in the fight to attract the investment capital that Australia has relied on to drive its prosperity for over two centuries.
These are the themes I wish to explore today.
There has been a lot of debate recently about the level of debt in Australia and what it implies for our economy and credit rating. I’d like to start today by providing some facts and context about this debt.
Economy wide in Australia, gross debt is around 245 per cent of GDP. Around 50 percentage points of that debt is from the public sector – 8 percentage points is owed by public sector corporations, 10 percentage points by state and local governments and 30 percentage points by the Commonwealth Government.
The vast bulk of debt in Australia is, however, owed by the private sector. Private business sector debt stands at around 75 per cent of GDP and the largest share, around 125 per cent of GDP, is households (with mortgages accounting for around three quarters that amount).
The level of household debt gets a lot of scrutiny because it is high by international standards. However, low interest rates, debt concentration amongst high income households and growing asset holdings provide some comfort. For example, the net worth of the household sector has risen by around 80 per cent over the past decade, despite the increase in household debt. This means there are assets against these liabilities. In fact, the aggregate asset holdings of the household sector are around five times greater than the debts of the household sector.
Our regulators have also used macroprudential tools to ensure the sustainability of lending in the housing market, and have focused on tightening mortgage lending requirements through the establishment of benchmarks for banks on loan serviceability. The effects of macroprudential tools can be seen in a slowing in the growth of investor housing credit, which has reduced from a recent peak of annualised growth of greater than 10 per cent in mid‑2015 to current rates that are around 5 per cent. The banks have followed suit and have reduced the amount of high LVR lending and are assessing future credit based on interest rates of at least 7 per cent, but in some cases even higher. Recently, some banks have also increased the spread between lending to investors and lending to owner-occupiers.
Much of Australia’s economy wide debt has been financed by domestic savings but some has also been financed from international sources as Australian investment opportunities exceed domestic savings. Taking into account the foreign non-equity assets that Australians hold, this leaves Australia with net foreign debt of around 63 per cent of GDP.
Australian banks, businesses, and government all borrow from foreign sources, although the private sector accounts for around three-quarters of net foreign debt. In particular, private non-financial corporations accounted for 47.3 per cent of net foreign debt as at September 2016. The household sector makes a relatively small direct contribution to our foreign debt, given that the vast bulk of their borrowing is from domestic financial institutions. But indirectly it does play a role as Australian banks source around 20 per cent of their funding from international sources.
Around half of Australia’s foreign debt is held by the United States and the United Kingdom. The United States is by far the largest holder of Australian issued foreign debt, holding around $577 billion of debt at the end of 2015, which is around 28 per cent of the total Australian debt that is held by foreigners. The UK is the second largest holder of Australian issued foreign debt, worth around $402 billion (or 19 per cent of the total).
China was the seventh largest direct holder of Australia issued foreign debt at the end of 2015, with a stock valued at around $48 billion (or 2 per cent of the total). However, China’s share of Australian foreign debt is growing off a low base – the Chinese stock of Australian foreign debt was near zero around seven years ago – and some debt may be held indirectly through intermediaries in third countries.
Looking specifically at Government debt, 57 per cent of total Commonwealth Government Securities on issue were held by non-residents as at September 2016. This proportion has fallen from the historically high levels observed around 2012, but remains elevated. Much of this debt is held in Asia, Europe and North America, particularly by fund managers, hedge funds, central banks, banks and insurers attracted by the comparatively higher rates of return available on Australian debt, especially given our AAA credit rating.
Australia’s foreign debt and why we need it
So that lays out the facts of how much debt Australia has and who we owe it to. But this leaves a very important question unanswered. Why do we need this amount of foreign debt?
As I noted in my address to the Lowy Institute in September, unlike in many other advanced economies, Australia needs to fund a current account deficit of around four per cent of GDP on average each year. Current account deficits have always been a part of Australia’s economic model. It has been a standard feature of our economy for the past two centuries because as a large, resource rich country with relatively high demand for capital, Australia has relied on foreign investment to meet the shortfall of domestic savings. Even economies that might be thought of as having some similarities to our own, like Canada, do not have as long a history of current account deficits.
But unlike many other countries that run persistent current account deficits, the need to fund our current account deficit is less because there is too little saving by Australians — our rate of saving is higher than that of the G7 countries on average and close to the OECD average — but more because there are so many investment opportunities available within Australia that can’t be covered by domestic capital alone.
More recently one of the more encouraging aspects of last week’s National Accounts data was that the current account deficit had narrowed to 2.7 per cent of GDP down from 4.5 per cent in December 2012.
For those who draw attention to the challenges of twin deficits from a rating perspective, on both counts – the current account and budget - Australia’s position is stronger today than it was a year ago, since the Government was first elected three years ago, and under the former government. Coupled with higher growth rates and further evidence of a continuing successful economic transition from the mining investment boom we can be more confident about the direction of our economy today than in recent years.
As I mentioned above, Australia’s current account deficit is because there are more investment opportunities than can be covered by domestic capital. Therefore, not being able to attract foreign capital would result in a reduction in the living standards of Australians, with less investment, lower growth, fewer jobs and lower wages. Previous Treasury modelling suggested that without the funding provided by the current account deficit, this reduced capital inflow would lower GDP over the following decade by 2.6 per cent, gross national income by 2 per cent and reduce real wages by 7.2 per cent.
So successive waves of foreign capital has allowed the Australian people – including our generation – to enjoy higher rates of economic growth and employment, and a higher standard of living than could have been achieved from domestic savings alone. Such capital is a necessity. It is a must have – not a nice to have.
At the end of 2015, there was more than $3 trillion of foreign investment in Australia. This investment in Australia can take different forms. $735 billion is in foreign direct investment with a further $460 billion in portfolio equity investments. More than 25 per cent of Australia’s net income deficit is net income accruing to foreign direct investment, partly reflecting the significant foreign direct investment in Australia’s resources sector.
Of the various forms of foreign investment, foreign direct investment has been the more stable funding source than other key forms of external finance, such as foreign debt.
Attracting and keeping this foreign debt is vital for this country but there are understandably some concerns about the size and nature of this debt, particularly in the context of maintaining Australia’s AAA credit rating.
We need to protect against the vulnerability that this debt can create. Australia’s AAA credit rating supports Australia’s attractiveness as a destination for foreign capital, reducing pressure on funding costs and providing a further layer of resilience. But it is not the only protection, returning the Budget to balance is also critical, not only to sustainably fund the services that Australians rely on but by creating a buffer to global economic headwinds and external shocks.
Further protection is provided by effectively managing the risks on this debt. For example, by ensuring that our external liabilities are well hedged against exchange rate risk. Indeed, accounting for derivatives and offsetting holdings, Australia has a net foreign currency asset position. As a result, the Australian economy’s net overall foreign liability position is not itself vulnerable to a sudden depreciation of the Australian dollar.
Another risk, rollover risk, which is the risk that existing debt will not be refinanced once that debt becomes due, has been reduced with the Commonwealth Government progressively extending the maturity of its borrowings over recent years. On 12 October 2016 the AOFM issued a new 30 year bond line (maturing in March 2047). This brought Australia into line with other major sovereign issuers and followed a gradual lengthening of both the nominal and real yield curves over recent years. Lengthening issuance may increase the Commonwealth’s cost of borrowing, but it decreases the risks of managing the debt portfolio.
Given that Australia has a relatively high amount of foreign debt, and the Commonwealth Government contributes to that amount, it is important to think about how this debt is being used.
It is patently obvious that there are ‘good’ uses of this debt and ‘bad’ uses. Bad debt is debt used for current spending purposes. Borrowing for this type of recurrent expenditure at the Commonwealth level is not sustainable and it is vital that we reduce our borrowing for day-to-day Government spending. This point has also been made by both the current and former Governors of the RBA.
The Turnbull Government has a clear fiscal plan to return the Budget to balance, and it is important that this plan continue to be legislated. We have comparatively low levels of public debt compared to other countries, but it is high by historical and by Coalition Government standards. I have consistently stated that the Australian Government is committed to meeting this fiscal challenge and, since coming to Government in 2013, a disciplined program of fiscal consolidation has reduced the projected level of gross Commonwealth debt.
The Government is also focused on implementing policies to better manage debt. The changes to Vocational Education and Training (VET) student loans recently passed by the Parliament will lead to an estimated reduction in total outstanding Higher Education Loan Program (HELP) debt of more than $7 billion by June 2020 and by more than $25 billion by June 2026.
The Government received a mandate to deliver further fiscal consolidation by pursuing expenditure restraint. And we are getting on with doing that job. We have already cut the rate of spending growth from 4.2 per cent, as it was under the former Labor government, to around 1½ per cent. By the end of the sitting weeks of Parliament this year, we successfully legislated over $21 billion worth of Budget repair measures over the forward estimates to 2019‑20, and we intend to build on this success. This was the challenge set down by the ratings agencies to the Parliament after the election. So far we have bested expectations. However, we seek and need the continued support of the Parliament to implement the Budget measures that still need to be passed. I will provide an update on the value of those measures to the Budget on Monday.
The biggest opponent to legislating the necessary Budget improvements to protect our credit rating is Labor. By their own admission, and confirmed by eth Parliamentary Budget Office, Labor would prefer the Budget deficit to be $16.5 billion higher, and this after abolishing the enterprise tax plan and increasing other taxes, that will impede growth and discourage investment.
In short, Labor’s plan higher deficit plan is about borrowing more and taxing you more to pay for higher welfare bills. That’s not a good plan.
You could be forgiven for thinking Labor are sabotaging the Budget to undermine Australia’s AAA credit rating for their own political gain.
Once borrowing for recurrent expenditure is under control, we will have more headroom to take on and deploy so-called good debt. This is debt used for investment purposes that increases productive capacity and produces future income. Already the Turnbull Government is investing in and will continue to invest in productive infrastructure that boosts economic activity. Our record $50 billion investment in infrastructure is a clear example of this. But we can’t just go out and spend on ill defined projects just because interest rates are low.
All debt has to be repaid and there has to be a return on any investment. There still needs to be a vigorous process to identify the best projects that will be most beneficial to productivity and economic growth.
There is a difference between economic stimulus and strategic investment in productivity enhancing and capability building infrastructure. The Turnbull Government will not repeat the stimulus mistakes of the Rudd-Gillard-Rudd Government with cheques to 16,000 deceased people, overpriced school halls and catastrophic programs like the home insulation debacle. These schemes saddled Australia with a generation and more of debt and have now constrained our capacity to deal with our current challenges. Labor remains in denial of these facts. We will continue to choose to invest and put in place policies that encourage others to invest – to unlock the jobs and growth that exists within our transitioning economy.
At the time of its release earlier this year, Infrastructure Australia’s Infrastructure Priority List had identified 93 good ideas, but only two fully assessed, viable projects. After further work, the most recent version of the Priority List identified 15 high priority or priority projects, of which the Government has committed funding towards 14, including Inland Rail, Westconnex and the Perth Freight Link.
It is not good enough to call for more investment but fail to have done the planning and project work to put forward projects that are ready to go. We can’t invest in wish lists; we need concrete plans for concrete projects. In this respect NSW has led the way – both on the planning and financing of projects.
As an informed investor, the Turnbull Government is looking to get involved in project planning earlier and earlier. This year we announced $50 million to accelerate planning and development work on major transformational infrastructure projects. The Turnbull Government will fund planning and development works for projects which have clear strategic merit but which are not yet ‘shovel ready’ such as the commitment in October of $10 million to progress planning and early works for Brisbane’s Cross River Rail. $894 million has been committed to support the Inland Rail project and just this week final approval was given for the Western Sydney Airport.
The Government has an immense infrastructure program underway, including commitments to the Bruce Highway, Northern Connector in Adelaide, Monash Freeway in Melbourne and the $5 billion Northern Australia Infrastructure Fund (NAIF). These will soon be joined by more than 100 projects committed to during the election. In contrast, Labor continue to frustrate plans for vital infrastructure across the nation. They’ve already scrapped the East West Link in Victoria. More recently Labor have worked against WestConnex and even railed against Western Sydney Airport here in New South Wales, and planned to scrap the Perth Freight Link in WA — three of the six highest priority projects on Infrastructure Australia’s Priority List. Infrastructure is incredibly important and we’ve got an opposition that just seems to want to put up the stop sign every single time we want to take the economy forward.
How to attract foreign investment
The recent national accounts provided a clear and timely reminder that we must continue the process of economic reform. Business investment contracted for the 12th consecutive quarter in September. We need to build and maintain an economy that continues to attract the long-term foreign investment that Australia needs.
Economies with stable and ongoing growth attract investors wanting to be a part of that growth story. That is why the Government’s national economic plan for jobs and growth is so important because it will set Australia up for another 25 years of growth and will encourage foreign investors to want to contribute.
We have to be a flexible and competitive economy to attract investment. This includes many of the policy settings that we already have in place; a flexible exchange rate, an efficient financial system, and a foreign investment review regime that strikes a balance between maintaining an attractive and welcoming environment for foreign capital on the one hand, and maintaining community confidence in the foreign investment regime on the other.
But another large part of that story is competitiveness on tax. When selecting a country to invest in, among other factors, foreigners compare after tax rates of return across jurisdictions. This is why an Australian company tax rate that is higher than other comparable countries deters foreign investment.
High rates of company tax distort investment decisions and undermine economic growth. Reducing company tax increases the returns companies receive on their investment. This makes marginal projects more likely to go ahead, and makes Australia a more attractive destination for foreign investors.
Australia’s current 30 per cent corporate tax rate is high compared to many countries we compete with for investment. The average corporate tax rate for the OECD is 25 per cent and only five OECD countries have a statutory company tax rate that exceeds Australia’s 30 per cent rate.
Businesses have been telling us that they are waiting for signs that profits and demand will be strong for a sustained period into the future, before embarking on significant investment projects. For many businesses, hurdle rates remain high despite lower financing costs. This is consistent with heightened risk aversion following the GFC – a global phenomenon, rather than Australia’s own.
Given that it is a global problem, many governments around the world are taking action to encourage businesses to get out there and start investing. We cannot afford to stand still while the rest of the world is moving.
We know that the Trump administration will be bringing down tax cuts for companies to 15 per cent. We know that the May Government already has this rate heading to 17 per cent and is prepared to go even further when it comes to reducing the tax burden on businesses so they can support jobs, support investment and support growth. And this Government wants to do the same. Labor is standing in the way of supporting our economy to be more competitive by refusing our Enterprise Tax Plan.
Labor’s refusal to support our enterprise tax plan will leave our economy stranded.
We must compete for capital to drive future productivity growth, because as a small capital importing country, expansion of our capital base has historically been the main driver of labour productivity growth. And productivity growth leads to higher wages and improved living standards. Our competitiveness in attracting investment to Australia has important implications for our standard of living.
Economic modelling by Treasury found that cutting the company tax rate is expected to permanently lift GDP by just over one per cent in the long term. Half of the gain from a company tax cut is expected to flow to Australian workers as permanent increases in wages. And that is not to say that there won’t be more cyclical short-term effects as companies decide to take advantage of the certainty that the enterprise tax plan provides and start investing now.
We need to attract foreign investment to meet our current investment gap, especially in the new non-mining infrastructure and businesses we need to promote growth and boost earnings in a low growth, low interest and low wage international climate.
Labor takes growth for granted, while at the same time wanting to increase taxes. We recognise, in the global environment we are operating in, you have to fight for every inch of growth and cannot afford to sneer at the reforms that are necessary to achieve it or the growth they deliver.
We have just had a reminder that we can’t count on living standards just rising by themselves, we can’t believe that our economy will just keep growing.
We also want to ensure that growth benefits Australians right across our economy. We understand that the transition taking place in our economy is not being experienced evenly. This is compounded by the broader global changes resulting in globalisation and technological and environmental change, especially in the energy sector.
For this reason I announce today that I have commissioned the Productivity Commission to conduct an analysis of the geography of our economic transition. They have been tasked to identify the areas of friction where the burden of transition and change has become greater than the benefit. This work will assist the Government with our investment and economic strategies going forward to support these areas and communities to move to a more reliable and sustainable economic base for them and their future.
There is no substitute for persistence and patience when it comes to getting the policy settings right to drive the investment Australia needs to support the jobs, incomes and revenues that are needed to increase our standards of living. That is why we will continue to seek support for our enterprise tax plan and continue to roll out our investments in infrastructure, defence, communications, science and innovation central to our national economic plan and in those regions where the challenges of economic change are most acute. That is why we will continue to pursue the Budget savings and improvements we have before the Parliament because they are critical to the national interest.
Too often participants and commentators in the economic policy debate grow tired of the discipline that is required to pursue and implement good economic policy. In the absence of immediate support or gratification, too many are too quick to want to move on to demand the next new thing.
We have a plan, we will continue to add to that plan and stay the course and focus on what works
Our National Innovation and Science Agenda backs Australians to generate and capitalise on ideas that will grow the economy and create jobs.
The Government is supporting economic growth by opening export markets, lowering import prices and promoting the efficient allocation of domestic productive capacity by concluding trade agreements with Japan, Korea, and China. The Government is also seeking to conclude trade negotiations with Indonesia and India, is working on a scoping study with Europe and has started discussions around trade opportunities with the United Kingdom.
We are investing a record $50 billion in land transport infrastructure to reduce congestion, improve safety and better connect Australian products to domestic and international markets.
We also have a defence industry procurement plan which is an enormous part of that strategic investment we’re making in our capabilities. It is a major expenditure program which is going to have a huge impact on the whole defence supply chain around the country, which will support jobs.
Reducing the company tax rate to 25 per cent as part of the Government’s Ten Year Enterprise Tax Plan will raise productivity, increase GDP and over time raise real wages and living standards. It will also help attract the investment that this economy needs to power the next generation of growth in the Australian economy.
As 2016 draws to a close we have made a strong start on our term of delivery, in 2017 the Turnbull Government will continue to get on with the job.