27 January 2017
Speech - #2017002, 2017

‘The Shared Alliance’, Address to the Australian Business Breakfast, London

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After twenty five consecutive years of annual economic growth, an entire generation of Australians has grown up without ever having known a recession. It is one of our nation's greatest achievements.

Our task now is to do what is necessary to set up and drive the next generation of growth.

Despite continuing global uncertainty and the very real challenges we face fiscally and economically, we have good reason to remain optimistic about our economic future.

Domestically, our economy grew by 2.7 per cent in 2015-16. That is well above the OECD average; it was also faster than every economy in the G7, including here in the United Kingdom, the United States and more than twice that of Canada – a similarly resource-rich economy.

Exports and household consumption are expected to support growth, with dwelling investment growth higher in the near-term and a modest recovery expected in non-mining business investment over coming years.

Australia is ranked among the highest of all the countries for which the IMF has estimates for potential growth.

Importantly, this growth is supporting jobs.

We've seen around 520,000 jobs created under the Coalition Government and the unemployment rate has fallen to 5.8 per cent after a post-financial crisis high of 6.3 per cent.

And our latest surveys of business sentiment have generally been positive.

Also according to the ANZ-Roy Morgan index, consumer confidence continues to be above the long run average, where it has been for 36 consecutive weeks. This is the longest above average stretch since mid-2011.

In our mid-year statement, we forecast real GDP growth to be 2 per cent in 2016-17, rising to 2¾ per cent in 2017-18 as the detraction from mining investment eases.

In terms of the nominal economy, there have been significant developments in commodity prices over recent months that have affected our forecasts for nominal GDP.

Iron ore prices are around a third higher than since Budget. Metallurgical coal prices have been over three times higher, although they have fallen somewhat more recently. Australia's terms of trade rose by 4.5 per cent in the September quarter 2016, following a rise of 2.3 per cent in the June quarter.

Substantial uncertainty remains around the drivers of recent price movements. While there is widespread expectation that current price levels will not be sustained, there is no clear view as to when they will fall. Accordingly we have adopted a conservative approach when assessing the impact of commodity prices going forward in relation to our growth outlook.

As a result of the strong gains in commodity prices, nominal GDP growth is now forecast to be 5¾ per cent in 2016-17 before moderating to 3¾ per cent in 2017-18. In the short term, we see higher commodity prices partially offsetting the impact of weaker wage growth and domestic price pressures.

In the global economy we have forecast growth to recover to 3 ¼ percent in 2017 and 3 ½ per cent in 2018, up from an estimated 3.1 per cent in 2016. I was also pleased to see the IMF and World Bank's recent reports predicting a moderate recovery for global growth in 2017.

Despite the debt and deficit legacy we inherited, as a Government we continue to make progress in getting the growth in Government expenditure under control and arresting the growth in Commonwealth debt, which is still well below that of many comparable and other AAA rated economies.

Given our strong performance relative to other advanced economies, it is not surprising that we continue to perform well in meeting our financing requirements. This is particularly evidenced by the highly successful 30 year bond issuance last year.

Just last week, investor confidence in the Government's sovereign bond market was reinforced when the Australian Office of Financial Management had its largest single issuance of Treasury Bonds via syndication of $9.3 billion, exceeding the $7.6 billion 30-year bond from late last year.

Total bids received at the clearing price were $15.3 billion. By comparison, the successful 30-Year bond received clearing bids of $13.8 billion.

So Australia continues to be well supported and rated in international debt markets, reinforcing our global reputation and standing as a secure place to invest.

Notwithstanding the reasons for optimism, we must clear any fog of unreality about the scale of the challenges we face.

The recent negative quarterly growth result in September demonstrated that our continued growth cannot be presumed and that our successful transition from a once-in-a lifetime mining investment boom to broader-based growth will not always be smooth.

We also acknowledge that while in aggregate we have enjoyed strong growth, this has not been the universal experience in all parts of the country or for all Australians. For some Australians there has been very real dislocation as a result of globalisation and technological change.

The end of the mining investment boom and decline in our terms of trade has impacted national incomes, living standards and public revenues.

Our longstanding natural energy advantage has also been impacted by the global move away from fossil fuels, placing additional cost pressures on households, traditional industries and businesses alike.

Our budget has been driven into deficit by an overheated GFC stimulus package that imposed a new debt burden on a new generation. As a result, our fiscal scope to respond to new challenges and opportunities is restricted as we work to reduce a stubborn deficit by bringing expenditures into line with more modest post commodities boom revenues.

While the size of our deficit and levels of Government debt are small when compared even to countries like the UK, our external account means we have less room to move.

The Turnbull Government has not shied away from the budget repair task. Since the last election $22 billion of budget repair measures have been successfully implemented and legislated. We now require a further $13.2 billion in predominantly expenditure savings measures that we have put before our Parliament to be legislated to restore the budget to balance by 2020-21.

This places a heavy burden of responsibility on our Parliament as we return for our first session this year in just over a week's time.

The numbing effect of the post GFC global economic funk on wages, inflation, rates and earnings, which is afflicting all advanced economies, has compounded in Australia the extant negative impacts of globalisation and technological change for many communities and regions.

This has led to frustration for many Australians who want to be able to earn more, to work extra hours, who haven't had a decent pay rise in some time or, worse still, are worried about whether their job is secure. These Australians feel disempowered and out of control in a very uncertain and changing world, and they are not alone.

Weak earnings growth, that is, what employees are taking home to their families or just themselves, is the predominant cause of economic and political angst not just in Australia but throughout the developed world.

Prime Minister May has been making similar observations when she speaks about those who feel they are getting by, but not necessarily getting on, what she calls the JAMS - the just about managing.

In her recent shared society speech she said 'you are putting in long hours with little time for yourself – working to live, and living to work. You give work your all, but there is still little left over at the end of the month to spend on the things that really matter to you. Decisions made in faraway places didn't always seem to be the right decisions for you. You looked at the changing world ... and worried about what the future held for your children and grandchildren.'

Prime Minister May is right. This is also true for many in Australia and as a Government we understand this.

Our challenge, in response, must be to take the steps necessary to protect and improve the incomes and earnings of hard working Australians, particularly those on middle incomes who feel most vulnerable.

As a Government we have the responsibility to steer our country through some of the most difficult economic changes we have had to face. This is what we are talking about when we refer to our transitioning economy. It is as important that we strive to ensure that everyone makes it through, right across the country. That is what we mean by promoting an inclusive growth agenda.

We know that you can't just wistfully conjure up the past, as some promise, where things are now imagined to have been kinder and more simple. We know you can only move forward.

Our Prime Minister, Malcolm Turnbull, has encouraged Australians to lean into the challenges we face as we are not a people that can be easily intimidated out of our prosperity. While the fears, insecurities, frustrations and disappointments are real, it is important that we choose to make the changes that are necessary to set our country up for the next generation of growth.

There are others speaking to discontent in our country, who have chosen to indulge the policies of populism and denial. This is a cruel hoax and not in our national interest.

Here in the UK the May Government also knows this means doing what is necessary to drive economic growth. You cannot have inclusive growth, if you do not have growth.

This week I have had opportunity to discuss and learn more about the steps being taken to drive growth in the UK economy. Chancellor Hammond's National Productivity Investment Fund, the forthcoming Housing Statement, the recently released Industrial Strategy Green paper, all speak to an alliance of thinking between Australia and the UK Government about how to drive inclusive growth in a highly uncertain environment. These initiatives overlap and mirror many of the initiatives we are also pursuing in Australia, particularly in areas like innovation, science, infrastructure development and finance.

This alliance of thinking also extends to our shared interest in making the case for trade. Future generations of Australians and Britons should not be denied the benefits of trade and investment that has delivered so much prosperity to past and current generations.

We welcome the ambition of the May Government to make Britain "a great trading nation" by "forging new trade deals around the world".

We have strong and deep people-to-people, cultural and historical links. We benefit substantially from each other's trade, investment, work and travel arrangements, tourism and education.

Australia's total trade with the UK was worth around $27 billion in 2015-16, with Australian exports worth around $12 billion and our imports from the UK around $15 billion.

The connection between the UK and Australia is also strong on the investment side. Our similar legal frameworks and the UK's historic role as an international financial market are important to the investment flows coming into Australia – which continues to attract and benefit from strong investment from overseas.

The UK is a significant base for Australian's banks to raise capital from overseas, with roughly 45 per cent of their foreign debt issued via London.

The stock of foreign investment into Australia from the UK was around $500 billion as at the end of 2015 – the second largest source of foreign capital into the country – while the stock of Australian investment into the UK was around $350 billion.

At a time of rising anti-trade sentiment, it's more important than ever to keep our eyes firmly fixed on the benefits of trade.

In Australia, if you're against trade you're against jobs. In particular you're against the jobs of the future.

It is disappointing that there are some in Australia who are prepared to give up on trade and the jobs that come with them. Like the May Government, the Turnbull Government is committed to staying the course on trade and investment.

We also share a commitment to creating a policy environment that encourages business investment. This is what drives jobs and growth and this is what the May Government's business tax road map and the Turnbull Government's enterprise tax plan are all about.

Post our mining investment boom, investment capital is still not flowing sufficiently to drive the economic activity needed to lift incomes and in particular address the economic dislocation in areas and regions most adversely impacted by our economic transition.

We need to coax capital out of its cave.

Fifteen years ago, Australia had the ninth lowest corporate tax rate among advanced economies.

Today, only five of the 35 countries in the OECD have a corporate tax rate higher than ours.

The OECD has found that corporate income taxes are the most harmful major tax when it comes to economic growth. Research clearly shows that increasing tax on employers lowers economic growth and therefore lowers standards of living.

A high corporate tax environment means companies have more difficulty attracting funding – making them less able to invest in their businesses – in their machinery, equipment, technology and in their people.

Australia needs to encourage business investment to promote economic growth, support job security and employment growth as well as improve living standards.

Our ten year enterprise plan begins by reducing taxes for small and medium-sized enterprises, leading to a flat tax rate of 25 per cent for all companies.

Now this does not go as far as has already been achieved here in the UK, where corporate tax rates have already dropped from 28 per cent to 19 per cent, and are scheduled to fall further to 17 per cent.

What is more impressive is that the bulk of these cuts began in 2010 under Prime Minister Cameron, in the aftermath of the financial crisis and a budget deficit of around 10 per cent of GDP. Some have argued that Australia can't afford tax cuts. The UK Government, in a far weaker and more vulnerable fiscal position than Australia, took the view they could not afford not to.

Lower tax rates have supported a steady and sustained recovery in business investment in the UK, increasing nearly 25 per cent in the six years to March 2016.

Looking to the future, UK and Australian modelling predict similar benefits.

UK modelling predicted that reducing the company tax rate from 28 per cent to 20 per cent would result in a permanent increase in investment of up to 4.5 per cent over a 20 year period (or £6.2 billion).

Australian modelling predicts that reducing the company tax rate from 30 per cent to 25 per cent would result in a permanent increase in business investment of up to 2.9 per cent over a similar period (equivalent to around $6.5 billion in today's dollars).

Many countries we're competing with for investment have more attractive corporate tax rates, and are looking to further reduce them. President Trump wants to cut the US corporate tax rate from its current level of 35 per cent towards 15 per cent.

Higher taxes and falling investment create a vicious cycle of stagnating growth and eroding living standards. So with much of the world looking to stimulate investment and growth through more competitive tax rates, Australia, as a net importer of capital risks falling behind and becoming uncompetitive.

Research shows the economic burden of company tax falls mostly on employees. In the US it has been estimated that a 1 per cent cut in local business taxes can increase the number of local establishments by 3 to 4 per cent over a ten-year period. More businesses, outlets, stores, franchises and premises, means more work and more jobs.

Treasury modelling indicates our tax cuts will increase the before-tax wage of the average worker by over one per cent over the long term.

This means an end result where working Australians have more money in their pockets. This, combined with other measures, is how you enable Australians and their families to move from just about managing to getting ahead.

Opposing tax cuts that help Australian businesses to compete is anti-Australian jobs and does not put Australia first.

When seeking to protect the incomes of working Australians, it is also important to be cognisant of the pressures on household budgets that these incomes support.

Key areas of focus for our Government this year are housing and energy affordability and providing certainty about the core services Australians rely on.

Housing costs can typically account for a third of household income for middle income working Australians, and even more for those on lower incomes.

Notwithstanding the differences between the UK and Australian housing markets, we are dealing with many of the same affordability challenges, in particular the need to boost supply.

Like in the UK, in Australia we have a supply challenge for social housing, affordable housing, private rental and owner occupied housing. Housing affordability and affordable housing are both important issues. These challenges also exist across the spectrum of household sizes, compositions and demographics.

Good housing policy must also enable supply issues to be worked through on the ground and recognise that there is also no single national housing market. What is relevant in Sydney may not be relevant in Adelaide. What works in London, does not necessarily work in Bristol.

The UK Housing Infrastructure Fund is a good example of such a measure. I will be watching with interest the release of the May Government's Housing Statement. This week I have had a good opportunity to get behind the thinking of the statement with Chancellor Hammond and Minister Barwell and wish them well with their new initiatives.

We must also take action, together with the States and Territories to boost the supply of housing right across the spectrum, from families looking to buy a home to those looking for longer term private rentals or those in need of supported, 'affordable' or formal social housing. To do this we need to do things differently and better. The current arrangements are not getting results.

On energy, our Prime Minister and Minister for Energy have already highlighted the damage being done by the ideological approaches being taken by some of our state governments, supported by the Opposition, in relation to renewable energy. Australia has a responsible and measured approach to emissions reduction, but it is in the interests of every Australian paying more and more for their power bills and every job, that common sense win out over climate ideology.

Those on middle incomes rely not only on what they earn, but also on their non-wage income, in the form of services such as Medicare. This is a type of 'services wage'.

By this I am not referring to middle income welfare. Rather, I am referring to the core services provided to middle income working Australians that provide them with a certainty and peace of mind about being able to cover the health and education needs of themselves and their families.

Reliance on a 'services wage' is more pronounced when actual wages are under stress and jobs are under threat. Protecting the incomes of middle income working Australians requires not just economic policies that boost their actual wages, but also sustainably managing your budget so you can afford to protect the services that Australians rely on into the future. That is why getting our expenditure under control and bringing the budget back to balance is so important.

In a fiscally constrained environment we also must be more innovative in how we run and fund our key social and human services. Our Productivity Commission is currently in the consultation phase on some excellent work in this area.

As part of our broader approach to social investment, I am releasing today a discussion paper on developing the social impact investment market in Australia. During my visit to the UK I have been encouraged by the progress being made by initiatives such as Big Society Capital and projects like Lend Lease's Elephant Park development.

The services and social challenges we face in housing, health, education or elsewhere are bigger than the budgets of Governments, but so are the benefits of addressing them. Social impact investment led by the private sector can provide an innovative source of funding for social services and infrastructure, as we have seen here in the UK, and we are keen to progress this agenda in Australia.

We will have more to say about all of these issues as the year progresses.

Before I conclude, it would be remiss of me not to make some observations regarding Brexit, particularly in relation to financial services.

As I discussed with Chancellor Hammond this week, there is a complex and shared set of issues that need to be resolved.

There is a collective interest from the negotiating parties, Governments, central banks and financial institutions to exercise strategic patience in getting these arrangements pragmatically settled.

Any punitive, restrictive or impractical set of new arrangements will have far greater and more lasting implications than the immediate reaction to the poll result itself. There is enough uncertainty and volatility in our global financial markets, without adding these unnecessary pressures.

Any reduction in financial system efficiency and liquidity within and between the EU and UK would have implications well beyond Europe.

Within an open single market the UK has developed into a major trading hub for euro-denominated transactions, accounting for 75 per cent of global trades in euro-denominated interest rate derivatives.

Restricting the location of euro-denominated clearing could impose additional risks and increase costs for EU and global market participants.

We must all encourage the relevant parties to explore how the market can continue to seamlessly operate and transition efficiently.

The UK is a sound and strongly regulated system and has been a key contributor to financial stability in Europe.

It is still well placed to provide what the European Central Bank refer to as the "broadly appropriate guarantees for the supervision and oversight" of activities such as euro-denominated clearing and settlement.

With goodwill and mutual commitment the EU and UK can develop a strong new post-Brexit framework for these and other issues such as financial "passports".

These passports are important for the continued delivery of existing and new financial services and products across the EU by UK institutions.

It is not for Australia to impose itself on discussions that are taking place well beyond our shore and direct interest. However, we will always be advocates for common sense and pragmatism when it comes to improving the efficiency and stability of global financial markets. While much has been achieved since the GFC, it is important these gains and the cooperation and interaction that secured these achievements be retained.

Australia and the UK share much in common. Amongst many principles, we share a commitment to growing our economies as the best way to improve the living standards of our people. This task does not get any easier as the world becomes more uncertain and complex, but we can always take comfort in the fact that our friendship and partnership is to the perpetual benefit of our citizens.

Thank you for your attention.

Editors note – Speech delivered 6.30PM AEDT, Friday 27 January 2017