Thanks very much Ed, and to all those at Bloomberg, thank you for the invitation to be with you here today.
It is a very distinguished audience that I have the pleasure of speaking to today and for those joining us beyond these walls it is great to be with you also.
Can I also acknowledge that later in the day I understand that the Cabinet Secretary Arthur Sinodinos will also be joining you and he will be able to answer all the hard questions that you have. I’ll deal with the ones upfront – I am sure you will have plenty of tricky ones for me later.
Before we get to that, I would like to just set the scene with where we are heading as a country, where we are heading as a Government under new leadership and the strong national platform for jobs and growth that we are putting in place.
The question being asked of participants by the Bloomberg summit is:
“Australia has dodged recession for a quarter of a century. Is its run of good fortune coming to an end?”
A fairly pessimistic question, if I must say, but a journalist recently asked me, when I was in a previous portfolio, a very similar question, and they said – “is the great Australian dream over?”
I said emphatically – no, it’s not.
As our Prime Minister has made a habit of saying, this is the most exciting time to be an Australian – and I agree with him.
Australia’s economic success over the past three decades has greatly enhanced our quality of life – and it didn’t happen by accident.
It is a product of reforms and hard work and investment and great courage and entrepreneurship of Australians in the business sector and of course leadership at a Government level over many different types of governments.
The Turnbull Government is determined to ensure this continues well into the future, and that is despite the headwinds that we face and challenges that are ahead.
I’m very optimistic about our future and confident that we can capitalise on our opportunities, as well as make them, to further realise our potential.
According to the Westpac Melbourne Institute Index there are now more Australians who are optimistic about our economy than are pessimistic. Westpac Chief Economist Bill Evans, who is here today, rightly described this as a “cracking result”.
But this isn't cockeyed optimism on our part.
There is a pragmatic realism to our optimism about our economic future in this country. We are not naïve to the uncertainty and volatility in global economic conditions, nor to the need for our economy to transition and diversify, post the mining boom. We back ourselves, as a Government and the Australian people, to successfully and prosperously make this transition.
The Australian economy, in particular labour market, has performed well and the outlook does remain positive.
Australia’s robust macro-economic frameworks and past reforms are paying dividends, interest rates and the exchange rate are all working together to support growth and employment.
The labour market has been resilient in the face pf below trend GDP growth. Employment is now 2.7 per cent higher than it was a year ago – the fastest rate of employment growth since November 2010.
Resources exports do continue to grow, with LNG exports set to expand massively over the next few years making Australia the largest LNG exporter in the world by the end of the decade.
Meanwhile, the transition to broader-based growth, which is the key, outside of the resources sector is very much underway.
The lower exchange rate has underpinned a recovery in other exports.
Services exports in particular were up a solid 7.3 per cent over the past year, supported not only by the lower dollar but also rising demand from neighbours in our region.
To protect our way of life and improve our standard of living Australians know that they can’t afford to stand still.
To increase our productivity and secure our prosperity Australians know that this can only happen through change, by being agile and by being adaptive.
Change that will boost our capacity for growth and jobs: in trade; in new technologies; in creating the right conditions for our businesses to grow.
We must back Australians who work, who save and invest.
We need to seize the opportunity of the new digital economy, to transition and adapt to the new economic opportunities of growth in our region.
In the next 15 years, China and India, as we all know, together will be home to over 2 billion new middle class consumers.
China’s middle class is projected to increase from around 12 per cent of the population in 2009 to 70 per cent by 2030.
As the Chinese people grow wealthier, we have a new opportunity to broaden the range of goods and services we provide.
With rising incomes comes increased demand for high quality meat and produce, creating opportunities for our farmers to capitalise on a growing market.
The emerging middle class will also have greater demand for more sophisticated goods, and a broader range of services, especially the financial and professional services at which Australians excel.
I’m advised that for every dollar we spend buying Chinese goods and services as Australians, the Chinese spend two dollars buying our goods and services.
There are enormous opportunities for our engineers, our doctors, our accountants, our architects, our financial planners and so many more.
We have a comparative advantage in our health services and in particular our social services, especially for aged care and ageing services related to the demographic challenges shared across the region.
Australia has an ageing population and we are not the only ones. The developed world has an ageing population and we are very well placed to provide services in those countries where their democracies have a similar trajectory to our own and, in fact, in many cases are far more advanced down that path.
The proportion of the Chinese sixty-plus age group will grow more than threefold – from 10.9 per cent to almost 36 per cent – over the next fifty years. The population of those aged eighty and older will expand nearly fourfold – from 1.8 per cent to 6.8 per cent.
By 2019 the proportion of people age sixty and older in China will exceed that of people ages 0-14.
Coinciding with the expansion of China’s social safety net, there are enormous opportunities for our doctors, health care workers, health service providers – especially aged care and nursing care – our accountants, and our financial planners.
We are the big winners out of this relationship.
In China, our opportunity goes beyond the macro trends.
As others around the world focus on what is happening at a macro level in China, we understand because of our close relationship and our strong positioning and the quality nature of the goods and services in particular that we provide that we can work within those macro trends and we can run that inner track on where the real opportunities are in terms of our relationship with China.
During the resources boom, of course, we benefitted from our natural endowments.
And to capitalise on the next wave of opportunities in China we will need to be relevant to the changes taking place in their economy – as they transition from a production to a consumption economy.
We have to ensure that we make and capitalise on our opportunities.
This is why the China Free Trade Agreement is so vital to Australia’s future economic growth.
The ChAFTA will result in China’s removal of numerous barriers to imports and Australian service exporters will gain improved access to Chinese markets.
These include financial services, legal services, education, tourism, health, aged care. This improved access to market will be equivalent or better than those enjoyed by competitor countries but we will have to be competitive in all of these areas.
It is not surprising that the IMF recently said;
“Australia has strong institutions, a flexible economy, and is well placed to seize opportunities created by Asia’s rapid growth and rising middle class, helped by the recent free trade agreements.”
As we transition from the mining boom to broader-based economic growth, Australians understand that they need to make, and we need to make, the connections between their supplies of goods and services and the local demand in China.
For many decades the Australian people have seen first-hand and fully understood that the growth in our commodity exports and our role in providing the raw materials to support the building and investment that has dominated China’s growth over the past two decades.
And we all benefitted indirectly from record high prices for our commodities.
With commodity prices coming down and resources investment now in decline, mining investment going from about 8 per cent of GDP to 3, we need to manage the transition to new sources of growth from different sectors of the economy – and we are.
ChAFTA will underpin a new wave of commercial engagement with China.
Just as domestic economies mature and develop from the primary to the tertiary, so too is our economic engagement with China maturing to the services focus of that economy.
Currently services comprise 70 per cent of our employment but only some 30 per cent of our exports.
The majority of Australians are employed in the services sector and as our growth picks up it will be a more job intensive growth than we have seen.
Australian businesses need to be able to provide their services to people in China in the same way someone in Hobart might provide them to someone in Cairns or someone in Sydney was providing them to someone in Perth.
We are used to dealing with these distances in our own domestic economy, which suits us well for providing them to customers that aren’t that far away.
- There are 7 million people in Shenzen and they are 9 hours away.
- There are 8.5 million in Guangzhou and they are 9 hours away.
These are not new frontiers for us and that is what can give us a competitive advantage.
The Government’s Free Trade Agreements will help attract investment to Australia, and make key industries more competitive and increase opportunities for Australian businesses.
The historic Trans-Pacific Partnership Agreement (TPP) will also deliver enormous benefits to Australia, including unprecedented new opportunities in our region.
The TPP will establish a more seamless trade and investment environment across 12 countries which represent around 40 per cent of global GDP.
It has revitalised multilateral trade liberalisation at a time when there has been limited opportunity for progress through the World Trade Organisation.
The success of the TPP, and I particularly want to commend, not only for this but the three other Free Trade Agreements that Minister Robb has been able to bring to a conclusion – our finest ever trade minister and I don’t think that is an arguable proposition. The success of the TPP builds on this agenda that he has been pursuing.
These agreements boost our competitiveness and provide these opportunities that we all celebrate.
Collectively, these agreements will provide a significant boost to these great opportunities.
To build on this significant momentum, the Government is also working to conclude other key trade negotiations, such as the Comprehensive Economic Cooperation Agreement with India and you have seen more recent statements by the Trade Minister in relation to Indonesia.
We are also continuing to pursue tax treaties with other nations that reduce tax evasion and promote investment through the prevention of double taxation.
Connecting Australian businesses to the world’s most dominant and growing economies through our trade agenda, the most ambitious and successful in living memory for this country, is part of our plan to establish, what I said at the outset, a strong national platform for jobs and growth in our economy.
In addition to opening new markets, the other key pillars to this platform are:
- a better tax system
- competition driving productivity
- a $50 billion national infrastructure plan
- a stronger budget
- an even more resilient financial system
- enhanced workforce participation
- and making innovation the centrepiece of our economy.
A better tax system
On the tax system, Australia’s tax system was designed in a different era, for a different economy.
Financial deregulation, the growth of multinational companies and the increasing digitisation of global commerce pose substantial challenges to the tax system.
It has been many years between servicing for our tax system.
Our tax system collects high levels of personal income tax by international standards.
High marginal rates and low thresholds mean hardworking Australians are not being backed for their effort under the current system.
The Inflation Tax, also known as bracket-creep, pushes people on to higher tax rates as their incomes increase over time. It is a growing problem that impacts on workforce participation.
Next year, those on an average wage in Australia will be in the second highest tax bracket, over the last 15 years or so we have had an increase in their wages of just over double but we have had an increase in their income burden of almost triple. This is not something that backs people to work, save and invest.
We also want our transfer system to be sustainable and not act as a barrier to people working. You know you have got things right, when it comes to your welfare system and your payment system in Australia, when Australians are always better off in work than they are on welfare. And I don’t think we can say that in all cases.
The way our personal income tax system and our complicated welfare system interact should not result in the creation of welfare traps, eroding or even removing the financial incentive to join the workforce.
We have initiated an open and constructive conversation, which I think has been well received by the Australian community on how we can create a better tax system, not a bigger tax system – a better tax system, that backs Australians who work, and who save and who invest.
A more competitive Australia
We also need to reboot competition policy reform that has languished since the conclusion of the Hilmer competition reforms more than a decade ago. The Harper Review points the way to a new era of such reforms, especially at a State and Territory level.
These reforms can drive the changes needed at the micro level of our economy, in the public and private sector alike, that will lift our productivity performance – and must.
These reforms are about opening up the opportunity for new service offerings that increase the choices available to consumers.
Competition policy is simply about having more choices for consumers – it is not measured by how many competitors there are but how many choices consumers have.
So, it is about the choices and to facilitate more efficient and effective ways to provide those services to better meet the expectations of those consumers, both here and as a consequence then overseas boosting our international competitiveness in the export markets.
Competition policy should be guided by the principle of making markets work in the long term interests of consumers. It should foster diversity, choice and responsiveness in government services especially. And it should encourage innovation, entrepreneurship and efficient investment.
Competition policy can be an important driver of the disruptive changes and resource reallocations that underpin growth in a modern, nimble economy.
Policies that strengthen our competition landscape are crucial for Australia as a small, open economy, exposed to competitive forces that originate beyond our borders.
I have always found the Australian economy best, and Australians at their best, when there is a bit of tension in the cord, when they really have to make that extra effort. We must be wary of complacency in such a wonderful country and ensuring that our competition settings are right and tight means that it will, I think, produce the best out of Australian businesses and out of our entrepreneurs and out of our economy more broadly.
It is true that the competition reforms of the 1990s, pursued by both sides of politics, are credited with raising the level of Australia’s GDP by 2½ per cent. They contributed to a productivity surge that drove strong growth in household incomes, directly reducing the prices of essential goods and services, and stimulating business innovation.
Australians need to earn more, they need to earn more with real wage growth. We also need to earn more from the way we are competing on the world stage.
The good work undertaken in the late 1990’s and early 2000’s reinforced Australia’s standing as a world leader in global markets where we have a comparative advantage.
But important unfinished business remains from the original National Competition Policy (NCP) agenda, and new areas have arisen where competition policy ought to apply. That is why I put it squarely and fairly in the middle of the Treasurer’s Agenda at a state and territory level together with the Commonwealth and that is why it has been linked absolutely and completely to the discussion we are having about a better tax system.
Our discussions, whether it is about tax or competition or federation reform, is a discussion about how we grow jobs and how we grow the economy. It is not a discussion about tax – it is a discussion about growth and it is a discussion about jobs.
Tax system changes, competition policy changes, trade changes – the things I am mentioning – are all means to an end. They are not an end in themselves. It is not the sort of situation where you just try to pursue some sort of ideological principle. That is not the nature of this Government. We are a very practical government that is focused on results and those results are jobs and growth.
An example is establishing choice and contestability in the provision of human services like health and aged care. These are areas where we think there is real opportunity when it comes to competition policy reform and this will only assist us more with our growth objectives and our export objectives in these important service areas.
If managed well, this can both empower service users and improve productivity at the same time.
It is through increased competition and gains in productivity that we will secure stronger growth in the real wages of Australians.
You can get a pay rise two ways in this country; the boss can give you more because you have increased your productivity or the Treasurer can by cutting your personal income taxes – I would like to see both.
The Government is committed to working with the states on a comprehensive response to the Competition Policy Review conducted by Professor Ian Harper, and I commend him and his panel on his report and the Government will be responding very, very shortly and it will be an enthusiastic response.
Investing in productive infrastructure
The Government is implementing our $50 billion national infrastructure plan to unlock our productive capacity, generate jobs, and expand business and labour market opportunities.
A key part of that is the Asset Recycling Initiative introduced by my predecessor, Mr Hockey, in this role.
The first agreement under the Initiative was signed with the Australian Capital Territory in February 2015 and the second with New South Wales in March 2015.
The efficiency gains through privatisation of the New South Wales electricity network will place downward pressure on electricity prices, with the proceeds from the sale to fund new productivity-enhancing infrastructure.
That is a great asset switch from the state government’s perspective and we want to encourage these types of innovative policies. The leadership which we have seen from Mike Baird, here in New South Wales, we would love to see it around the country and we wish to encourage it by putting our money where our mouth is through the Asset Recycling Initiative.
We have also established a $5 billion Northern Australia Infrastructure Facility to provide concessional loans to catalyse the development of major projects in the North.
A stronger financial system
The financial sector also plays a vital role in supporting a vibrant, growing economy that improves the standard of living for all Australians.
We understand this very clearly.
The system’s ultimate purpose is to facilitate sustainable growth in the economy by meeting the financial needs of its users and providing the stability and security for those transactions to take place.
The biggest decisions Australians make in life – buying a home, providing for our retirement, or starting a business – are all supported by our financial system.
The Government charged Mr David Murray with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth.
The Government announced its response to that Inquiry in October, accepting the overwhelming majority of the Inquiry’s recommendations.
The Government’s financial system agenda will be implemented in stages over the coming years, helping Australia respond to the challenges and opportunities that the future brings.
A strong and sustainable budget position
We also need a strong Budget and our priority is to continue the job of repairing the Government’s finances.
Since 2007-08, the Australian Government's fiscal position has deteriorated from surpluses in the order of 1½ per cent of GDP to deficits in the order of 3 per cent of GDP.
We are making progress.
Since coming to Government we have made more than $60 billion in budget savings. If we had stayed on the spending trajectory of the previous Government in 2012/13 our current budget position – over the Budget and Forward Estimates – would be almost $80 billion worse off – almost $80 billion worse off had stayed on the same trajectory.
Year on year we are reducing the deficit by around half a percentage point of GDP and our trajectory is toward budget balance not greater deficits.
Our expenditure as a percentage of GDP will begin to decline next year after peaking and our net debt will peak next year and will begin to decline after that point.
By international standards though our debt does remain modest, but by our own standards as a Coalition Government we greatly lament the level of debt we currently have. The fact that having bequeathed the last Government debt free public finances we are back where we started at around 18 per cent of GDP when it peaks for net debt.
While interest rates may be where they are now and low, this may not always be the case and therefore we cannot afford to be complacent about debt.
The Government’s annual interest bill is also money that could be better spent on the delivery of essential services.
The Budget will be balanced be controlling our expenditures, not by increasing taxes. Our focus on changing the tax system is about boosting economic growth, not raising revenue to pay down the deficit. That may be the objectives of others in the debate, but that is not the objective of the Government. Our objective in changing the tax system is to back Australians who work, save and invest, to add growth to our economy and to drive jobs. That is why we seek to pull the levers around the tax system.
Our revenues are forecast to return to the longer run average next year and will continue to be improved by policies that assist Australian to earn more, not to be taxed more.
At the same time, we will continue to reallocate scarce taxpayer resources from recurrent spending to the key drivers of growth, including infrastructure investment and measures to support innovation.
There are also key challenges in the areas of workforce participation and we are working to continue to see those numbers increase. We are encouraged by the more recent employment figures that came out last week. We’re not going to be too focussed on the monthly movements for obvious reasons but the growth in employment over the course of the last 12 months has been extremely encouraging.
In particular, it was given special mention by the G20 as one of the key goals of reducing youth unemployment and our youth unemployment today is lower than it was at the last election.
Finally, we are also working to encourage innovation and to nourish the entrepreneurship that is critical to the continued dynamism of a modern economy.
The economy and the tax system need to encourage and back the innovators to create the new ideas and promote technological change but turn them into commercialised products that actually transform our economy and the prosperity of Australians.
There has never been a Prime Minister more passionate, more engaged and more knowledgeable on the issues of innovation than Malcolm Turnbull. He is in the absolute driver’s seat on this agenda supported by Christopher Pyne, myself and others but he is the one taking the strong leadership on this and he has placed this as a centrepiece of our economic strategy.
The capability to innovate and to bring innovation successfully to market will define our competitiveness and ability to seize opportunities in the fast growing Asian region.
It will be centre-stage in our economic policy, through a coordinated, coherent, “whole-of-government” approach and this will be outlined in the first instalment on this in our innovation statement in just a few weeks.
In closing, while we cannot control what comes our way, and you are all familiar with what is coming all of our ways wherever we might be in the global economy, we can control how we respond and how we frame our policies. Our policies, as a Government, are designed to protect Australia's national economic interests and back Australians as they achieve their economic prosperity and financial security in a transitioning economy.
Australians will not be intimidated out of their future prosperity.
While the headwinds may be strong there are also tailwinds but the greatest tailwind, I think, is the resilience and optimism of the Australian people.
First and foremost it's about jobs for us as a Government.
A growing economy is the best and only real way to guarantee jobs. A job is also the best form of welfare anyone can imagine.
This is necessary for the future and to support the strong welfare safety net that we take great pride in in this country and are committed to ensuring remains strong so no family, no Australian, gets left behind.
Our way forward is to promote growth and build resilience, diversify our economy so that Australians can face a more complex economic world with great confidence.
Our plan is to build and sustain a strong National Platform for Economic Growth and Jobs that backs Australians who are out there every day making their way in the world. They are already out there, they are already doing it – working hard, saving for their future, and investing in their capabilities and opportunities, as I am sure will be the great focus of the discussions over the course of the day.
Thank you very much for your attention.