29 January 2016
Speech - #2016008, 2016

Address to the Citibank A50 – Australian Economic Forum, Sydney Opera House

Check against delivery

Can I start by saying this in terms of our attitude towards economic policy – the key to managing economic policy is to understand the things you can’t control so that you can better manage the things that you can.

That is very much our outlook.

Of course what happens in global markets and elsewhere is incredibly important and we need to understand this. So much of the work that Treasury and the Reserve Bank of Australia does is to ensure we have a very deep and thorough understanding of what is taking place.

We need to understand the broader economy in which we are functioning and operating and that we are linked into.

It is that understanding of the broader economy that has helped us to pitch and gauge, slant and direct the economic policy that we need to put in place so that we can better achieve the outcomes and results that we are seeking by pulling the levers that are available to us in the right way.

Now, there would be no one in this room who would be unaware or unfamiliar or any stranger to the global economic headwinds that are confronting all of us; developed, non-developed, developing economies, whichever part of the world you care to point to.

We’re all living in this interconnected global economy and we are all aware of the headwinds that are there. But they don’t have to determine the path for any one economy and certainly they don’t have to determine the path for our economy here.

That comes back to the decisions we make as a country.

In terms of the things that we can’t control, the global outlook is as it is.  

Subdued growth below trend – that is the outlook – low inflation, low interest rates, heightened volatility and uncertainty, eight years now of quantitative easing being present and the impact that has, as money washes around. And I think that is largely a consensus that has emerged.

The transition in China and the recovery in the US, our two largest economies globally, are obviously having an impact on everything around the world as well and certainly are very relevant to what is happening here in Australia.

I want to talk a little bit about that and what has happened in our economy and the transition that is taking place there and then get to some of the things we are very much into achieving.

Now, we know China is slowing and that is no surprise - that is like forecasting the dawn. China is slowing.

But, it is also transitioning and that is where the opportunities emerge.

It is a simple arithmetic fact that China growing at 6.9 per cent, as was observed recently, increases their purchasing power 50 per cent more than a growth rate of over 10 per cent back in 2010.

That is a volume of growth that makes an enormous difference to the sorts of things that we do and sell and engage in with China. That is a positive thing and it is something that we are very mindful of.

China, as you know, is moving from a producer economy to a consumer economy – more than 50 per cent of their economy is now service and freight.

And growth will always matter in China. It matters economically, it matters socially and it matters politically.

The objective of growth in China I don’t think is lost on any of their leaders or their policy makers and that is something I think we should bear in mind.

It is often said in politics, always look to self-interest. Well an economy is no different and in the politics of China growth is important in terms of the stability and the social achievements of that country.

We can rely on China wanting to achieve growth.

China’s economic and financial institutions as well as their regulatory frameworks are evolving, maturing and adapting. I don’t think that is anything terribly startling.

And they do have, frankly, a bit more room to move than many of the other economies around the world.

Their interest rates have much more room to move in terms of quantitative easing if that is what they want to do.

Their reserve ratios are still at levels where they can make decisions if they choose to.

Their debt to GDP is not like many of the developed economies that are represented here in this room.

They have options, they have choices and they are going through a period where they’re balancing these long term structural objectives with some short-term immediate objectives as well.

So I don’t think it is any surprise when we see some volatility emerging from some of the bumps in the road that China is moving down.

The positive thing is that the road is heading in the right direction. It is heading to a good place and it is where we want to be with them. We need to keep our eyes very much focused on where they are heading, not just where they are right now.

That is certainly the context in which we are seeking to frame our policies.

China remains incredibly important for Australia. Exports comprise around 20 per cent of our economy and growing and China is obviously a critical part of those.

But those sectors that have really benefitted from previous growth in China are continuing to benefit. Our minerals producers and others are still performing. Their volumes are increasing, albeit at lower prices and they are building market share.

So while the story about Australia moving from an investment phase of the mining boom into a more diversified economy is true it doesn’t mean the other parts of our economy have decided to leave the building Elvis-style. That is not what has happened.

They are out there and they are building market share and they are improving their productivity and they are winning. They are just having to do it in tougher circumstances that are lower prices but their volumes are up.

The expanding parts of the Chinese economy, and this is the great thing for Australia, are also the expanding parts of the Australian economy. 

This synchronisation delivers us great opportunities.

The new and growing parts of our economy are linked into the new and growing parts of the Chinese economy.

There will be one billion middle-class Chinese by 2030.

China’s share of Australia’s service exports has gone from three per cent to fourteen per cent in the last fifteen years.

Their new growth is linked to our new growth and it is the composition of that growth which is sometimes a bit more important than its absolute level.

So we are well positioned and we are well synchronised with the changes occurring in China. We are not naïve to the risks, we are not unaware of the things that could go in other directions. But it is also fundamentally true that these things are in place.

The stronger growth and the recovery in the United States is good news – there is no doubt about that. It is good news, and of course that provides some further mitigation where it is needed from Australia’s point of view in terms of other negative impacts that are both seen and unseen.

We have traditional trade and economic links with the emerging economies in our region - and this is our region. We may not be Asian but we are in South East Asia and we are very much embedded and woven into the fabric of this part of the world and we understand it well.

That, of course, with our older ties to economies like Japan and of course Korea – where Minister for Trade and Investment Andrew Robb’s trade success is very well known – adds to our diversity.

We are not a one dimensional economy – externally or internally. I think that is beared out by our experience.

Now, in Australia, our economy is continuing its own transition from the investment phase of the mining boom to a more diversified services orientated growth path.

This is becoming the accepted, understood and consensus view of the Australian economy – and it is right.

The growth outlook is positive – our latest national accounts for September had through the year growth of 2.5 per cent up from 1.9 per cent in the previous quarter.

This is twice what is occurring in the similar commodities-based economy of Canada.

Our rate of fiscal consolidation is about the same as what is happening in Canada but we are achieving twice the level of growth.

And our growth is forecast to strengthen to 2.75 per cent next year and the projections beyond that are up to around 3 per cent.

These things, just like in all of your investment houses, are pored over constantly.

Our Mid-Year Economic and Fiscal Outlook, the Budget update released in December, had key assumptions, whether on iron ore, coal prices or things such as these, and they are very consistent with current conditions with the exemption, obviously, of oil prices.

And our understanding of where those things head from here would, I think, gel with most of you in the room today.

In terms of our growth numbers, net exports and households are really the driving force. Retail and motor vehicle sales are all up.

The exchange rate has been, as Glenn Stevens I am sure would have told you, doing its job. That’s what it needs to do, that’s what it was designed to do and that is giving great comfort and opportunity to our service based exporters in particular, whether it is in tourism or education or health or any of these other areas. It’s a positive thing.

On jobs growth – there are now 300,000 more Australians in a job than a year ago. Last year saw our highest jobs growth in a calendar year since 2006.

Even though our real GDP growth at 2.5 per cent is below the long-run average, it is job intensive growth and that is one of the differences in the transition occurring in the Australian economy.

There are more jobs for every inch of growth that we were getting now than we were getting before and that is very good news.

Any banker in the room who is lending into this market will say ‘here, here’ to that.

I can’t overestimate how essential that jobs figure is to this Government’s thinking. It is the centrepiece, the key goal that we are seeking to have an impact on.

The transition story is particularly good here in New South Wales.

New South Wales Premier Mike Baird is leading the strongest economy in the country. The way the New South Wales economy has been performing, namely through good strong leadership on infrastructure and structural policy change, has seen it move into its current strong position.

Where things have weakened, in the resource based states like Western Australia and even Queensland, New South Wales has moved in, with Victoria not far behind it, to pick up the slack.

This highlights the internal story within the Australian economy.

Again it is not one dimensional. Not every state is the same. There are different moving parts around our national economy and what we are seeing here in New South Wales is extremely exciting.

So, what can we control?

At home our task is, in this environment of acknowledged global uncertainty and volatility, to provide the economic leadership, the stability and the policy settings to drive and support jobs and growth in our new economy and to enable the transition that is taking place.

To enable the transition, to support it, to back it in, we diversify our opportunities, we cover off our economic risks, we strengthen our fundamentals, particularly in our finances and we make the changes that need making to structurally support it.

We released the innovation white paper last year. This was a deliberate statement not of just policy detail but Government intent – to sponsor, to encourage, to spark a light, if you like, a fire amongst the innovators around this country, whether it is in tax or in support of educational institutions, in research leadership, in changing arrangements to fill the ‘valley of death’ around venture capital – all of these things.

It was designed to say to that sector of our economy that you are a key part of this country’s future and the Government understands that.

In the financial markets here we are seeing the same thing. We have still got a long way to go but ASX Managing Director and CEO Elmer Funke Kupper is moving down that block chain path and helping to drive new innovation in our financial markets.

Where it goes? Well, we will see but we want to encourage this.

In the Fintech sector as well, not far from here, with Fintech hub Stone & Chalk we’re seeing it happen in this country and it is encouraging.

On infrastructure, we have a $50 billion national plan which is delivering major projects in this country, whether it is in this state with the Western Sydney Airport or other projects around the country that will boost productivity.

Foreign investment I know is something of keen interest.

Our policy is based on this – be open, be transparent but be sovereign as well. Open, transparent and sovereign.

We will set the rules about foreign investment in this country, that is every country’s right and responsibility but we will do it to pursue our national interest on our terms by encouraging investment that supports jobs and growth.

If you are wondering what is in my head when I consider foreign investment, it is these factors that weigh heavily – is it good for our country, is it in the national interest, is it going to support jobs and growth?

We also need stronger finances.

In this environment of global uncertainty we cannot weaken our financial position by adopting a tax and spend approach.

We must put ourselves in the strongest possible fiscal position to deal with what comes next.

The best guarantee against higher taxes is lower spending and that is our focus.

In our Budget and forward estimates, updated recently, expenditure as a share of the economy is falling from 25.9 to 25.3 per cent.

Expenditure as a share of our economy is falling because of the fiscal decisions, the spending decisions of this Government to reduce the size of our spending as a share of the economy.

The Mid-Year Economic and Fiscal Outlook was well received by the ratings agencies. They gave it a very positive response which I am very pleased about and we are staying on that track.

Higher spending, funded by higher taxes is not a plan for jobs and growth.

And of course we need to make changes in our tax system, to make sure it is a tax system that is growth friendly.

There is currently a discussion and debate taking place in this country about our future tax system and I think it is a positive one for once.

It’s not being driven by large tomes, which of course are put out there as doorstops for people to pore over.

It is being driven by Australians putting forward proposals for public debate and we have seen a lot of that over the last four or five months. It has been a very positive process.

Now, of course, the Government will have to come to a landing on these issues before an election and we will, but it is important to understand why we are doing this and that is to spur jobs and growth.

The tax changes under contemplation by the Government are not about balancing the Budget, they are about growing the economy and ensuring there are the right incentives to work, save and invest in this country.

We are concerned that particularly personal income taxes and corporate taxes, are holding Australians back.

One of the reasons our transition is going so well is because Australians are out there making it happen every day and Australian businesses are out there making it happen every day.

Of course Government has its role to play, but when 300,000 people got a job last year, the people who should take a bow are the private companies who employed them and the people who put their hand up for a job. They are the real heroes of those statistics.

So, we understand that for this to continue to happen, it is the private sector that has to drive this growth.

And the tax system has to support that.

That is why we are the only side of politics in this country talking about trying to reduce taxes, particularly personal income taxes and wherever possible where we can reduce the corporate tax burden as well, while making sure that all companies pay their fair share of tax.

If you earn income here, you need to pay tax on it here.

We were world leaders in the BEPS process and we introduced very significant multinational taxation laws here last December. That regime is now in place.

So, to wrap-up I want to thank you for the opportunity to address this important forum.

We’re a Government that is very focussed on growth and we are a Government that is focused on enlisting and engaging our people and our economy to do the thing it is meant to do.

Just as the exchange rate does its job, we need the economy to do its job by ensuring the settings are right, the leadership is right and the direction is right.

And that is our commitment.

Thank you for your attention.