5 October 2016
Speech - #2016019, 2016

Australia — The upside economy in a post GFC world

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It’s great to be with you in this fantastic city.

New York is bold and it's brash. New York is built upon and sustained by an indomitable spirit of entrepreneurship.

In New York, opportunity is always knocking and there is always someone ready and willing to open the door. One should never get between a New Yorker and a deal.

Like New Yorkers, Australians are also not intimidated out of our prosperity.

Australia has just completed twenty five years of uninterrupted annual economic growth.

An entire generation has now grown up in Australia without ever having known a recession. This is despite a GFC, an Asian financial crisis, global terrorism, SARS, one in a hundred year floods, droughts and a thirty per cent fall in our terms of trade

It is one of Australia’s greatest national achievements and was no accident.

It is the product of a generation of hard work by millions of Australians who got a job, created a job, started and ran a business, invented a new product, opened up a new market, took a risk and invested the reward. This was supported by Government policies that opened up our economy to new opportunities, greater productivity and higher levels of investment.

The Australian Government led by Prime Minister Malcolm Turnbull is committed to having the economic policy settings in place that will drive the next generation of growth.

Right now, our economy is undergoing a successful transition, from a once-in-a lifetime mining investment boom to broader-based growth led by other sectors, such as services.

We are assisted, of course, by the synchronised transition of our largest trading partner, China, from a production economy to a consumption economy. And demand from China will only grow as its middle class hits around one billion people by 2030.

That said, our transition is one that requires careful economic management.

Over 2015-16 our economy grew by an enviable 3.3 per cent. That is well above the OECD average; it’s also faster than every economy in the G7, including here in the United States, the United Kingdom and more than twice that of Canada – a similarly resource-rich economy.

Estimates of our potential growth also compare favourably to other countries with AAA sovereign credit ratings from Standard & Poor’s.

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

This reflects the underlying strength and resilience of our economy.

And this growth is supporting jobs.

We’ve seen around 220,000 jobs created over 2015-16, bringing the unemployment rate down to 5.6 per cent after a post-financial crisis high of 6.3 per cent.

It’s a solid figure; one that is accompanied by a steady increase in consumption, while dwelling construction remains strong.

And our latest surveys of consumer and business sentiment show a positive outlook

To ensure we continue on our growth path we must keep the door of our economy open to investment.

Australia's economic success has been built on capital from overseas — from Britain, China, Japan and, of course, the United States.

It was imported capital that created wealth and jobs.

It helped develop Australian farms and businesses.

It helped build our houses, factories and shops.

Australia knows how important this investment is to our future.

We’re a capital-importing economy.

Australia needs to fund a current account deficit of around four per cent of GDP on average each year. Previous modelling by our Commonwealth Treasury suggested that a failure to fund a current account deficit of this size 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.

The demand and opportunities for investment have always exceeded the domestic capital available to realise these opportunities. This is not changing anytime soon, if ever, and that is why it is unquestionably in our national interest to welcome foreign investment.

Of course, that welcome must come with a clear set of practical rules to ensure that foreign investment is not detrimental to our national interest.

Rather than hinder foreign investment, our investment screening arrangements play an important role in ensuring that our door always remains open.

They help reassure the Australian community that this investment will always occur on our terms and in our interest.

And that, in turn, reassures investors that their investments are viewed by Australia as valuable and desirable.

In our particular region of the world, our approach to foreign investment is unusually open and welcoming.

Unlike many of our neighbours, we don’t have an investment black list that limits foreign investment in particular industries or sectors.

We are working hard to maintain this attractive environment. We welcome an overwhelming majority of investment proposals from proponents around the world.

And while we do have measures in place to protect the national interest, we’re always happy to work with investors to address any concerns.

For this reason, rejections are rare.

Finally, I should also say that the arrangements in place for American investors in Australia are some of the best we have.

For instance, thanks to our Free Trade Agreement US private investors can access the higher business investment screening threshold of more than $1 billion. That compares with a $252 million screening threshold for private investors from non-FTA countries.

In addition to providing direct investment, foreign investors also provide the financial capital intermediated by Australian financial institutions.

The stability of our financial system and of our financial institutions is therefore of critical importance to maintaining access to foreign capital.

As you all know, Australia’s financial system not only weathered the global financial crisis, it proved itself to be both strong and steady.

Our prudential framework — which was more stringent than minimum international standards before the crisis — together with a proactive approach to supervision, helped maintain a healthy financial sector domestically.

Our financial system has continued to perform robustly in the years since.

The major Australian banks, for instance, have remained profitable — far preferable to the alternative – and significantly more so than most of their international peers in the US, Japan and Europe.

One reason for this performance is that Australian banks also saw a much smaller increase in asset impairments following the financial crisis.

The ratio of non-performing assets to total loans peaked at 1.9 per cent in mid-2010, well below the peaks experienced in the US and the UK at around the same time.

This ratio has continued to improve, falling to 0.8 per cent as at December 2015.

Banks are also continuing to lend more and more to businesses, with business credit growth remaining strong over this year.

In August 2016, bank loans to businesses were up 8.2 per cent from a year earlier providing further positive evidence of our ongoing economic transition.

It’s a similar story when it comes to the funding and capital positions of the Australian banking system.

Since the crisis, the funding position of Australian banks has continued to improve, with an increased focus on stable sources of funding — such as deposits and long-term wholesale debt — and a reduction in the use of short-term sources of funding.

Overall, the share of Australian banks’ total funding sourced from domestic deposits has increased from around 40 per cent before the crisis to just under 60 per cent today.

Further, during this time the use of short-term debt has fallen from around 35 per cent to just over 20 per cent.

Banks have also taken steps to improve their capital positions since 2008, with the total capital ratio of Australian banks improving from around 11 per cent in September 2008 to 14 per cent today.

As of December 2015, the judgment of the Australian prudential regulator was that our major banks had capital ratios that are within the top quartile of international peers.

That is where we want our major banks to be.

With those international peers likely to strengthen their own capital positions over time, the major Australian banks will also likely need to continue to improve to maintain their relative position.

Now, that said, these results aren’t accidental.

They reflect efforts by the Government and Australian regulators to ensure Australia’s financial system is strong now and into the future.

We’re also cognisant of the impact of the domestic housing market on the strength of our banks.

As with the United States, Australia has a strong tradition of home ownership, which contributes to demand. Given population growth and low interest rates, we’ve seen housing prices increase.

However, unlike many overheated real estate markets in the US in the past, our real estate asset prices have predominantly been underpinned by genuine under supply. In addition, unlike in the US, borrowers cannot just walk away from loans and throw their keys in the door. Our lending model is based on full recourse financing, with low doc loans a very small component of our housing credit market. This puts the necessary tension in the chord to hold our real estate markets together.

More recently, prices are growing, but are doing so at a more moderate pace compared with the peak around a year ago.

Housing supply is also responding to longstanding shortages. The number of dwellings under construction has increased by almost 20 per cent in the last year.

Further, in the next two years we will see an unprecedented volume of dwelling supply come online — particularly in the medium-high density segment in CBDs of Sydney, Melbourne and Brisbane.

This will have a moderating influence on growth in dwelling prices, supporting a better outlook for housing affordability.

Low interest rates have contributed to house price growth but, together with higher rates of saving, households can pay off the principal on their mortgages more quickly, or to build up a buffer through loan offset and redraw facilities.

And macro prudential management, such as requiring banks to limit investor lending to 10 per cent annually and to tighten their lending requirements, supports sustainable lending in the housing market.

Australia is also a unique investment destination when it comes to infrastructure.

Earlier this year, our population hit 24 million. If we were a US state, we’d be the third biggest — bigger than New York, in fact.

And that number will continue to grow strongly, particularly compared to other advanced economies as we remain committed to maintaining a positive immigration program that has been a mainstay of our economic growth for generations.

Our Productivity Commission is projecting our GDP to be around 58 per cent higher by 2060 than it would with only natural increases in population. This is almost a trillion dollars in today’s terms.

Our immigration system has always been geared towards attracting migrants with high rates of workforce engagement and employment in skilled areas. This not only supports population growth but also lifts participation and productivity in our economy that also drives growth. More than two thirds of our annual permanent migration intake is skilled.

Because our immigration program is built around attracting those who make a contribution rather than take one, today we can claim to not only have one of the highest proportions of foreign-born citizens in the OECD, but also one of the lowest levels of unemployment amongst our foreign born population amongst OECD countries.

Furthermore, the Lowy Institute’s 2016 poll found 73 per cent of Australians now agree that immigration has a positive impact on our economy and 72 per cent, agree that ‘accepting immigrants from many different countries makes us stronger’ and strengthens us because of immigrants’ hard work and talents.

Our skills based migration program, combined with arguably the world's most effective border protection regime, has enabled us to achieve the twin goals of economic growth and social cohesion. This makes Australia the most successful immigration nation on earth, providing our Government with the license to confidently pursue positively controlled immigration policies into the future.

This means Australia needs a significant infrastructure push to support a growing population, drive productivity growth, maintain and enhance our standards of living, and make sure our cities remain world-class.

There will be opportunities for governments, businesses and international investors to work together to fund Australia's future infrastructure initiatives.

The Australian Government is investing in productivity-enhancing infrastructure across the country.

Our $50 billion national infrastructure plan includes, for instance, large-scale projects like the WestConnex Motorway in New South Wales and a new airport in Western Sydney to expand on our potential as an international gateway for the region.

The Australian Government is also looking at ’innovative financing’ approaches. This includes concessional loans, debt guarantees, value capture and even equity investments — all of which is aimed at encouraging additional private sector investment in infrastructure.

Here, we’re partnering with the private sector and providing access to ‘patient capital’ in the form of concessional loans. These extend beyond the term of typical bank loans, and could have more flexible repayment options — making them a very attractive option to investors.

The Australian Government is also working to increase exports, reduce taxes and encourage innovation through implementing our national economic plan for jobs and growth.

While so much of the global economic discussion focuses on monetary and fiscal stimulus, we believe that these options have largely exhausted their effectiveness, at least from an Australian perspective. By contrast, we believe the answer to our global economic challenges is to focus on what is needed to boost private investment and trade.

We cannot afford to allow what I call 'doona economics' to overtake our domestic economic debates. In Australia we talk about jumping into bed and pulling the doona – a heavy bed covering – over your head in the hope your problems will go away. This is akin to the protectionist mindset that thinks we can all retreat from engaging in the global economy and somehow not leave our citizens poorer.

We must all work to keep the doors open to global trade, including supporting the Trans Pacific Partnership as agreed.

Australia is a trading economy and we intend to remain one. In the last twelve months our exports rose by 9.6 per cent, our strongest result since the Sydney Olympics. That is why we have been so exercised in securing trade agreements.

To boost private investment in our economy and the jobs and growth that go with it, as a Government we took a 10-year enterprise tax plan to our recent general election. Beginning with tax cuts for small and medium-sized enterprises, our plan is to eventually reduce the tax rate for all companies down to 25 per cent.

This will not only make Australian companies more competitive overseas — it will also make Australia an even more attractive place to invest.

So, too, will our National Innovation and Science Agenda.

This package of measures, championed by our Prime Minister, is aimed at supporting a culture of innovation and entrepreneurship — similar to what exists here — and rewarding risk-taking.

For example our changes to crowd-sourced equity funding will make it easier for start-ups to raise capital, and our changes to employee share schemes will help them attract the best staff.

And changes to company tax loss arrangements will make it easier than ever for our existing businesses to reinvent themselves.

Our twenty year defence industry procurement plan will see naval ships and submarines built in Australia, supporting thousands of high-tech manufacturing jobs and sustaining industry capability right across the supply chain.

This will make Australia an even better place for US investors and defence contractors to set up new partnerships and to collaborate with innovative Australian firms and research institutes.

And our national competition policy reforms are focussed on improving the delivery of public services and further reducing unnecessary regulation that increases the cost of doing business.

Lastly, I want to say that the Australian Government is committed to reducing our debt.

Australia's gross debt to GDP will soon peak at around 30per cent. This is low by international standards, including for other triple-A rated economies. But it is high for Australia. The Turnbull Government is committed to arresting our debt by first restoring our Budget to balance.

The Budget I delivered in May projects a return to balance in 2020-21 subject to parameter variations, with expenditure to fall from 25.8 per cent of GDP to 25.2 per cent.

So let me conclude by thanking you all, once again, for giving me the opportunity to share why Australia is the upside economy for investors in a post GFC world.

Australia offers certainty, stability and good returns. But, like you, we are a nation of great economic ambition.

We have a remarkable economic record and we are determined to keep it that way.

We want more growth and jobs and the incomes and living standards that come with it for our children and grandchildren. And we know, from our experience, that foreign investment is vital to achieving this goal.

So, as always, you're all very welcome down under.