31 August 2017
Speech - #2017022, 2017

“The economics of opportunity”, Address to Bloomberg, Sydney

Check against delivery

As we move into spring, we can continue to take confidence that a brighter picture is emerging within our economy.

The `better days ahead' I spoke of in the May Budget was not wishful thinking. It is now the emerging economic consensus.

The resilience of our economy has enabled us to push through what has been an arduous post GFC funk for the global economy. This is now turning.

In recent months, we have witnessed a steady stream of positive economic data.

Business conditions have risen to their highest level in almost a decade, to stand at almost three times the long-run average.

At the same time, business confidence has increased to double its long-run average - one of the strongest results since 2010.

What has this meant for Australian households? The answer is simple: more jobs.

In the last six months alone over 210,000 full-time positions were created. This is the strongest period of full time job creation since records began almost 40 years ago.

In the last fiscal year, around 240,000 Australians went out and got a job, the strongest year of job growth we have seen since before the Global Financial Crisis.

The strength of recent job outcomes has seen the unemployment rate decline, reducing some of the spare capacity in the labour market.

This is also directly benefiting Australians who wish to work more hours.

And there is reason to believe this jobs growth will continue, given the ANZ job ads survey was at its highest level in over six years in July, at over 177,000 job ads. Annual growth in the series is at its strongest rate in almost two years.

So hundreds of thousands of Australians who now have a job are the direct beneficiaries of businesses doing well.

Importantly, the strength in the labour market is being matched in other parts of the economy.

Retail sales have been strong in recent months, with sales volumes increasing 1.5 per cent in the June quarter – the strongest quarterly outcome since early 2013.

And we are also seeing some encouraging signs of a pickup in business investment. New private business investment has increased in each of the past two quarters in the National Accounts, following 12 consecutive quarters of decline.

The latest NAB quarterly business survey had capex intentions above long-run averages and measures of capacity utilisation also appear strong.

This welcome pickup in non-mining investment is ideal in its timing, given we are in the final days of a prolonged fall in mining investment driven by high commodity prices.

Mining investment as a share of GDP halved - and detracted more than 1 percentage point from growth per annum over the past few years.

But this drag is almost over, as the Reserve Bank Governor has observed, with the transition from the mining investment boom "almost complete". Without this drag on the economy, we can look forward to increased growth, as outlined in the Budget forecasts.

This increased investment in the private sector is also supported by the necessary investment in infrastructure that is taking place in this country, including the record $75 billion investment at the Commonwealth level I announced in the Budget.

Notwithstanding the strong increase in engineering construction due to some large scale mining projects in the quarter, yesterday's construction work done data, showed that public construction work done rose 4.7 per cent in the quarter to be up 13.7 per cent through the year to June 2017.

The emerging sense of confidence surrounding the global economy, further bolsters our own confidence that better days are ahead.

Global forecasts are being upgraded, not downgraded.

After remaining subdued for several years, global trade volume growth is starting to increase, and there has been some improvement in the outlook for business investment and industrial production in major economies.

Importantly, our major trading partners are set to continue outperforming the wider global economy, with our Asian trading partners in particular expected to grow strongly.

Chinese GDP growth has ticked up so far this year, growing at 6.9 per cent, but the nation's high levels of debt-to-GDP continue to be of concern, as I flagged here this time last year.

The United States economy is still performing well, with a continued economic expansion and an unemployment rate falling to around its pre-GFC low of 4.3 per cent in July 2017.

And then there is Japan, where an Olympics-fuelled boom is fostering strong growth in investment, with the nation's unemployment rate declining to levels last seen in the mid-1990s and the longest expansion in over a decade.

This long-awaited uptick in global growth is great news for Australia.

Because we are well positioned to take advantage of this shift.

Despite some weather related disruptions to commodity exports in the first half of 2017, Australia's economy has been benefiting from its strong export performance for several years.

This performance has been supported by the Government's progress in securing free trade agreements with the powerhouse economies of North Asia.

These FTAs are continuing to deliver significant opportunities to expand Australian sales abroad, and boost employment at home.

And we are now pressing ahead with new FTAs with Indonesia, to show our confidence in ASEAN, as well as with Europe and, when the time is right, the UK.

Australia's export strength is far wider than simply selling mining commodities. Our agricultural exports are up 20.8 per cent through the year to the March quarter and many rural and regional communities have felt the benefits. Likewise, Australia's service exports have grown at a rapid pace in recent years on the back of strong growth in education exports and tourism.

As an example, in 2016-17 around 1¼ million tourists from China visited these shores, boosting the economies of our major cities and regions. As China's middle class continues its march towards prosperity, our ability to capitalise on these opportunities will fuel growth in service exports and create jobs for years to come.

The June quarter 2017 national accounts are due to be released this coming Wednesday. Of course it is too early to tell what the result will be at this stage. There are some early indications that the economy will continue to perform well but this will need to be balanced against other factors, including the impact of Cyclone Debbie which is expected to detract from growth.

Australia's strong growth performance was what Moody's referred to when they released their credit analysis maintaining our AAA credit rating last week - a AAA credit rating that has been maintained with all three major rating agencies.

Over 150 countries are provided with credit ratings by all three major ratings agencies. Australia is one of only 10 countries that are rated AAA by all three agencies.

These ratings not only reflect the Government's prudent stewardship of our flexible and diverse economy and our responsible focus on returning the Budget to balance, but the actions taken by regulatory bodies to mitigate risks to our growth story. As Moody's put it "proactive prudential policies" are working to "bolster the resilience of the banking sector" and mitigate the risks of high household debt.

In their analysis, Moody's noted that Australia had seen solid growth for 26 years and that they did not expect it to come to an end for the foreseeable future. And it won't, as long as we make the right choices to secure it.

That's how it works! You make the right choices, you pursue economic growth; you give businesses incentive to expand and innovate; and Australians directly benefit from the tangible opportunity created. This is the economics of opportunity.

This is not an ideology or theory, as our critics claim. It is just practical, common sense economics.

It is what has made Australia a prosperous country and will continue to do so, so long as we do not allow this common sense approach to be overwhelmed by the rebirthing of failed left wing economic policies, offering false promises to people who have been caught in the transition of our economies in the post GFC period.

These forces are real. Whether it is Bill Shorten's New 'Red' Labor in Australia, the most left wing Labor Party we have seen in generations, Jeremy Corbyn in the UK or Bernie Sanders in the US.

Equally, we cannot allow the economics of opportunity to be overwhelmed by the New Romantics of Protectionism, who pretend we can engage in some type of economic time travel to the past.

The reason for the rise in neo-socialism and protectionism is the frustration still being felt on wages growth.

Flat wages growth has opened the door to the politics of envy.

The opportunism of Bill Shorten's New Red Labor has embraced these forces to form a new flat earth economic alliance.

Whilst the improvements we are seeing in our economy are welcome, they are of limited comfort so far to households who have not yet seen this translate into an improvement in their incomes.

As I said in the Budget, it has been some time since Australians have received a decent pay rise.

And when your wages haven't budged in a while, despite the fact you are still working hard and putting in the long hours, the stress on your household budget begins to bite.

This is not just a problem we are facing in isolation; wage growth has been weak in many developed economies, as the global economy transitions out of the post GFC funk that has lingered longer than most had predicted.

Joint RBA and ABS research has found that as at September 2016, fewer than 10 per cent of jobs whose wages were changed received pay rises in excess of four per cent, the lowest level since at least 2000.

Over the past five years, real wage growth is less than half what is was in the preceding decade.

One of the reasons why we have seen such modest growth in wages, especially in the private sector, is because business profits have been subdued for quite some time.

Up until the September quarter last year, company profit growth had been declining for three years by an average 0.8 per cent every year.

This reality is even starker when mining industry and financial firms are removed. The National Accounts show that private profits outside of the mining and financial sectors were declining at an average rate of 1.9 per cent per year between September 2012 at the peak of the mining boom, and September 2016.

Over that same period, private sector wage growth almost halved from 3.7 per cent to 1.9 per cent, coinciding with a 30 per cent fall in our terms of trade.

There is no chicken and egg conundrum when it comes to wage growth. For wages to increase, the preconditions of sustained profit growth and improved productivity must be met.

In recent months, we have seen some strength returning to company profits, showcased in the current reporting season.

Of the 43 ASX50 companies to report, 32 reported higher profits, but we're not there yet.

While company profits grew at 40 per cent through the year to March 2017, it was largely a commodities story. Mining sector profits contributed 27 percentage points - that is three quarters - of that growth by itself, buoyed by a temporary recovery in commodity prices.

Nonetheless, there has been an associated pickup in profits across several sectors, including manufacturing, professional scientific and technical services and real estate in the last six months which we anticipate would benefit workers in time. This is a tangible demonstration of the flexibility and resilience of our economy,

The strong jobs growth that we have seen will start to eat into spare capacity in the economy and put upward pressure on wages. And we are already seeing this occur in certain industries.

The very sectors where we are seeing the most jobs created - healthcare, education, and accommodation and food services - are exactly where we are seeing wage growth above the national average.

Likewise, jobs are being lost in the mining industry and wage growth there is the weakest.

Further, Governor Lowe has noted strong demand for certain construction workers, due to an increase in infrastructure spending, is pushing wages higher. Likewise in IT security.

As the Governor said in his recent Parliamentary testimony: "If labour markets are strong, eventually workers will get bigger pay rises."

Or in the case of Qantas employees, generous bonuses. After announcing the second highest underlying profit in its history, the airline last week announced it would pay bonuses of $2500 to around 25,000 non-executive staff, including cabin crew, engineers, ground crew and office staff as well as $2000 to their part-time staff.

In the meantime, flat wage growth remains the reality.

In response the Turnbull Government is not buying the argument being pushed by Labor, that you can do better if we make someone else do worse.

Over generations Australians have built important institutions that protect fairness, particularly fairness of opportunity.

The progressive design of our tax system and our targeted welfare safety net has protected against rising income inequality, particularly since the GFC. That's a fact.

Forty percent of households in Australia pay no tax, after taking account of tax and welfare benefits received. The top one per cent of income tax payers, account for 17 per cent of income tax revenue, while the top ten percent account for almost half.

We cannot increase wages if we extinguish aspiration and incentive by taxing even harder those who succeed to create value, investment and jobs in our economy. This becomes self-defeating for our economy.

In addition, our targeted social safety net, with social security payments in excess of $100 billion per year, has not only also protected against rising income inequality but led to a reduction in poverty.

All of this is welcome, however, it does not mean that people have been taking more home, which is what really matters.

Household disposable incomes, after adjusting for tax and welfare, have also been flat.

Making others' take home less won't help this either. The issue is how much you are taking home and what can be done about that.

As a Liberal National Government, our view is that the problem we have to solve is growth, not how we carve it up, but how we make it bigger. Our answer is to choose the economics of opportunity over Labor's politics of envy.

As a government we are implementing our national economic plan for jobs and growth.

  • An innovation and science program, with strong support for start-up businesses
  • Legislated tax cuts for small and medium sized businesses to drive investment and employment, with more to come
  • Investing in our national economic infrastructure - roads, rail and runways - boosting the Bruce Highway, the Inland Rail, Western Sydney Airport, the North-South Corridor in SA and Forrestfield Airport Link in Perth - connecting our economy internally and to the world,
  • Record investment in our defense industry, supporting local and hi-tech manufacturing,
  • Improving the resilience, strength and accountability of our banking and financial system,
  • Restoring the rule of law to the building and construction industry and cracking down on corrupt practices with unions, and
  • Export trade deals to generate new business opportunities.

This is supported by policies that work to reduce cost pressures on businesses and households.

Our most recent budget provided a comprehensive package of measures to address housing affordability, addressing both supply side weaknesses and demand side pressures.

Critical public services in health, education and disabilities were all guaranteed to reassure Australians under wage pressures about the essentials they rely on.

On energy the Turnbull Government is putting downward pressure on rising electricity prices, by focussing on solutions that are about engineering and economics, not ideology and politics.

This is all supported by a fiscal plan to bring the budget back into a projected balance by 2020-21 and ensure the Government lives within its means by keeping expenditure under control at less than 2 per cent real per annum.

A key part of our plan for growth is to ensure that our fiscal policy settings protect against smothering our economy with higher taxes.

That is why we maintain a tax-to-GDP cap over the medium term of 23.9 per cent. I call it our tax speed limit.

If you do not constrain the burden of taxes on your economy, it will eat itself, like a snake consuming itself from its tail.

Once upon a time, this used to be a bipartisan position in Australian politics.

In fact when we came to Government in 2013, Labor's Shadow Treasurer said that keeping taxes as a share of GDP, then below 23.7 per cent, would be a core test for the new Government.

We have passed this test, but since then Labor have chosen to opt out and not be held to the same standard.

At the last election Labor decided it would abolish the Turnbull Government's tax-to-GDP cap and allow taxes to rise unconstrained. This remains Labor policy.

The tax policies Labor took to the last election would have seen taxes as a share of GDP rise to 25.7 per cent, while still managing to increase the deficit over the forward estimates.

Exceeding the tax to GDP speed limit by 1.8 percentage points as Labor proposed, would ultimately increase the annual tax burden on the economy by $31 billion, in current year terms.

Tax has now been defined as one of the key areas of difference between the Government and the Opposition.

Labor plans to introduce six new taxes, if elected, that are expected to cost more than $150 billion over ten years.

A housing tax, by abolishing negative gearing provisions.

An investment tax, by increasing capital gains tax by fifty percent on everything from investment properties to shops, offices, warehouses and factories.

A small and medium sized business tax, reversing legislated tax cuts and concessions for businesses up to $50 million in turnover.

A family business tax, raising the tax on distributions from family trusts, affecting more than 200,000 family businesses.

A savings tax, increasing the tax on superannuation contributions by wage earners.

A higher wage tax, lifting the top marginal rate to 49.5 per cent.

This means gluing the Australian economy to some of the most uncompetitive tax rates in the OECD, for the next ten years and more.

You don't grow the economy by taxing Australia out of business. You don't support Australian households by taxing Australians out of job.

You grow the economy by pursuing the economics of opportunity, not the politics of envy. By making it easier for businesses to invest, grow and create jobs. That is why we remain committed to our tax speed limit, as well as other important tax measures such as our enterprise tax plan.

Our future living standards will also remain heavily reliant upon growth in productivity.

This point is arguably more critical now than it has ever been.

From the demise of a mining investment boom that once drove national incomes and brought unprecedented prosperity, to the oncoming predicament of an ageing population that, depending how we respond, can be both a brake on and accelerator pedal for economic growth.

The reality is that if we only maintain the current productivity growth rate that we have seen over the past five years of 1.8 per cent, it will not be enough to offset the slowdown of our workforce courtesy of our ageing population.

We need a sustained lift in productivity growth to around 2.5 per cent for us to maintain our living standards at two per cent national income growth.

This must start with updating our productivity agenda to be better aligned with where our economy is today and where we believe it is headed.

The productivity agenda that was successfully implemented throughout the 1980s and 90s led to a significant turnaround in the nation's productivity growth and our economic ranking in the OECD.

For almost two decades, the economic landscape was dramatically altered - trade liberalisation, reductions in tariffs, widespread reform to capital markets, deregulation of government assets, changes to labour markets, competition and taxation reform, and the targeting of macroeconomic policy.

It was a complete dismantling of old economy regulation.

As a result, Australia's productivity was growing in excess of 3 per cent from 1993 to 1999.

Multi factor productivity growth was more than double its previous rate and even higher than the US - boosting our per capita GDP ranking surge from 15th in the OECD in the late 1980s to 8th by 2002.

But that was then. This is now. In a new digital economy, our national productivity software needs an upgrade.

Our challenge is not to nostalgically re-heat productivity agendas devised before smart phones and the internet. It is to fill the air gap between these old reform agendas and what we need to do today to lift living standards.

This new productivity agenda will be more relevant to an Australia that is orientated towards the service and knowledge economy, while continuing to draw on our traditional strengths and opportunities in resources, construction and food production. High tech, innovation and niche manufacturing, particularly in growing sectors such as health, will also present specific opportunities.

That is why I tasked the Productivity Commission to undertake the first of what will be a five yearly report on national productivity. This initiative is intended to serve as a twin to the Intergenerational Report.

I have now received the first of these reports and am working through the more than 1000 pages of its contents with my colleagues.

What I can say is the report details the need to shift the dial on our productivity agenda.

The PC is not trying to provide a checklist for governments to achieve, but it is defining a new direction for an inclusive agenda, owned, evolved and progressed by all levels of Government.

The report notes that realising this productivity growth is the most sustainable way of growing incomes - "It is not about working longer hours, rather is about making the most of the resources we have available.'' It is not about getting paid less for doing more.

It defines the key drivers of productivity as immediate causes that reflect technological advances, underlying factors of competition and an openness to trade and investment, and the fundamental factors such as investment in education and infrastructure.

The Commission argues that delivering health and education more efficiently, and with a serious focus on what improves outcomes for the users of these services, will deliver bigger benefits than even traditional industry reform.

In health, the gains could be more than $100 billion over the next few decades.

Healthier and happier people are naturally more productive and also more willing to look for work.

But despite the fact we have one of the highest life expectancy rates in the world, our years spent in ill-health, some 10 years, are among the highest in the OECD.

Poor health can represent one of the largest brakes on an economy's labour supply, with preventative health measures potentially having significant positive effects. Ill health and disability also restrict the effectiveness and productivity of those in the workforce.

A working age male with excellent health has a probability of participating in the labour market that is 63 percentage points higher than one in poor health.

The successful prevention of mental health or nervous conditions, can also boost labour force participation by up to 26 percentage points.

Also if you want to reduce inequality, health outcomes are one of the best ways to do it.

More than one in ten people in the lowest two income quintiles are stricken with chronic disease, while the disability rate in the lowest income quintile is 37 per cent.

People in very good health can earn an hourly wage 18 per cent higher than those in poor or fair health, while poor mental health reduces hourly wages for men by about 5 per cent.

Men with a nervous or emotional condition earn 35 per cent less than average earnings, while men in chronic pain earn 15 per cent less.

These sorts of statistics prove the two-fold benefits of a productive and innovative health industry that thinks preventatively: it helps address inequality, and it alleviates budget pressures.

Close to $210 billion was spent on meeting the various health-related needs of Australians in 2014-15. The government-funded share of this represents around one third of total tax revenue.

A one per cent efficiency gain, not spending more - just spending better, can equal $2 billion every year.

Other key areas that will be critical include improving the efficiency of our cities, which is a key agenda of the Turnbull Government already and progressing open data reforms, including liberating consumer data rights, that will unlock inestimable value in our economy and empower households and businesses in a way we cannot even yet imagine.

This is how we are seeing our economy and the steps we are taking as a Government to drive growth and lift living standards.

As always there are risks, including the risks posed by alternative approaches that we reject, and the volatile environment in which we live.

As a Government we are focussing on what we can control by exploiting the opportunities before us, while strengthening our resilience in the face of the things we cannot control.

We are making strong progress as a Government and a country in a dynamic and uncertain world. Our economy has proved as resilient as it has prosperous and it is our intention to keep it that way by continuing to make the right choices and thereby secure the better days ahead.