12 October 2017
Speech - #2017025, 2017

‘Better days ahead’, Address to Citigroup, New York

Check against delivery


Thanks for your warm welcome and to everyone at Citigroup for once again hosting me here today.

It's great to be back in New York.

There is no doubt the United States has been a powerful force in shaping the economic future of a capital-hungry Australia; where international investment has fuelled our ambition and enables us to reach our potential.

From the barrels of rum that sailed into Sydney Harbour aboard the aptly-named trading ship Hope in 1793, our total two-way trade is now worth more than $63 billion, while our total investment is now worth more than $1.47 trillion.

The US is both Australia's largest single investor, and the largest destination for Australian investment.

What's more, the amount of investment has grown 'sizably' since the financial crisis — at over A$860 billion, total US investment in Australia has increased three-fold since 2002.

At around A$195 billion, the stock of US direct investment in Australia is more than that of any other country.

This investment has created 330,000 high paying jobs — with an average salary of more than A$115,000.

On the flip-side, total Australian investment in the US was valued at $617 billion in 2016 — a figure which has doubled since 2005.

Like anywhere else, Australia has not been immune from the battering forces that have hit economies around the globe over the past decade.

What began as the Global Financial Crisis, or Great Recession as it is known here in the US, has become a long running Global Economic Funk of low inflation, low rates and low growth.

This has been a hard economy to find yield and boost earnings. In a tough global environment, Australia has been an economic stand out.

Despite the challenges we have all faced, the Australian economy has now chalked up a record 26 years of uninterrupted growth, backing the judgement of global capital, especially here in the US, that we have been and remain a very sound place to invest.

Australia has the second highest GDP per capita of the G20. Second only to the US.

Our success is grounded in being an open trading economy, with a strong and resilient banking system, that has always sought to maximise our opportunities.

Our traditional strengths in resources and agriculture continue to be embraced while actively diversifying our economic base by transitioning our manufacturing industries and rapidly expanding our services sector that now makes up around 60 per cent of our economy.

The Australian economy grew by 0.8 per cent in the June quarter, taking our annual growth to 1.9 per cent and we expect real GDP growth to track up to 2 ¾ per cent over the rest of the financial year before returning to trend growth of 3 per cent in 2018-19.

Our confidence in the better days we see ahead for Australia is not only driven by the improved global outlook, but the flow of new domestic data, including the strongest period of job creation we have seen in decades.

[Slide 1 - Employment]

We have now had 11 consecutive months of jobs being created. There has not been a longer run of jobs growth in 23 years!

In the past six months, we saw the strongest gain in jobs since the Sydney Olympics; more than 250,000 Australians taking a risk and being rewarded with a job. And the vast bulk of these jobs have been full-time positions.

This growth in employment is expected to continue, with job advertisement and surveys of expected employment all pointing to further growth.

With this sustained pickup in employment conditions, it is no wonder that businesses are reporting the best conditions they have seen in almost a decade. This was confirmed again this week as being 'rock solid' in the NAB monthly survey of conditions, that also saw business confidence tick up.

We are also seeing some encouraging signs in business investment, with new private business investment increasing in each of the past three quarters, following 12 consecutive quarters of decline.

Our recent economic results are particularly pleasing, given what the Australian economy has endured in recent years.

The Global Financial Crisis did not sideswipe us like it did here in the US or across Europe, thanks to the strength and resilience of our financial system that did not fail, due to the prudence of earlier reforms by the Howard Government.

Our greater challenge has been the prolonged and somewhat painful exit from a once-in-a-century mining boom that both helped our country prosper and left our economy with a hangover that hasn't quit.

[Slide 2 - Terms of trade / mining investment as % of GDP]

Commodity prices began to soar around 2004 on the back of a demand shock driven by the expansion of China. Resource companies received a substantial income boost which flowed through to the wider economy.

Our exchange rate appreciated beyond parity with the US, giving consumers significant purchasing power.

Mining investment inevitably followed the soaring commodity prices, reaching a peak of nine per cent of GDP, when there was little spare capacity in the economy and unemployment was low. Naturally, wages and incomes began to grow at a rapid pace.

This sudden orientation to mining split our economy in two, as labour and investment were diverted to mining, and away from other sectors of the economy, such as manufacturing, which were also weighed down by high exchange rates making them less competitive and the higher wages needed to attract labour.

But this plane was always going to land.

Following the peak of the commodity price boom in 2011, we saw a 30 per cent reduction in our terms of trade, as commodity prices retreated rapidly. Mining investment also began to dry up and the income boost that the country had been receiving went into reverse.

Over the four years following the peak of the mining investment boom, private non-mining, non-financial profits had been declining at an average rate of 1.9 per cent per year between September 2012 and September 2016.

That drag has been a significant anchor on the Australian economy, handicapping our gains for half a decade.

From its peak, mining investment more than halved from 9 per cent to under 4 per cent of GDP and on average knocked almost a full percentage off real economic growth per annum.

The impact has also been felt by households courtesy of subdued wage growth.

At the start of the mining boom, our measure of real consumer wage (defined as wages relative to the prices consumers pay for goods) moved sharply away from the producer wage (which is wages relative to the prices firms receive for their output) which continued to grow in line with productivity.

And it stayed away, with the gap increasing over the coming years.

Producer and consumer wages historically track together.

However, since the peak of the boom, the consumer wage has spent five years moving sideways, with the producer wage and productivity steadily playing catch up.

As the adjustment from the end of the mining investment boom continues and spare capacity in the labour market is absorbed, we can expect upward pressure on wages to resume, in line with productivity growth and investment.

In the meantime, households continue to be frustrated with static incomes. This frustration is exacerbated by the memory that it didn't used to be that way too long ago, during a time that, in hindsight, was more the exception than the rule.

So as you can see, we have been in a holding pattern on wages and investment that has weighed down any economic momentum we have been able to achieve.

Only now has the vast majority of that investment boom washed out of the system and the drag on our economy is almost complete. This is most recently evidenced by the welcome pickup in non-mining investment in the last few quarters, and surveys of capital expenditure intentions suggesting growth of around 5 per cent this financial year.

But despite a brighter picture emerging within our economy, and a renewed sense of optimism within the global economy, complacency remains our enemy.

We cannot afford to rest on our laurels; to sit back and wait for growth to magically fall from the sky, and the Turnbull Government in Australia is not.

The Australian Government has been unashamedly prioritising growth strategies that we know will boost our economy, deliver a well-earned pay rise to our workers, and lift our living standards.

To grow our economy, just like in the US, we must have a competitive tax system that encourages our businesses to expand, embrace new opportunities and innovate.

Across the globe, the principle of cutting business taxes to drive growth and investment is the emerging economic consensus.

Those failing to act and reduce the burden on businesses, risk becoming isolated and uncompetitive in an increasingly low-tax global marketplace.

[Slide 3 - International corporate tax rates]

In its World Economic Outlook released this week, the IMF makes this point crystal clear.

In modelling 15 percentage point reductions in corporate tax rates in the US, Germany and France, the IMF found the resulting impact of greater investment would have "large benefits for the reforming countries''.

For those countries refusing to jump onboard tax reform, the IMF warns of "significant negative spillovers on activity and fiscal positions".

The Australian Government gets this, and has already legislated progressive tax cuts for businesses with a turnover less than $50 million, taking their tax rates down from 30 per cent to 25 per cent over a 10-year period.

And we are doubling down on our Enterprise Tax Plan, seeking to extend those significant tax cuts to all businesses.

The Australian Treasury estimates that cutting our corporate tax rates from 30 per cent to 25 per cent would generate a sustained lift in GDP of just over one per cent.

And we are investing in a nation-building infrastructure pipeline that will boost productivity across our states and regions.

[Slide 4 - Infrastructure funding]

In this year's Federal Budget, I announced a ten-year $75 billion infrastructure program.

The plan is unprecedented in scale, benefits every State and is set to deliver a productivity boost across the country that will further bolster our thriving jobs market.

The centrepieces of our near-term plans are the $5.3 billion Western Sydney Airport and an $8.4 billion Melbourne to Brisbane Inland Rail

Our commitment to infrastructure also spans to energy, evident in our game-changing Snowy 2.0 pumped hydro storage project which will have enough capacity to provide 350,000 MW/h of electricity for a week, enough to meet peak demand continuously for 500,000 homes.

This will be the biggest pumped hydro scheme in the Southern Hemisphere.

The results of our investment are already evident. Public investment in our national accounts approached nine percent growth in the June Quarter and there is more to come.

The same is true for defence investment. The Turnbull Government has embarked on Australia's largest recapitalisation of our defence forces since World War II.

We are returning defence spending to two per cent of GDP by 2020-21, three years ahead of schedule.

As a member of Australia's National Security Committee of Cabinet I know how important this commitment is to our allies, especially here in the US, as we continue to stand together to protect the freedoms and values we hold in unison.

But it is also important to our economic cooperation in defence industries. For example, Australia sits on both sides of the table of the Joint Strike Fighter procurement, as purchaser and as part of the supply chain.

And our national security cooperation is not limited to traditional defence projects - domestic security, cyber security, border protection and related projects are consuming larger parts of our budgets.

In my last two budgets alone I have committed $2.7 billion to additional domestic security initiatives.

Australian defence and security industries are up to this task and want to work with the best, which means expanding our commercial partnerships here in the US.

To protect our better days ahead, we have also been pre-emptive and forward leaning in addressing the risks we have identified for our economy.

I want to discuss three such risks today.

Firstly, Australia's household debt remains high, with around eighty per cent of Australia's $2.1 trillion household debt tied up in mortgages.

This is a real risk, if not properly managed, and we get it.

Australian households are now the fourth most indebted in the OECD as a share of disposable income – behind Denmark, the Netherlands and Norway.

At 122 per cent of GDP, our household debt is roughly two-thirds higher than the average ratio in advanced economies.

But these figures must be understood in the context of the factors that mitigate these risks.

Firstly, on average, Australian households have five times assets coverage over the value of their debts. Total household wealth last quarter reached a record $9.8 trillion, or almost $400,000 per person, with the value of their assets being predominantly in housing.

While Australia's housing markets, especially in our largest cities, have experienced strong growth over the past decade this, of itself, is not evidence of an underlying weakness in housing asset values nor that a hard landing for our housing markets is ahead.

Australian housing values, while high, are still real. Safe as houses still broadly means something in Australia.

The rise in housing values has been driven principally by genuine economic forces of supply and demand, where mortgages are subject to full recourse finance, supported by a strong, stable and resilient banking system and world's best practice credit standards.

Low or no doc loans that crippled US housing markets are a rarity in Australia.

More recently, housing supply has been tracking ahead of population growth, where it is beginning to pull on the reins on house prices as it makes ground on years of undersupply.

[Slide 5 - Housing market]

The two occasions when we have seen considerable price pressures in homes in the last decade have both coincided with periods when the construction of new homes simply wasn't keeping up with population growth.

In the last four years, supply has moved ahead of population to now build the strongest cumulative growth in stock in 25 years.

This increase in stock is now working its way through the backlog, and there remains a strong pipeline going forward.

In this year's Budget I announced additional measures to ensure supply keeps up with demand in the future, and am now working with our provincial Governments to improve the responsiveness and forward planning of the zoning and regulatory approvals system.

This includes providing tax incentives for affordable housing investment, through managed investment trusts, that would be of real interest to US pension funds, providing a fifty percent withholding tax reduction from 30 per cent to 15 per cent for such investments, including development projects.

Where the supply demand imbalance has been exacerbated by investors seeking to capitalise on rising prices, we have taken action through our prudential regulator, APRA, to constrain access to credit.

[Slide 6 - Housing finance]

This action has included restricting credit growth for investors to 10 per cent for our bank lenders and the proportion of new interest only loans to 30 per cent of total new residential property loans.

The combination of interest only loans in a low rate environment escalates the risk that homeowners will bid up price to secure a property, rather than restrict their exposure. The regulator's actions have been targeted to address this risk.

They have also had the effect of increasing the rate spread between principal & interest and interest only loans. Currently, for the major banks, rates for owner occupier principal & interest loans are around 100bps lower than for investor interest only loans.

These measures have had the effect of releasing investor fuelled steam from the market, encouraging mortgage holders to convert to principal and interest loans and pay down debt and create more room for owner occupiers, including first home owners to get back into the market.

Further measures to lift lending standards include stricter guidance on loans with LVRs at or above 80 per cent and new applicant repayment capacity assessed on rates around 200 bps higher than offer.

Since setting a cap on interest-only loans, the growth of investor lending has continued to moderate, growing at 0.4 per cent in August - the equal slowest result in the past 17 months.

And our banks have rapidly approached the 30 per cent cap on new interest-only loans, down from a peak of 46 per cent.

As observed by Moody's in their credit report last month, when they once again maintained Australia's AAA credit rating, APRA's "proactive prudential policies bolster the resilience of the banking sector" and mitigate the risks of high household debt.

And the proof, as always, is in the pudding.

Capital city house prices only rose 0.3 per cent in September to be 8.5 per cent higher through the year.

Sydney prices declined 0.1 per cent in the month, the first monthly decline in prices in 17 months.

APRA's measures, which have the full support of the government, are working to smooth the landing in our housing markets.

When you take together the unique characteristics of Australia's housing market, and the actions of our regulators; making comparisons of rising house prices in Australia with the housing investment bubbles we saw in the northern hemisphere are misinformed.

But there other factors that are also assisting Australia to manage our higher levels of household debt.

Households have taken advantage of the low interest rate environment to get ahead on their mortgage, and create a buffer.

Mortgage holders in Australia have the equivalent of over 2 ½ years of mortgage payments in offset accounts.

And for the one third of households who do not have a buffer - these include those who have just started their loan, those on interest-only loans who now face a strong price incentive to convert to principal and interest and pay down debt, or those on a fixed interest loan who often face a penalty for early repayment.

And finally, our debt concentration is also in higher income households, with the top two quintiles holding around 60 per cent of Australia's mortgage debt.

So managing household debt is a real issue. We keep a close watch on it as you can see, but the factors I have outlined hopefully put this in an informed context.

Any discussion of the Australian economy will almost always turn to a discussion about China, our largest trading partner and a key source of growth for our economy.

The Asian giant's rapid urbanisation has had a profound effect on the Australian economy.

Our iron ore and coal has fueled the Chinese steel industry that has been the linchpin for China's development, allowing its sprawling cities to embrace 500 million rural residents in the last three decades.

But the risks to the upside that have borne so much fruit for the Australian economy, can be just as sharp on the downside.

Particularly as our largest trading partner undergoes necessary structural reform, as it seeks to wean itself off investment-led growth and boost private consumption, while reining in debt.

The IMF estimates that augmented government debt in China is likely to rise to 91.5 per cent of GDP in 2022, while the broader measure of public and private debt is projected to increase to 296.7 per cent of GDP in the same year.

[Slide 7 - China debt]

This high level of credit has intensified the risk in China's financial system, particularly amongst lower-tier banks and in the 'shadow banking' sector where the size and quality of debt remains more opaque. The Chinese central bank estimates that banks' off-balance assets are around 110 per cent of their total balance sheet assets.

With the Chinese Government steadfastly committed to its growth target of 6.5 per cent - which it will likely exceed this year, with the economy growing at 6.9 per cent in the first half of this year - there is concern that there will be sharper increases in debt.

So as you can appreciate, the path of reform is never a smooth one.

Pleasingly, these risks are something the Chinese Government has acknowledged and is attempting to contain, as it seeks to provide stability to the regional economy.

Last month I was in Beijing to lead Australia's strategic economic dialogue with China. In our discussions there was a very candid assessment of China's challenges. Creating 13-15 million jobs a year to prevent unemployment from rising is no easy task.

China generates more jobs in just over week than we do in a year.

In these discussions China openly discussed their credit management challenge as well as the need to make their SOE sector 'more fit than fat'. They also highlighted the need to ensure their tax system encouraged investment.

China has steadily begun tightening macro-prudential and regulatory measures, and has committed to increasing its analysis of capital markets, and the asset quality within its banks.

Nonetheless, it still has a few tricks up its sleeve, including its domestic saving rate of 45 per cent, its adequate levels of foreign exchange reserves and the fact the authorities have overall control of the system.

But while Chinese authorities have further significant tools to manage risk, they will need to find the balance between stability and growth-enhancing reforms that generate productivity.

Given this perennial risk to our economy of a slowing China, the Australian Government has actively sought to expand and diversify our trade relationships, including acquiring new partners and broadening relationships with existing partners.

An empowered Chinese middle class are presenting us with plenty of opportunities to diversify our trade, going beyond the iron ore and coal shipments that have long been the bedrock.

We are well placed to deliver financial, education, health and aged care services to meet the increasing demands of a changing and ageing Chinese society.

Those new trade opportunities also build upon the strength we are seeing in our agricultural exports, with wool exports to China valued at $2.4 billion in 2016-17, up 20 per cent from the previous year.

While there is a whiff of protectionism in the air given the current political upheaval across the globe, Australia has done the opposite in an attempt to open up new trade routes.

That means new free trade agreements with Japan, Korea and Peru, and the potential of a FTA with Indonesia - our closest neighbour - that each present lucrative opportunities.

For instance, the UN Food and Agriculture Organisation predicts a 70 per cent increase in food production will be required by 2050 to meet global demands. That's an extra 1 billion tonnes of grain and an extra 200 million tonnes of meat.

The real value of food consumption alone in Indonesia will increase four fold by 2050.

These opportunities are right on our doorstep.

Which brings me to our third and final area of risk management, ensuring as a Government we live within our means and that our banking system is unquestionably strong.

The key reason Australia was able to withstand the body blows thrown from the GFC was because of the prudent budget management of my predecessor Peter Costello, who by the time he left office in 2007 was running budget surpluses in excess of $19 billion.

Six years later when we returned to Government we inherited from the now opposition party $240 billion in accumulated deficits and a generation of debt.

[Slide 8 - Budget balance]

Having implemented more than $100 billion of budget repair measures, and reduced average real growth in government expenditure to below 2 per cent, which is the lowest of any Australian government in 50 years, we are on track to return the budget to balance in 2020-21.

Similarly we have reduced the growth in debt by two thirds and for the first time in almost a decade from the first of July next year we will not be borrowing to meet recurrent expenditures.

What we are achieving is a responsible path back to budget balance, not a mad scramble of austerity that would put economic growth at risk. You don't want the medicine to kill the patient.

This is a pathway the OECD recognised as "appropriate", and the IMF affirmed as "appropriately prudent''.

This fiscal discipline led to all three major ratings agencies maintaining their AAA credit rating for Australia - one of only ten countries rated AAA by all three major rating agencies.

It was also critical for us to build buffers into our financial system to ensure our banking sector remained unquestionably strong.

In July, our regulator APRA announced they would raise the minimum capital requirements for our major banks by 150 basis points to ensure they build a bigger buffer and are less susceptible to shock.

As well as fiscal discipline, we are holding our banks to a higher standard of accountability and opening the gates to competition in a sector dominated by four main players.

Top of my agenda when I return home will be introducing the Banking Executive Accountability Regime which will make banks and their senior management accountable for their actions to their customers.

This will further reduce risk in the sector and ensure the customer is placed at the centre of their operations, where they belong.

This is in addition to the one-stop shop we will set up to allow customers to resolve disputes and achieve outcomes with their banks without paying an army of lawyers.

We are also removing the prohibition on the use of the word 'bank' by ADIs with less than $50 million in capital, in a bid to bring new, innovative entrants to the market.

And we are moving at pace to establish an Open Banking regime in Australia to transform the way Australians interact with the banking system.


So these are the right choices we are making in Australia, as a Government, as a nation, to create our opportunities, appreciate the risks we face, and put in place the prudent buffers we need to protect our economy and realise the better days we know are ahead.

We look forward to continuing to work with our friends and partners in the US as we continue down this road and write the next chapter into Australia's remarkable economic growth story.

Slide pack [PDF 663KB]