24 October 2017
Speech - #2017026, 2017

“Protecting our living standards”, Address to CEDA, Canberra

Check against delivery

Almost a decade after the GFC hit, a brighter picture is now emerging for the global and domestic economy, providing evidence of better days ahead.

Over the past 12 months, 371,500 Australians got a job, the strongest jobs growth since before the Global Financial Crisis.

Twelve months of consecutive jobs growth is the best result in over 23 years.

Annual jobs growth is now running at over three per cent, fifteen times greater than it was in 2013 when the Coalition Government was first elected.

Since then, 825,000 jobs have been created and almost two thirds of those jobs have been secured in the past two years.

[Chart - Employment growth]

And the performance on full time jobs has been even better. In the past twelve months 315,900 full time jobs were created, the strongest growth in full time jobs in the almost forty years since records have been kept.

Hours worked has also increased, with the rate of growth in hours the best in almost seven years.

These results recently led Deloitte Economics to conclude that 'Australian job growth is a thing of beauty'.

Business conditions are also at the highest level since 2008 and firms are beginning to ramp up their investment and hire more workers, shrugging off the economic funk that has clouded their outlook since the GFC and the end of the mining investment boom.

While there is record jobs growth and the unemployment rate has fallen by more than half a percentage point in the past two years, there is still slack in the labour market.

Inflation expectations also remain low and wages are continuing to adjust from the impact of the mining investment boom.

[Chart - Real wages and productivity]

During the mining boom, wages growth ran well ahead of productivity growth, and the movement in producer and consumer wages split apart.

The windfall gains of higher commodity prices meant firms could sell their output at much higher prices. At the same time, consumer prices did not increase nearly as rapidly, in part because of a high Australian dollar.

This meant people were able to buy more than they could previously when their wages were hardwired to their own productivity.

In its wake, wages growth has pushed sideways.

Wages grew by a subdued 1.9 per cent through the year to the June quarter - the slowest annual growth in at least 20 years.

Our challenge now is not just to create more jobs, but as I outlined in this year's Budget, better paid jobs as well.

And there is reason to be optimistic, as Deloitte Economics also recently observed:

"Profits are up, jobs are up, and the next train to leave the station will be wages. … the job gains that have already occurred light the path for the turn in wage gains."

This assessment is shared by the Government and underpins the 'better days ahead' outlook presented in this year's Budget.

But we cannot be complacent.

Spare capacity in the labour market must continue to reduce and inflation expectations recalibrated. Both Treasury and the RBA expect inflation to move back towards the mid-point of the target range of around 2½ per cent in 2018-19.

But for wages to increase we must also increase business investment and drive a new wave of productivity growth.

Deepening our capital stock through investment has contributed 0.9 percentage points to our long-run productivity growth of 1.6 per cent.

This is supported by data from the Business Longitudinal Analysis Data Environment (BLADE), which shows that businesses with more capital per worker pay higher average real wages. It also shows that real wages are higher for businesses with higher labour productivity and that workers at the businesses that have the highest productivity have the fastest growth in real wages.

[Chart - Wages and capital per worker by labour productivity category]

This is why the Turnbull Government is seeking to extend the tax cuts we already legislated for businesses with a turnover of up to $50 million, to all businesses. Treasury modelling demonstrates that such policies will deliver a boost to before-tax real wages of up to 1.2 per cent.

This is now an urgent matter given moves by the UK, France and US to lower rates of corporate tax to drive investment. We risk Australian businesses becoming stranded on an uncompetitive tax island if we fail to act accordingly.

It is also why we have committed to a $75 billion national infrastructure agenda, already impacting our economy.

However all of this will still not be enough.

[Chart - Market Sector Labour Productivity Decomposition]

We must also get more out of the investments that have already been made, otherwise known as multifactor productivity.

In the first term of the Howard Government, Multifactor productivity growth (MFP) was adding three per cent to total labour productivity growth. It has only contributed 0.7 per cent on average over the past five years.

So all up, if we only maintain the rate of labour productivity growth we have seen over the past five years of 1.5 per cent, it will not be enough to offset the slowdown in the growth of our workforce courtesy of our ageing population.

We need labour productivity growth of around 2.5 per cent to maintain the growth in our living standards.

[Chart - The Long Run - MFP and Labour Productivity]

This is why a year ago I tasked the Productivity Commission to undertake the first of what will be a series of five-yearly reviews into boosting Australia's productivity, as a sister publication to the Intergenerational Report.

We must set a discipline for continually scrutinizing our productivity agenda.

Today I am releasing the PC's first five yearly report.

The report seeks to provide a direction, rather than a specific `to do' list for governments to immediately achieve, or be forced to rule in or out. No one change is sufficient, they conclude.

The report also states:

'The Commission has deliberately floated ideas that cannot always be implemented immediately, but where preparation and further testing is needed for fruition'.

The report provides a roadmap to higher living standards that should be owned, evolved and progressed by all levels of Government and the Australian people over many years.

These are the views and observations of the Commission. This report is not from Government, but produced for all Governments, State and Federal.

Similar productivity agendas from the 1990s were crucial to lifting our productivity.

The changes that were made then overhauled old economy regulation - trade liberalisation, reductions in tariffs, widespread reform to capital markets, sale of government assets, changes to labour markets, competition and taxation reform, and better targeting of macroeconomic policy.

These changes brought about a new generation of prosperity.

There was a lot of low hanging fruit back then and as Professor Hilmer mentioned recently, back then reform was easier to achieve.

Back then, the burning platform provided by the early 1990s recession focussed the debate and compelled greater bipartisanship.

We are thankfully no longer standing on a burning platform. But nor should we wish for one. On a burning platform people get burnt.

The price of a generation of Australians growing up without ever having known a recession is that reform comes more stubbornly and incrementally.

We also need to understand that many Australians are now far more sceptical of change. Whenever governments mention the word `reform' or `productivity', they get nervous. They've seen this movie before.

Unlike last time when economic reform was a mystery to most, this time around Australians are more alive to the costs of change as well as the benefits.

Plus, the economic and political bandwidth available for change is narrower than it once was, made more difficult by the binary way change is viewed and exploited. Who are the winners and who are the losers? Where is the conflict?

The Commission in this report has sought to bring the agenda up to date and ensure it is aligned with where our economy is today and where it is headed.

The world is getting more complicated and more connected at the same time.

The report references 'the cloud', the 'internet of things', google chrome, social media apps, 3D printing, drones, machine learning, gene technologies, robotics as new on the scene or exponentially advanced since previous agendas were crafted.

But the Commission also highlights the fact that despite these developments, the gains in productivity from technical change appear to be diminishing.

We no longer have a mining investment boom to fuel our tanks.

And of course we have the prospect of an ageing population firmly in our headlights. Fewer people of working age will have to support a growing number of people who have left the workforce.

The PC's first five yearly review seeks to make sense of this and provide some direction.

The new path we are encouraged to embark upon is signposted by a series of key insights pointing to the need for:

  • more integrated and patient centered healthcare to create more healthy workers;
  • a more proactive education system that supports better teaching to create more proficient, more resilient and more adaptive workers; and
  • more functional cities that will not choke our economy.

The Commission continues its advocacy for more efficient Government delivery of non-market services, recognising government performance is critical for productivity with our economy now dominated by services.

As the biggest provider and regulator of these services, Government cannot be the weak link in the chain.

And they continue their advocacy for stronger, more efficient and competitive market systems. Like the Harper Review before, the Commission argues this should be done by placing the customer at the apex - not the firm or any service provider.

Observing that 'user needs are often not given priority … there is therefore strong scope to empower people so that their needs, not those of service providers, are the key focus'.

Improving the efficiency of markets remains core to the agenda, with specific attention given to the energy sector, fostering innovation, and reducing unnecessary regulation.

The Turnbull Government has already intuitively moved in all of these directions.

This is a large report, some 1,200 + pages, including 16 supporting and working papers. We do not have time to address all that is in these reports today, but I would like to address some of the core issues raised in a bit more detail.

We have the third highest life expectancy in the OECD at 82.8 years, but also spend the most years in ill-health. An entire decade, on average, spent on the sick bed. If we had the same level of 'healthy' life expectancy as Singapore, Australians would on average live 2.6 years longer.

[Chart - Essential elements of integrated care]

We have reduced smoking and car accident deaths, but we have one of the highest obesity rates in the world.

We have decreasing rates of disability, but 17.5 per cent of Australians have mental or behavioural problems and we have a suicide rate that is double the rate of the best performing countries.

The PC notes that successful prevention of such mental or behavioural problems can boost labour force participation by up to 26 percentage points.

To answer the conundrums that exist in those statistics, we must consider our own health and the effectiveness of our health system.

Improving the health of Australians is not just about enhancing our quality of life, it's an economic growth strategy.

Healthy and happy people are naturally more productive people. They are more likely to be out looking for a job, more likely to be free of dependency on welfare and more likely to be earning higher wages.

Health is a genuine wealth enabler.

In contrast, poor health can be a handbrake on labour supply and the economy, lowering the standard of living for all Australians.

While our health system is the envy of much of the world, there are some clear "fault lines", the Commission suggests, this may be both holding back our march forward to health, and therefore impacting our productivity.

Less than 20 per cent of Australian GPs are told when one of their patients has been seen in an emergency department, compared to 68 per cent in the Netherlands and 56 per cent in New Zealand.

The pathway of patient care in Australia is all too often fragmented and plagued by poor or non-existent communication between different parts of the health system.

This veil of ignorance, where a doctor may not even be aware of significant health issues affecting their patient, can slow down the process of care, put the patient at risk, and lead to unnecessary procedures being performed.

The narrative of its findings centre on the lack of integration and information sharing in the health sector, arguing that greater cohesion between hospitals, GPs, specialists, administration and community health clinics would ensure patients receive the best care at the lowest cost.

It means teamwork to deliver care, and sharing knowledge about each patient in the system, using a system-wide approach to not only managing chronic illnesses, but preventing them. Prevention, as always, is better than a cure.

The Commission also decries the waste that exists in the system and the unnecessary procedures that still take place despite evidence that the likely benefit to the patient is nil.

More than $200 million could be saved every year by reducing knee arthroscopies that research shows have little benefit in most cases.

At the core of the Commission's recommendations on health, is a clever play on words borrowed from US author Eric Topol - The Patient will See you Now.

Making the patient the centre of care - improving the care of the patient through all parts of the health system and ensuring there is a "teamwork" approach to their care.

The Turnbull Government has already recognised this critical need to coordinate health services, with our Health Care Homes trial beginning earlier this month.

These 200 practices, when fully rolled out, will focus on the holistic care of a patient, tailoring a care plan that addresses all their current health concerns across all parts of the health system, and working to prevent further illness.

GPs and nurses will act as health care navigators, serving the patient via a standard visit, a video conference call with other specialists, a home visit, or even an SMS reminder.

Putting the patient at the centre of care.

The trial will use a blended system of payments that encourages GPs to provide broad health care.

Often just picking up a phone may be all that is required to help patients along their health journey, rather than spending hours every year in waiting rooms, a clear drag on productivity.

A one-year trial of telehealth conducted by the CSIRO saw a 45 per cent reduction in MBS spending, a 25 per cent reduction in PBS spending, a 50 per cent reduction in hospitalisation, and a 40 per cent reduction in deaths. Just by delivering care over the phone.

Data sharing remains the system's Achilles heel, and the predominant reason why communication through the system, from emergency departments to your local GP, remains poor. Or as the PC report puts it, discovering information about a patient is 'akin to pinning the tail on the donkey'.

In 2012 only 37 per cent of specialists and 22 per cent of surgeons use computers, compared to 96 per cent of GPs. It's awfully hard to collect and share data when you are still using a fax machine!

This is why the Turnbull Government's opt-out My Health Record platform will come into its own, giving practitioners and patients immediate access to records to improve their care and drill down on the specifics.

[Chart - Estimated impacts of health recommendations]

The Commission estimates the economic benefits from a health system reboot could be worth up to $200 billion over the next 20 years.

This is not about allocating more resources or conversely cutting health budgets.

It's about doing more with the investment in health we have already made. Doing things smarter.

And ensuring our increasing longevity is matched with quality of life.

In 2014, more than 26 per cent of university students had not completed their degree program within nine years of commencing. Short-term attrition rates have risen from 12.5 per cent in 2009 to 15.2 per cent in 2014.

To make matters worse, underemployment among university graduates has surged from nine per cent in 2009 to 20.5 per cent in 2016.

And over a quarter of recent graduates have jobs that don't match up with their degree.

The strength of our future workforce will be determined by the choices we make today to re-arm and refocus our education system.

Professions come and professions go, as technological change and an ageing population create new demand and new opportunities. This process has been accelerated by globalization, technological change and market disruptions like the shared economy.

The Commission makes the important observation that 'technology adoption, use and diffusion - the long run drivers of productivity - require people with the right skills'.

This means that not only does skills development protect employees from these disruptions, it is an accelerator for the benefits that flow from these disruptions to our economy and our living standards. That is, it helps create more and better paid jobs.

This requires a shift in how we approach education, placing more of an emphasis on meeting the needs of our future jobs market; building a supply chain in preparation for jobs where there is currently little demand.

But just like in health, the Commission pinpoints some fundamental flaws in our education system that are holding us back from realising our future potential, and restraining productivity growth.

The Commission claims our school results are stagnating. Our VET system isn't delivering the type of employees that employers want. And we have a university system that is more preoccupied with publishing than improving teaching standards.

It recommends boosting salaries in subject areas where there are teacher shortages, to attract high calibre people and stop teachers from teaching out of field - like the 30 per cent of high school IT teachers who have never even studied the subject.

It recommends:

  • creating a graduated assessment system that measures the proficiency of VET students, rather than straight competency, and
  • creating a fair credential embracing massive open online courses (MOOCs) that lower the cost of education and make learning more accessible. Embrace the disruption.

The Commission argues that universities are too focussed on publishing research, given the career prospects of lecturers depends more on their publishing resume than their teaching record. This is an upside down world.

Universities are about knowledge, but they are also at least as much about learning and the transference of that knowledge to students.

Thanks to the financial windfall of attracting foreign students, universities can become obsessed with boosting their international rankings that are narrowly based on their research capabilities.

The Commission calls it a "gladiatorial obsession'' - hire the best researchers, increase your ranking, and the cashed-up foreign students will come.

There appears insufficient incentive to improve teaching standards, no data to measure the teaching strength of universities, and no accountability for how successful students are at getting jobs when they walk out the front gates.

One way to realign the incentives, the Commission notes, would be to give university's some 'skin in the game' - funding that is linked to the success of their students, not their research findings.

This is something the Turnbull Government sought to address in this year's budget - announcing plans to link 7.5 per cent of funding to universities on their performance. Employers are looking for graduates who are skilful, not just competent. It doesn't matter if you can perform a task, as your school certificate or degree says so. It matters how well you perform the task.

Determining the difference has often been difficult for employers and they have often been disappointed with the process.

There must be accountability built into the university and VET systems to ensure students are prepared for the workforce of tomorrow.

In the 2016-17 Budget, I announced a range of initiatives to improve teacher quality, including linking teacher salary progression to classroom impact, rather than just how long they have been in the staff room.

Our recent performance in the OECD's PISA tests showed we had a growing share of lower performers and absolute falls in average scientific, reading and mathematical ability.

Alarmingly, that landmark test showed that young Australians may be less capable than teenagers of the same age 15 years ago, which is an economic problem as much as it is a social problem.

The spotlight naturally falls on how we are teaching our school kids and who we task for such an important job.

Our recently legislated Gonski 2.0 schools funding package will see an extra $23 billion poured into schools over the next decade. It's not just money we are kicking out the door with no accountability. It is transparent, consistent and needs-based.

And just to back that in, we have our Gonski 2.0 Review to Achieve Educational Excellence in Australian Schools which will provide advice on how schools can best allocate these additional resources to achieve better results.

We have also strengthened course accreditation standards to ensure teachers enter the classroom prepared to have an immediate impact on student learning, in addition to the rollout of performance assessments for new teachers graduating from 2018.

And we have taken action now to reset our VET scheme, with our VET Student Loans program which consigned Labor's flawed VET FEE-HELP to the history books. Students can start to rebuild their trust in vocational education and taxpayers can ensure their money isn't rorted.

In the budget I also announced our new Skilling Australia Fund - a major commitment of $1.5 billion that will be matched with funding from the States to support up to 300,000 apprenticeships and traineeships.

All of these measures are building the workforce of tomorrow.

The Commission estimates that the potential productivity gains we can bank from getting our cities functioning better is about a $29 billion increase in GDP.

[Chart - Contribution of cities to growth]

Around eighty per cent of Australia's GDP is produced in cities, and forty per cent in Australia's two largest, Sydney and Melbourne. By the time we reach 2050, almost 11 million extra people will squeezed into our capital cities.

I should note that these facts are not intended to diminish the relevance of regional Australia. If anything, given the high level of urbanization in Australia, it highlights the fact that Australia's regions punch well above their weight for our economy.

That said, the huge weight of our cities means that if we get them wrong it costs all Australians, but if we get it right?

Currently our cities compare favourably with global peers, but there are growing strains, particularly on our roads and public transport which has a material effect on our productivity. The social costs of congestion in our capital cities will grow from $18.7 billion in 2014-15 to at least $31.4 billion by 2030.

The Commission highlights better planning and building major infrastructure as a significant driver of productivity, but only if we get it right and it improves the quality of people's lives.

Many of the recommendations have already been recognized by the Turnbull Government.

The housing affordability plan and reforms to state housing agreements announced in this year's Budget, require the establishment of housing strategies that better match supply and demand, which include reform of planning and zoning systems. This is backed up by our small business red tape reduction fund, that is incentivizing State Governments to reduce regulation.

Work on infrastructure reforms is also underway as part of the Turnbull Government's Smart Cities Plan. Our record $75 billion commitment to infrastructure will be wisely spent, with the government staying actively involved as an investor.

The establishment of our new Infrastructure and Projects Financing Agency will assist the Government to make and implement the right choices on infrastructure and how we use taxpayers money in the smartest way possible.

A 10 per cent reduction in the cost of delivering infrastructure would save $2.9 billion a year.

While acknowledging the importance of public transport, the Commission urges governments to maintain a strong focus on roads.

To pay for the upkeep and construction of our roads, motorists currently pay an average $1300 every year to drive a car - courtesy of rego, fuel excise and various State taxes.

[Chart - Road related revenues are in structural decline]

While that revenue is enough to cover the funding requirements now, time is ticking. Revenue raised from fuel excise is falling as fuel efficiency, electric cars and the popularity of Uber is rising.

The Commission poses a hypothecated funding model built around demand, where drivers are charged for how much they use our roads, and at what times.

Would it be more efficient and lead to more investment in roads?

The Commission thinks so, estimating a permanent increase to annual GDP of $20 billion.

The Turnbull Government, through Urban Infrastructure Minister Paul Fletcher, is discussing these issues with the states and industry to evaluate the merits of how best to we fund and deliver the roads Australians will need in the future. The Commonwealth and the States are proceeding cautiously and highly consultatively.

The Commission is right to conclude that improving the efficiency of our markets takes us closer to peak productivity.

They are also right to highlight that in particular 'the costs of getting the energy system wrong are too large to contemplate', which is why households and businesses are paying too much now and why this needs to change.

The PC also rightly backs in their earlier proposals on data reforms quoting annual benefits of $5.5 billion, while pointing to $1.9 billion in benefits in reforms to intellectual property.

Here, the Turnbull Government has some substantial runs on the board.

[Chart - National Energy Guarantee]

Over the course of this year, we have rolled out a comprehensive energy policy that now clearly addresses the costly faults in the system in an enduring way. Our energy plan will deliver more reliable energy, at a lower cost to households and business, while still meeting our environmental obligations.

Our comprehensive energy policy delivers on the Commission's demand for Government to provide certainty, set clear policy direction, let the expert bodies deliver, as well as removing moratoriums and bans on gas exploration that have slowed supply and pushed up prices, rather than deal with each case on its merits.

The Commission rightly priorities fixing the energy mess and we are fixing it.

In the government's National Energy Guarantee announced last week, we have delivered the investment certainty that the sector has been crying out for, as was confirmed by the Australian Industry Group, the Australian Chamber of Commerce, and the Australian Business Council.

We have given energy retailers clear rules on how they purchase their electricity - a minimum amount of reliable energy from traditional sources and a minimum amount from low-emissions energy. The rest? Well, whatever is the cheapest source, thanks to the efficiency of markets.

[Chart - Average retail electricity price increases]

Importantly, as the Commission suggest with great foresight, this is a plan recommended by the Energy Security Board, a COAG appointed independent body of experts that have no ideological allegiance, but merely a mandate to put forward the best solution based on their extensive experience.

We are also well advanced in implementing policies that support the direction of the recommendation to create an environment more conducive to innovation and giving consumers rights over their data.

The Turnbull Government has been methodically positioning Australia to be the leading FinTech hub in Asia-Pacific, leading the world in payment innovations, RegTech and blockchain.

Our Fintech agenda, which includes a regulatory sandbox, exposure draft legislation released today, to give entrepreneurs and businesses a safe space to trial innovative platforms, builds on the government's $1.1 billion National Innovation and Science Agenda.

Governments can often be caught napping on innovation and have to scramble to either facilitate or regulate innovation sectors.

We have been on the front foot.

[Chart - Australian Governments fare well by OECD standards]

Finally, it is pleasing that the Commission notes that Australian governments perform relatively well by OECD standards. But it is always true that Governments must always seek to do better.

The Commission is principally saying that as a Federation we need to work together better, to play nice, including on securing productivity gains.

This fundamental position flows through to their suggestion for ensuring greater fiscal discipline by aligning revenue raising with accountabilities for expenditure and having even clearer and even more transparent fiscal processes.

The Commission also raised regrets about the need for the Commonwealth to have to buy reform and the evergreen need for better data to inform and keep programmes focussed.

These issues are not new and remain frustrating.

More directly, the Turnbull Government has been demonstrating our effectiveness through successfully legislating our agenda, keeping our fiscal discipline to maintain a prudent and consistent path towards budget balance projected for 2020-21, and the broad strategy of strengthening our regulators to ensure markets are both effective and fair.

Since elected last year, the Turnbull Government has passed 169 pieces of legislation. We made $100 billion of budget repair measures in three years and have reduced average real growth in government expenditure to below two per cent.

We have taken strong action to ensure our banking and financial system is unquestionable strong, but is also fair, accountable and competitive.

We are also well served by the ACCC and the AER, who recently provided invaluable insight into the energy market, while our new Energy Security Board is a prime example of COAG cooperation, which in its short life has had a sizeable impact.

So we are at a crossroads. The PC has shown us a path to update our national productivity agenda to ensure we not only maintain our living standards, but lift them.

This is not the sole responsibility of a Federal Government.

Experience shows that sustained growth in productivity is reliant upon governments working together, not going it alone.

The Commission makes this point crystal clear, urging reform of COAG and the development of a national reform agenda.

This week I will be sitting down with State treasurers at our Council of Federal Financial Relations meeting on Friday.

State Treasurers will have the opportunity to hear directly from Peter Harris and his team at the Productivity Commission, about the benefits of working together to boost Australians' living standards - not just in their own states, but in all states and territories.

In order to boost Australians' living standards, it's critical that all levels of Government work together across partisan lines - in the interests of all Australians and the nation as a whole.

That's why I'm hopeful my state counterparts will give Peter Harris a good hearing on Friday and I'm looking forward to a good discussion with them, the first of many, ideally one that can continue constructively until the next productivity report in five years' time.

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