3 November 2017
Speech - #2017030, 2017

Address to the Australian British Chamber of Commerce, Melbourne

Check against delivery

In January, I stood on a stage in London and spoke of the challenge of navigating our economy through an important transition. 

This involved riding the bumps through the final stage of the mining investment boom and dealing with the aches and pains of an economy that had been undergoing profound change.

From a reliance on a once-in-a-generation boom that spread prosperity across the nation for the best part of a decade, to the need for broader-based growth and diversification.

Some would describe this as normal transmission being resumed. Where wages once again move with productivity and exchange rates are determined by the aggregate of our external trade rather than the dominance of specific commodities.

In the speech I said real GDP growth was forecast to be 2 per cent in 2016-17 and it was, despite the unforeseen impact of Cyclone Debbie, and that it would rise to 2¾ percent in 2017-18, and developments since then have been consistent with this pick-up in economic growth. 

I said job creation was our fundamental focus and the reason why our Enterprise Tax Plan was so critically important to the economy and the financial health of Australian households.

Just a couple of months later, we have delivered tax cuts to 3.2 million small and medium businesses, giving them the flex to grow their business and create more and better paid jobs.

And here is where the rubber hits the road: Australia just experienced the strongest annual full time jobs growth on record - with over 315,000 full time positions created in the last year and 371,500 in total.

Nearly 20,000 new jobs were created in September, the 12th consecutive month of jobs growth, our longest run in over 23 years.

The rate of annual jobs growth is now above three per cent, more than fifteen times faster than in 2013, the year the Government came to office. 

A Turnbull Government means jobs.

I talked about the importance of fiscal repair and how we were committed to reducing government spending and returning the budget back to balance.

Well, just over a month ago I announced our Final Budget Outcome for 2016-17 that showed our budget deficit was $4 billion smaller than we had forecast in the Budget, with our real growth in government expenditure now running under 2 per cent - the lowest of any government in 50 years.

Another key area of focus that I noted was housing, and how important it was to address rising household debt.

Since then there have been a number of measures that have been taken to ensure that our housing markets are more sustainable. The Government announced a comprehensive housing package in the Budget that supports first homebuyers, encourages investment in affordable housing, and boosts supply.

And in March, APRA announced further measures to improve the quality of residential mortgage lending, zeroing in on interest only loans. 

These targeted measures have had an impact, with investor housing credit growth slowing and, as we have just seen in figures released this week, some of the heat coming out of the housing markets, with dwelling prices moderating in Sydney - with declines in the past two months - and through-the-year housing price growth continuing to moderate.

So we clearly set out what needed to be accomplished, and we methodically went through and ticked the boxes.

We don’t make empty promises. We don’t attempt to win people over with pie-in-the-sky forecasts and predictions just to win a few votes here and there.

We set out a clear pathway, and we deliver; without getting distracted by the internal obsessions of the media and the opinions within the Canberra bubble that Australians, frankly, are growing weary of. It is no wonder they turn down the sound on Canberra.

Australians are more interested in the economic policies of politicians, not their genealogy.

Australians want us to deliver results, not become distracted by Canberra’s endless diversions, and we are delivering.

****

But there is one thing I mentioned in London I wish to focus on in more detail today.

I said we needed to coax capital out of its cave.

Well, we still have some way to go, but capital has begun to poke its neck out.

Business investment has struggled to pick up the pieces following the end of the mining investment boom and the disruption and  upheaval from the Global Financial Crisis.

Investment capital has not been flowing sufficiently to drive economic activity, which has had a numbing effect on jobs, wage growth, inflation and non-mining profits.

Outside the mining sector, business investment has underperformed for most of the last decade and has been a drag on economic growth. 

Even in a prolonged low interest rate environment, and with international demand, especially from our local region, rising and our dollar moderating, business investment remained subdued.

Part of the weakness in investment was structural.

Following a global trend, Australia has been transitioning to a more services-based economy which relied more heavily on the skills of the labour force. And not all of this investment in human capital shows up in the official investment measures.

This transition is best displayed when you take a look at the four non-mining industries that have contributed most to economic growth in the decade to 2016-17 - healthcare services, professional services, financial and insurance services, and construction.

These are industries where the investment intensity - as measured by the ratio of investment to output - is lower than for the average of all non-mining industries. So the structural shift towards less capital-intensive industries may have been playing a role.

Part of the recent weakness in investment has also been cyclical, and related to headwinds that have affected the economy following the peak of the terms of trade and mining investment booms.

For example, it has been clear that non-mining investment has been the weakest in the resource-rich States of Western Australia and Queensland, as the downturn in mining construction has hurt investment and activity in industries associated with mining.

And part of the weakness in investment was the mindset of businesses themselves.

Slightly more risk averse in a post-GFC world full of elevated uncertainty, businesses were looking inward for growth. They targeted cost savings, operational efficiencies, increasing debt to equity ratios and share buybacks.

Boards preferring steady returns over the volatility that accompanies any pursuit of high returns.

But they also appear wary of the rapid rate of technological change and digital disruption which created a less stable environment to invest.

As was noted in the recent Heads of Treasuries report on business investment: "The psychological impacts described as the ‘scars’ of the GFC on business decision-makers, are deeper and more extensive than we had originally expected."

****

Thankfully we are now moving into more open ground.

Business investment is showing some credible signs of recovery, with new private business investment expanding by 1.1 per cent in the June quarter - the third consecutive quarterly increase.

It is now 1.5 per cent higher through the year, the first positive through the year growth since March 2013.

And according to the most recent Capital Expenditure Survey, that welcome trend may continue, with firms’ expectations for non-mining investment in 2017-18 improving strongly to be around five per cent higher than last year.

Similarly, the capital expenditure expectations component of the most recent quarterly NAB Business Survey showed investment expectations at around pre-GFC levels.

Businesses are seeing the better days ahead that I spoke about in the Budget, and are responding in the perfect manner - by expanding their businesses and giving Australians a job.

So while we are seeing a boon in jobs, a welcome return in business investment, and a renewed optimism within our economy, we must continue to pour our efforts into boosting economic growth.

To lock in the gains that we are beginning to see, and secure this exciting chapter of growth that is emerging.

****

In the past 12 months, I have tasked Treasury and the Productivity Commission on numerous occasions to `take the temperature’ on the Australian economy, and determine what factors were restraining growth.

Their work has been both comprehensive and insightful for governments as we together shake off the economic funk that has clouded the global economy and plot a pathway forward to those better days ahead.

Last month, the PC released its first in a series of five-year reports into productivity that I commissioned, which made a compelling case for a new productivity agenda based around effective health and education systems and cities that work.

We will hear again from the PC in the coming months with the release of its final report into Horizontal Fiscal Equalisation and whether the way we distribute GST revenue to States and Territories is holding back the national economy.

Treasury has equally been busy, providing the government with advice on the factors behind our subdued wage growth, some of which I unveiled at the Business Chamber of Australia function in Sydney in September.

Their latest work, in conjunction with State treasuries and done at the behest of the Council on Federal Financial Relations, opens the bonnet on business investment in this country and provides an invaluable insight into the views of the business community and its representative bodies.

What are their concerns? What is holding them back? What would it take to get them investing again?

While much of the uncertainty businesses are feeling is outside the control of governments, we must do everything we can to reduce these impacts.

Let me share three important keys to unlocking the growth in business investment needed to propel the economy forward.

****

Firstly, in an economy undergoing a structural shift, new opportunities for investment abound. They need to be explored and mined as future sources of economic growth and productivity. 

Wise money goes where the momentum is.

Our economy is becoming increasingly dominated by the services industry, thanks to an ageing population, a deepening dependence on education, and increasing household wealth.

Health and education are the quarries of tomorrow.

That is not to understate the important role mining will continue to play in our economy. It just highlights the diversification of opportunities that are available in the services space.

This potential was recognised in the Productivity Commission’s Five-Year Report into productivity released last month which shone the spotlight on the faults in the health and education systems that were potentially undermining productivity.

A health system that was fragmented and riddled with poor communication and teamwork was affecting the health of the population, and subsequently the workforce and productive capacity of our economy.

The economic benefits of an integrated health system and the removal of wasteful procedures that offered little benefit to the patient, was an estimated $200 billion.

Improving the health of Australians and the health system that serves them is not just about enhancing our quality of life, it’s an economic growth strategy. The PC also highlighted flaws within our education system - school results that are stagnating, a VET system that isn’t delivering the type of employee that employers want, and a university system that is more preoccupied with publishing research than improving teacher standards.

This room understands just how critically important it is to re-arm our education system so it produces workers with the right skills for the right time - the long run drivers of productivity.

As I said in launching the PC report: building a supply chain of workers today for the jobs of tomorrow.

This theme was common in Treasury’s dealings with businesses as it compiled its research into business investment - a skills and labour market that was responding to changing industry needs.

But this giant memo from the Productivity Commission is not just for governments to digest and implement.

It is a further reminder to the business community of the opportunities in this space.

And that is already starting to be recognised and felt.

Investment in the healthcare and social assistance sector is now at its highest share of GDP on record, at almost 0.9 per cent.

That upward trend in investment has had a natural flow to the labour market and wages growth, with over 130,000 jobs created in the sector in the last year and wages growing at 2.6 per cent compared to 1.9 per cent across the board.

So while the sector only accounts for 13 per cent of total employment across the economy, it has accounted for 40 per cent of the jobs growth in the year to August 2017.

And it’s important to note that private sector investment still accounts for around 60 per cent of total investment in the health and social assistance space.

This is not just a government story.

In the coming years, the strong and sustained jobs growth in the sector is likely to accelerate as the National Disability Insurance Scheme continues its roll out. Our disability care workforce will need to double from its 2014-15 levels.

When you put that in the context of the total job creation forecast to be created in Australia during the NDIS transition period, that's a mountain of jobs.

In fact, for every five new jobs forecast to be created before the NDIS is fully implemented, one of those jobs will be in disability care.

The investment opportunities not only abound domestically, but given China’s population will comfortably exceed 1.4 billion by 2020 and more than 350 million will be aged over 55 years, they are on our doorstep.

Service exports to China have grown by more than 60 per cent since 2013 and are now valued at $11.3 billion.

Some of this has come through our world class education exports - with total education exports increasing by more than 16 per cent in 2016-17 and by an average of 14.8 per cent over the past three years.

Indeed, just yesterday our trade figures - which also showed the longest consecutive run of trade surpluses in over 40 years at 11 months - confirmed that the value of our service exports continued to grow at a rapid pace, up 12.4 per cent over the past year. The data also highlighted we are seeing the benefits of the mining investment boom through continued strong export performance by our resource industry, with the value of resource exports up 22.1 per cent through the year.  

But the opportunities for increasing our linkages in the health care system also abound.

While the gate remains shut for many industries looking at direct investment in China, Chinese authorities are opening the health sector to foreign investment.

It is a recognition that they need some help to meet the demands of their ageing population and some 850 million residents that are on a fast track to the middle class by 2030.

Indeed, in his recent address to the Chinese Communist Party’s National Congress, President Xi Jinping highlighted the need to respond proactively to their aging population and ensure that integrated elderly care and medical services are provided. He also noted the need to accelerate aged-care industries and programs.

This is where Australian know-how and ingenuity can play a role.

Thanks to the China Australia Free Trade Agreement, Australian companies can get a seat at this table. China has committed to allowing wholly Australian-owned hospitals in key cities like Beijing, Tianjin and Shanghai, as well as wholly-owned Australian aged care facilities across the country.

Aveo’s investment in Chinese aged care is an example of what can be accomplished.

There are also opportunities in Indonesia which has just introduced universal health care which they hope will cover all 261 million Indonesians by 2019.

Secondly, to drive investment we need to release the shackles on Australian businesses by allowing them to compete in a global market without the burden of excessive taxation and stifling red tape. 

Our high corporate tax rate is quickly becoming an outlier in a global economy that is shifting to a low-tax environment.

Low corporate tax rates are the new normal among the advanced economies looking for a competitive edge, looking to drive their economies forward and boost productivity in the post-GFC era of subdued growth and wage stagnation.

It is an emerging economic consensus around the world.

This point is made clear in a Treasury working paper on International Trends in Company Tax and Collective Investment Vehicles.

In its key findings, the paper recognises that in a world increasingly connected and integrated through global supply chains, businesses have ample opportunity to expand beyond borders and set up camp in suitable locations.

The competition for this capital is fierce.

And so it is paramount that countries “strike the right balance” between lowering rates to attract foreign capital that will boost their economies and protecting the sustainability of the corporate tax base by implementing safeguards. If the balance is not right in one country, investment will go where it is.

Clearly, we risk being left behind. It is as simple and stark as that; marooned on our own tax island.

The IMF warns countries who miss the boat on corporate tax reform would face "significant negative spillovers on activity and fiscal positions".

The UK has dropped its tax rate from 30 per cent to its current rate of 19 per cent in ten years, and it still has a few more percent to go.

In resource-rich Canada, the corporate rate has plummeted from over 40 per cent in the early 2000s to 26.7 per cent.

France and China also believe in lower taxation. President Macron wants to take his country’s rates to 25 per cent.

And then we’ve got President Trump and his target of 20 per cent - the so-called ‘perfect number’.

The growing gap between our corporate tax rate and those of some of our trading partners is an obvious barrier for new investment. And it is steadily leaving our businesses uncompetitive, which is a handbrake on economic growth and a constraint on further job creation.

The Turnbull Government gets this. We understand what is at stake and why we need to hold firm in the face of an economic sabotage from a Labor party that continues to play populist politics with the economy.

We have 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.

Now we need that extended to all businesses; to free them from the shackles of high tax and allow them to grow their businesses, and deliver more and better paid jobs for Australians.

And give our economy a lift. Treasury modelling shows that taking our corporate tax rate from 30 per cent to 25 per cent would generate a sustained lift in GDP of just over one per cent.

A high reliance on corporate taxation also affects the efficiency and stability of our tax base.

Corporate tax revenue is a roller coaster of unreliability, particularly for a nation like ours that draws a significant portion of its tax revenue from mining.

When the downturn comes, the revenue gets squeezed.

And as we saw during the GFC, not only does tax revenue drop, but because businesses are able to carry forward their losses, the recovery to the tax base is stretched out over the coming years.

Australia has one of the highest levels of corporate tax revenue as a percentage of GDP in the world, at 4.4 per cent, due to its resource bias.

That's compared to the vast majority of Europe and the United States which are under 3 per cent.

And thirdly, to drive investment we have to deliver certainty. The only thing certain is that certainty will guide business strategy and unleash investment. 

Periods of economic and political uncertainty will always play havoc with the investment cycle, and that has certainly played a role in our economy in the last decade.

Although business generally takes a long-term view with its investments, any hint of uncertainty will weigh heavily on investment decisions or lead to a wait-and-see approach.

We see this diminishing risk appetite when looking at what’s called the ‘hurdle rate’ - the minimum return on an investment that would be required to gain managerial approval. It remains elevated from historical standards, even in a low interest-rate environment and with bond yields where they are.

Perhaps let’s deal with the predominant issue of concern that has undermined certainty.

Energy.

No surprises that energy was a hot topic for most businesses and groups who spoke with Treasury, given affordable and reliable energy is a load-bearing pillar in any investment decision.

Uncertainty over an emissions reduction trajectory to provide a framework for investment in new technologies was a particularly large inhibitor, as were high electricity prices and concerns around reliability.

These concerns were rightly echoed in the PC’s Five-Year Report, which claimed "the costs of getting the energy system wrong are too large to contemplate".

What the Turnbull Government has delivered on energy policy this year, and particularly in the last month with our National Energy Guarantee, clearly and methodically addresses these concerns.

And it provides the certainty that business has been crying out for; certainty that will put downward pressure on electricity prices.

Our energy plan sets a clear policy direction that will deliver more reliable energy, at a lower cost to households and business, while still meeting our international obligations to reduce emissions.

And importantly, is a plan recommended by the independent experts on the Energy Security Board who were commissioned to go away and devise a strategy that was durable; one that wasn’t swayed by ideology from both sides of the political fence.

Through our National Energy Guarantee, energy retailers will have clear guidelines on how they purchase electricity - a minimum amount of reliable energy from traditional sources such as coal and gas, and a minimum amount from renewables.

The rest is filled by whatever the cheapest source is. The power of the market.

This guarantee builds on a comprehensive package of energy measures the Turnbull Government has secured, including giving customers the power to ring their retailer and demand a better deal, which has netted some households savings upwards of 20 per cent.

It includes the abolition of the limited merits review process to bring down network costs, and the introduction of the Australian Domestic Gas Security Mechanism which keeps more of our gas at home for domestic use.

It’s also no surprise that this mechanism was not well received by sections of the business community.

The Turnbull Government does not make these market interventions lightly.

But where markets have failed to deliver for the Australian people, where markets are working contrary to the national interest, there will be no hesitation to act and we do not apologise for it.

Stable, working markets are in everybody’s interest.

****

So it is clear businesses have the right conditions to invest again.

The opportunities abound. The shackles of uncompetitive tax rates are being released. And certainty has been returned to the energy sector.

And we are seeing this optimism in the strong economic data in recent months - evidence of more jobs, more investment and more exports.

So as we approach summer, it is clear that the better days ahead that I talked about in the budget are emerging.

In fact, it is now an economic consensus.

Thank you.