11 March 2015
Speech - #2015003, 2015

‘Facing the Future: Australia’s Economic Priorities’, Address to the State Library of Victoria’s ‘Big Ideas Under the Dome’ Series

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Good evening, ladies and gentlemen, friends.

I’m delighted to be here with you at the State Library of Victoria, an important and significant institution in the public life of our city and state.

When the library was established in 1856, the colony of Victoria was at the heights of its gold rush prosperity. Victorians were not only thinking big – they were acting big as well as can be seen in architecture and institutions of our great city.

While our bullion stocks may be slightly depleted today, we have come a long way over the decades and the Library has played a vital role in the cultural and educational life of our city and state.

I’d  not only like to pay tribute to the State Library of Victoria for hosting this event about “Big Ideas”, but also thank John Wylie, President of the Board; his fellow Board members; Sue Roberts, Chief Executive, and her team here at the State Library who are  entrusted with the management of this Victorian institution and icon.

Mark Twain said there is ‘no such thing as a new idea’ and that ‘We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations’.

Tonight, I’d like to take give the kaleidoscope a turn, and consider afresh an idea that has been much debated over the years. 

That idea is around the most effective role for government, and particularly as it relates to creating economic opportunities.

Debate over the size and nature of government has been with us since antiquity – indeed, it was well underway before Julius Caesar was a boy.

It’s also a debate which has been manifesting itself in a very real way in Canberra as Tony Abbott’s Coalition Government sets out plans to repair the budget; to build a stronger and more prosperous Australia for the future; and to engage Australians in a conversation about the options for dealing with the challenges and opportunities highlighted in this year’s Intergenerational Report.

And shortly, we’ll be asking Australians to be part of a discussion around the future of our tax system with the release of a discussion paper as part of the Tax White Paper process.

The best role for government will be central to all of these public policy conversations.

The role of government

“The prevailing mood towards governments around the world today is one of mistrust. There is intense cynicism, especially among the young, towards most aspects of government.

There is a widespread belief that governments have few answers for contemporary problems. They are variously seen as the puppets of special interests or composed of people bent on self-promotion rather than the enhancement of the national interest.”

These words, which hopefully resonate with you this evening, were spoken by John Howard in a headland speech he gave some twenty years ago before his election as Prime Minister.

In my view the problem identified by Mr Howard is still manifest today. This problem is essentially twofold.

Government often tries to do too much, and in the process creates the expectation that it can solve every problem.

When this happens, history shows that both the represented and the representatives are often disappointed.

This may also help explain some of the election volatility that we have seen across Australia recently.

In my view, the purpose of government is as explained by that giant of a leader, Abraham Lincoln who said:

“Government should do for people only what they cannot do better themselves, and no more.”

In contemporary terms, this requires the government to provide a social safety net in areas such as welfare, health and education; support the construction of infrastructure projects which help commerce to prosper; and, in national security, provide the umbrella of protection which safeguards life and liberty.

At all times, when government undertakes these roles, it should also be promoting personal responsibility, maximum opportunity and individual choice.

In doing so it must also enable the private sector including in areas such as health and education the flexibility to prosper.

If government loses sight of its core objectives and gets too big by spending too much and operating in too many areas, it smothers, and even extinguishes in some cases an individual’s freedom of choice.

The challenge for government today is getting the balance right.

The Intergenerational Report

This challenge was set out in compelling terms in the Intergenerational Report which was released by the Treasurer last week.

It sets out the hard choices that government needs to make it if it is going to maintain our standards of living for future generations in light of the demographic and economic trends we face over the next forty years.

Overall, the Intergenerational Report tells a good story. We are living longer and our incomes are rising.

It’s quite extraordinary to reflect that forty years ago, there were 122 Australians over 100 years of age.

Today, there are 4,000.

By 2055, there will be 40,000 Australians over 100 years old.

Our population will be around 40 million, and life expectancy for men will rise to 95 for men, and 97 for women.

The number of Australians aged over 65 will double over the next four decades.

Significantly, the ratio of people of traditional working age to those aged 65 and over will change from 4.5 to 1 today, to 2.7 to 1 in 2055.

These are big demographic shifts, and they require us to focus our energies now on how we prepare for these future challenges.

It also requires us to think about how we will engage older Australians in the future economy, as well as strengthen workforce participation across other groups, including women.

Indeed in Australia the proportion of women in the workforce is below that of comparable jurisdictions like Canada. If we could reach their female participation rates our GDP would be $25 billion better off.

Another feature of the IGR is that we have become more productive as a country.

Forty years ago, our output per hour worked was half of what it is today.

With new technology helping us to work faster and smarter, our productivity levels should continue to rise.

That will be important to support our future standards of living.

The IGR also looks at trends in government spending and revenue.

Again, the numbers are compelling.

When the Coalition came to office, Australia was on a trajectory of having $5.6 trillion of debt by 2055.

That’s a net debt to GDP ratio of 122 per cent – a level not too far below that of Greece and above that of Spain today.

As a result of measures implemented by the Coalition, our debt level has been halved to around 57.2 per cent of GDP by 2055, or around $2.6 trillion.

That’s real progress – but we could do better.

If all of our 2014 Budget or equivalent measures were implemented, Australia’s debt would be repaid by 2031/32, restoring the nation’s balance sheet to the pristine condition the previous Labor government inherited in 2007.

The fiscal legacy Howard and Costello left behind was the epitome of fairness as there was not only no debt and interest bill on that debt but there was also money in the bank to help insulate the Australian economy against future shocks

An ageing population will generate new demands on government spending.

Between ages 25 and 58, a person’s consumption of goods and services is relatively constant and, on average, can be funded through their labour income.

Government public spending per person increases for older Australians, particularly for people aged 65 and over as they tend to scale down their participation in the workforce.

At the same time, demand for government provided services and payments such as the Age Pension and aged care tends to increase.

For example, aged care spending today is four times what it was in 1975, and only half what it will be in 2055.

What we need to do

The Intergenerational Report provides the framework for the task in front of us to secure opportunity and prosperity for future generations of Australians.

The question now is what we do with these forecasts in taking action and shaping policy for the future.

The key will be to ensure that government is more the enabler than just the provider.

Government cannot fund every project, subsidise every industry and meet every individual want.

Consistent with the responsibilities for government that I referred to earlier, I believe our focus should be on:

  • creating  opportunities for Australians to develop their potential, including those arising out of the digital transformation;
  • continuing to drive productivity through increased workforce participation,  and investment in skills and infrastructure; and,
  • putting the budget on a sustainable footing by reducing debt and getting spending under control.

Opportunities

I have great faith in the capacity of individual Australians to create new businesses, spearhead innovation and generate economic opportunities.

If government gets out of the way, their job becomes much easier.

During my time as Parliamentary Secretary to the Prime Minister I oversaw our deregulation agenda as part of our commitment to cut $1 billion a year in red tape.

Since the 2013 election, the Government has announced over 400 measures across the whole of government and a net reduction of around $2 billion in compliance costs.

Twice a year, the Parliament devotes a sitting day to the repeal of costly and unnecessary legislation and regulation.

We don’t cut red tape just for the sake of it.

Inefficient and ineffective regulation hurts productivity, deters investment and innovation, and costs jobs.

Our traditional regulatory approaches are also being challenged by technology and new business models, such as the growth of the ‘sharing economy’

Thomas Friedman described this trend as being as big as Gutenberg’s invention of the printing press:

“The world is flat – We are going from a world of vertical silos of command and control to a world where value is created horizontally by who connect and collaborate with.”

Whether it is the 30,000 listings for accommodation on Airbnb, or the more than half a million trips taken with Uber last month, Australians are moving into this new era of collaboration with enthusiasm.

Government needs to consider how it embraces the productivity benefits offered by the sharing economy, while ensuring that all industry participants and consumers are treated fairly and we don’t stifle the opportunity for innovation through inefficient regulation.

We can’t stop the change that is occurring, but we do have a role to play in ensuring we harness it to achieve the best outcome for Australians.

There are of course others areas where government can help to facilitate trade and commerce, such as opening up international markets for individuals to trade.

The free trade agreements that we have negotiated over the past year with our major trading partners in China, Korea and Japan which account for more than 60 per cent of our goods exports.

These agreements will help our exporters take advantages of opportunities to expand trade and explore new opportunities in the major markets of North Asia.

The entry into force of the FTA with Korea – our fourth-largest trading partner - saw 99.8 per cent of Australian goods exports enter that country duty-free.

The Japan FTA provides preferential or duty free access for more than 97 per cent of Australia’s exports when fully implemented.

The landmark FTA with China will add billions to the Australian economy, paving the way for 95 per cent of Australian goods exports to China to be tariff-free, while also delivering benefits for Australian consumers through cheaper goods and components from China.

We still think of our exports as mainly consisting of resources, agricultural products or manufactured goods.

There is huge potential for the export of services which account for around 70 per cent of the Australian economy, but only 17 per cent of our exports.

Australia has secured the best ever market access provided to a foreign country by China across the breadth of the services sector, ranging from aged care through to education, legal services, architecture and urban planning, among others.

Investment in big infrastructure projects is another important area where government, in partnership with the private sector, can support individual enterprise and economic growth.

Our record investment in infrastructure when combined with state governments and private sector spending will see up to $125 billion invested in projects that will create thousands of jobs during the construction phase and longer term productivity gains.

We are talking about building the equivalent of eight Snowy Hydro schemes in terms of the transformative effect for the Australian economy from these projects.

We’re also investing in our people.

As I said in my maiden speech in the Parliament, there would be few who disagree with the words of Thomas Jefferson who said that education is ‘the first defence of the nation’.

Education is an important driver of productivity and long term economic growth. It helps to deliver improvements in incomes and living standards, and is essential for supporting social opportunity and inclusion.

Whether it is through providing financial support for young people to develop skills through apprenticeships, increased funding for schools or providing incentives through programs such as Restart for employers to take on older workers, we support individual enterprise and economic participation.

The reforms we have proposed for the higher education sector are designed to encourage greater innovation, diversity and quality in the sector. 

They are ground breaking reforms and supported nearly universally by the universities themselves.

Under these reforms, institutions will be able to respond more flexibly to the needs of students, the labour market and the broader economy while ensuring they can continue to exhibit worlds best practices and stay ahead of their fellow institutions that are rising throughout the region.

Budget reform

Having outlined these areas of priority for government action, you may be asking yourselves why then do we hear so much about the need to cut spending on other government programs and to focus on repairing the budget.

Instead of spending less, should we instead be spending more?

The answer is no.

At this point, let me remind you we already have a budget deficit of more than 2% of GDP, meaning that government spending is outstripping revenue by 100 million dollars a day, around 40 million dollars a day of which is being spent on interest on debt.

My view is that government needs to spend less, and make those dollars work harder.

A legacy of debt and deficit will break the Burkean compact across the generations, as we leave our children and their children a life lived with less choice, less freedom and a lower standard of living.

I return to the scenarios outlined in the Intergenerational report.

When we came to government, our net debt was on track to reach 122 per cent of GDP, or 5.6 trillion dollars by 2054 in today’s dollars– which would be equivalent to one of the highest in the developed world today.

Under the currently legislated arrangements, our net debt has been halved to 60 per cent of GDP.

If all of the measures proposed in the last Budget were implemented,   our net debt would decline from 15.2 per cent of GDP in 2014/15 to zero by 2031/32, after which the Government would start to build budget surpluses again.

This is why the job of budget repair matters. Incremental savings over time make a difference, and only by doing so, can government afford the things we want it to do.

It’s what lies at the heart of the conversation we should be having about the Intergenerational report.

It was Adam Smith who once observed:

“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”

Federal and state governments, more typically of the hue of our political opponents, more often than not live up to that observation.

Increased taxes dampen productivity and growth and reduce incentive for people to enter and stay in the workforce. However, more efficient and effective taxes can do the opposite and provide the incentives for work and enterprise.

This is why we are committed to producing a comprehensive Tax discussion Paper as we go about boosting the competitiveness of our tax system.

We have 125 different taxes, just 10 of which produce 90 per cent of revenue.

There is clearly plenty of scope to improve the efficiency of the system.

It will also look at the best ways to go about reforming the competitiveness of our tax system.

We also need to address issues arising from the combination of an ageing population; the increasing mobility of labour and capital across borders, and the growing digitisation of the economy all require us to revisit old assumptions about the traditional sources of government revenue, as well as the economic cost of our decision making.

Pressure on our revenue base will continue to compound the necessity of taking hard decisions to reduce spending over the medium term. It is one of the real challenges we face in the lead up to the 2015 budget.

Conclusion

Australia has a lot to look forward to.

We are in our 24th year of consecutive economic growth.

We are perfectly placed geographically alongside the rising economies of Asia.

We have a highly skilled and educated population that can look forward to longer and more productive lives.

However, there is no room for complacency.

This is one of the key messages of the Intergenerational Report and its projections of what Australia will look like over the next 40 years.

Good leadership requires that we resist the temptation to put government at the centre of the economy and the default provider of all the solutions.

Government must be the enabler, so that current and future generations of Australians can prosper.

This is the best role for government.

Thank you.