Speeches

ADDRESS TO THE NATIONAL PRESS CLUB TUESDAY 16 FEBRUARY 2010 ‘KEY ECONOMIC ISSUES FACING AUSTRALIA’

16th February 2010

ADDRESS TO THE NATIONAL PRESS CLUB 

TUESDAY 16 FEBRUARY 2010 

‘KEY ECONOMIC ISSUES FACING AUSTRALIA’

*check against delivery*

 

Today I will discuss what I believe to be the four key economic challenges central to the well being of all Australians.

This list of productivity, taxation, public sector debt and cost of living/monetary policy is not exhaustive but it does represent the framework for economic debate over the next twelve months….at least.

Firstly, lets discuss productivity.

Productivity is an important public policy because it is ultimately the level of productivity that determines our standard of living. 

Most of us probably think about productivity in terms of how much output each worker produces.  This is partly determined by how hard we all work, the sort of job we do and the value we add.

The productivity of the capital stock should also be part of the equation.  This is essentially a function of the type of technology used, the efficiency of the machinery and the efficiency of the production process.

These measurements are not necessarily a good guide to the standard of living of the population as a whole because they exclude people who do not work, such as children, the unemployed and those who are fully retired.

The measure which provides the best guide to the living standards of the population as a whole is output per head of population.   

This is not just determined by how hard we work or the quality of the machinery we use, it is also determined by the proportion of the population that is actually working.

There is a general concern amongst commentators that Australia’s productivity performance has been slipping, and is expected to slow further in the next few decades.

Over the 1980s and the 1990s, growth in GDP per capita averaged around 1.9% a year. 

In the 2000s it slowed to around 1.7% a year.  This was in part a structural slowing following the tapering off of significant earlier reforms. But it also reflected temporary factors such as the drought and a substantial pre-production investment of labour and capital in the resources industry.

The third intergenerational report projects output per head of population will slow further to an average rate of about 1.5%pa over the next 40 years.

If this were to come to pass, it would mean Australians on average were not increasing their material standard of living as quickly as they had done in recent decades.

Productivity is primarily the result of business decisions as companies strive to survive in a competitive environment by producing more with less. 

Governments can assist this process in a number of ways.

First, by ensuring that community infrastructure, both privately and publicly owned, is adequate and efficient.  I am referring to roads, rail, ports, utilities, telecommunications, the legal system and so on.  Government investment in infrastructure should be subject to publicly released cost-benefit analysis. 

In this respect I note that Gary Banks the Chairman of the Productivity Commission belled the cat when he noted that the benefits of a publicly available cost benefit analysis “are potentially large” for the Government’s $43bn national broadband project. That is of course a project that the Government refuses to conduct a cost benefit analysis on.

The second way governments can aid productivity is by lowering the cost of capital and maximizing the availability of capital for private business.  The Government should not be competing with the private sector for scarce capital, especially once businesses return to the markets. 

Dr Warwick McKibbin, an eminent private sector academic economist and member of the Reserve Bank Board referred to this in November 2009 when he said that:

“The (global) fiscal stimulus and accompanying borrowing, causes real interest rates to rise over what they would otherwise be….the natural recovery from the shocks….implies that there will be competition by government and the private sector over scarce funds for either private investment or to finance fiscal deficits.”

The “crowding out” effect of government borrowings is particularly acute for small businesses.  Unlike the big end of town, they do not have access to the equity market to raise additional capital.  In 2009 big business raised around $100bn in new equity, not including IPOs  and other startup raisings. 

Some of this was used to pay down debt.  Small business was simply unable to go down this route, making them critically exposed to the cost and availability of debt finance from institutions and the non-intermediated markets.

The third step governments can take is to minimise the drag from Government.  This includes the cost of complying with Government regulations and also obviously taxation.  Part of this process in Australia is to achieve national uniformity without compromising the benefits of taxation and regulatory competition.

The Government is pursuing this through the Council of Australian Governments.  This reform is proceeding at a glacial pace. In fact it is likely the glaciers will melt before this process is complete.

The government is big on red tape spin but small on action. For example I note that the front page of yesterdays AFR had a graphic illustration of the Governments red tape spin clashing head on with reality. One part of the front page warned of a whole new reporting regime to ensure family friendly rules for business. Another part of the front page lauded “Tanner vows new assault on red tape”. Perhaps the more prescient headline was in The Australian today “Red Tape hard to cut, Tanner Admits”.

The fourth step to improve productivity is to promote competitive markets.  Barriers to competition must be removed.  Measures to promote competition, both regulatory and stimulatory, must be implemented in cases of natural monopolies/oligopolies.  The as yet incomplete privatization and deregulation of energy markets, and the incomplete move to a truly national energy market, would be a good case in point.

The fifth step concerns the skilling of the workforce.  In short, if our overall standard of education is better, then our productivity will be higher. $16 billion on new schools halls adds nothing to productivity. To raise productivity we need for example, to improve the curriculum by focusing on skills that develop the capacity of individuals to solve problems, rather than just the rote learning of the knowledge of others.

The sixth element is to encourage innovation and technological progress as a driver of productivity.  In Australia there is some evidence that the market fails to sufficiently drive innovation.  One difficulty is finance.  Another is the reluctance of investors to accept risk, which limits capacity to commercialise good ideas.  A third is insufficient intellectual thought being applied to forging new processes and developing inventions.

Governments can also aim to maximize the productivity of the population as a whole by encouraging as much of the population as possible to work. 

This can be facilitated by a number of targeted initiatives including:

The provision of affordable and available child care that helps mothers to re enter the workforce – an issue I have been raising through all my political life.

Training and re-education programs that promote the re entry of workers who have lost employment; and

Careful design of retirement policies that will encourage older workers to remain in the workforce for longer.

Beyond that there may need to be measures to promote change in community attitudes so that employers recognise the value and contribution of older workers. Senior Australians must also come to recognise the value of remaining in work.

And of course workplace flexibility is essential for productivity enhancement. The Coalition is concerned that the Government has bungled award modernization and has removed flexibility from many workplaces. We stand by our declaration that Workchoices is dead. It is the case however that for much of our term in office we were able to deliver workplace flexibility that gave workers a 22% increase in real wages and helped create more than 2 million jobs with an unemployment low of around 4%. When our detailed policy on workplace relations is released workers will see how we can once again deliver the foundations for more jobs and higher real wages than the Labor party.

I am not saying much about tax policy until the Coalition has received and had time to digest the as yet unreleased Henry Review.  This is a key report for the tax debate. 

What I can say however is that our response to Henry will be based on three key principles. The Coalition believes that taxes should be lower, fairer and simpler. 

Lower, because every dollar of tax collected is a dollar taken from a wage earner and their family, or a business.  Tax inhibits the ability of households to support themselves through their own efforts.  Tax reduces individual well being, because individuals are better than governments at determining the disposition of their income to maximise their welfare.  Tax is a cost on business that is lost to shareholders. 

We have long suspected that the Henry Review will be used as a smokescreen by the government to lift the overall government revenue stream relative to the size of the economy in order to pay for its continued reckless spending. 

I note the Government is claiming a commitment to revenue restraint.  In an interview on 22 January 2010 on ABC AM, the Treasurer said 

“we remain committed to keeping taxation as a share of GDP below the level the Government inherited, and that's 23.6 per cent of GDP in 2007-8.”

Well, apart from this downturn, it hasn’t been 23.6% of GDP since tax reform in 1999-so we will be keeping the Government to their word.

I note in addition that there was no time frame on that commitment- so that cap is clearly immediate and ongoing.

Fairness is our second criteria, because the Coalition believes that the tax system is not simply a mechanism for financing the government’s spending needs.  It can also be used to facilitate beneficial economic and social outcomes.  In this light, the Coalition believes that any changes to the tax regime should be directed at raising productivity, reward for effort, and increasing national savings. 

Simplicity, the third principle for our assessment, is important because the tax system ought to be easy to understand and to administer.  The existing body of tax laws is complex and needs to be rationalised and simplified.  People, particularly PAYE employees, find the process of completing tax returns somewhat confronting.  The Coalition would closely examine proposals which would reduce the compliance burden of revenue collection on households and business – if they work then we will support them.

My third issue is the Australian Government’s rapidly growing debt.

As I have already noted, the Government should not be competing with the private sector for scarce capital.  It should get out of the way so as not to increase the cost to the private sector of credit obtained directly from banks or from the financial markets.

Labor has created a significant problem.  It has produced a fiscal outlook which involves a number of alarming parameters.

Firstly the government is greatly increasing spending as a share of the economy.  The ratio of spending to GDP is forecast to peak in 2009-10 at 27.8% and then to fall to 25.4% by 2012-13.  That will still be higher than in the last six years of the previous Coalition government.

Secondly, Labor has projected seven years of budget deficits, from 2008-09 through to 2014-15. Well after the downturn of 2008. 

Third, the Government has peak net debt in June 2014 of $153bn.  I note wide expectation that this figure will contract because the downturn in revenue will be substantially less than expected. However do not be conned. Spending is still growing as proven by the $4 billion increase in forecast spending between the last Budget and MYEFO.

Fourth, the Government doesn’t believe it will repay net debt until June 2022.  This will require the equivalent of 8 consecutive years of underlying budget surpluses of around $19bn each year.

Finally, we are concerned at the massive cumulative net interest bill on Labor debt which we estimate will be around $70bn. That’s a lot of money lost forever.

The call on the capital markets is massive.  Borrowings this year will increase by almost $58 billion, which is the biggest peacetime increase on record. The government’s heavy demands on the capital markets will continue for at least another four years.

The cost to taxpayers of Government debt is large.  On current estimates the net interest bill in 2013-14 and 2014-15 will be about $9bn a year.  That is $400 each year for every man, woman and child in Australia.  A family with mum, dad and two kids, will be paying $1600 a year in interest to service Labor’s debt.

On top of this will be the cost of services forgone as money is directed to paying down the principal.  Running surpluses of an average of $19bn a year to repay the debt means a lot less money for schools, hospitals, national security and so on.

Labor’s debt repayment strategy, such as it is, relies on two elements.  The first is a significant period of above trend economic growth to increase revenues. And the second is restraint in spending once growth has returned to above trend, involving capping the increase in real spending to 2% pa. 

The Finance Minister has indicated in the Parliament that the trend rate of growth for Australia is about 3%.  MYEFO projections show GDP growth returning to above that mark in 2011-12.  The recent strong data in Australia, such as the very strong growth in employment, suggest we may reach that mark even sooner.

The key issue with this commitment is that there is no undertaking to continue spending restraint once the budget returns to surplus.  The 2010 Intergenerational Report states:

“The fiscal strategy will keep real growth in spending to 2%, when the economy is growing strongly, until the Budget returns to surplus” (p2 of the Overview).

This is a powerful admission.  At the point in time when debt peaks – when the budget moves from deficit to surplus - Labor will remove the shackles on spending.  That is, simply when the budget has returned to surplus, not when we have paid off the debt.

This says to me that Labor has no intention of repaying the debt.  Their professed commitment to fiscal responsibility is a sham.

The Coalition will restore fiscal rectitude.  We restored it last time we won office and we will do it again.

The Coalition will commit to the following principles.

We will run a budget surplus over the cycle.  We will do this to take pressure off interest rates.  A tight fiscal policy will allow the Reserve Bank to run an easier monetary policy.  The bottom line will be lower interest rates for households, lower interest rates for small business, and a lower exchange rate.

We will stabilize the Federal debt as quickly as possible after winning government this year. 

There will be two elements to this. 

The first will be tighter control of spending.  The key step will be to continue fiscal restraint until the debt is repaid.  We stand by the commitments made in “The Coalition’s Plan to pay off Labor’s Debt”.  The last five Coalition Budgets had spending of less than 25% of GDP. Only the Coalition can be trusted to get debt back under control and to get control of the economy.

A great deal of the Government’s stimulus package remains unspent.

The Treasury itself said that the total government stimulus package was $87.7bn over four years.

Of that, we estimate that $42bn or around half remains unspent.  And of that, $21bn is scheduled to be spent in 2010-11 and $10bn in 2011-12.  That’s $21bn from July this year and $10bn from July next year and this is all for a downturn in 2008.  They’re spending money to stimulate the economy two or three years after the one quarter of negative growth.  That is a key issue and a key challenge going forward.

The Government says there is no room to cut spending but I am not convinced.  We will deliver real savings to pay for our policies and to repay the debt more quickly.

The Labor Government is clearly not in control of its own spending.  I note the recent interview given by Finance Minister Tanner where he said government ministers could not be expected to dot the I’s and cross the T’s in relation to the governments stimulus package.

Well if the Finance minister gives others a license to spend then they will - and they have. I refer to the unfunded $1.7 billion blowout on school halls, the $1.2 billion school computers blowout, the $1.4 billion blowout in Medicare, the $1.8 billion blowout in pharmaceutical expenses and the $850 million blowout in the $150m solar panels program.

This creates a culture of fiscal flabbiness.  There was a shrug of the shoulders at the wasted $17 m on a failed NBN tender. There is a total lack of accountability in an unfunded $250 million no-strings attached payment to free TV stations.

And of course if the Government gets away with that, then an increase in the “national broadband network” from $4.7billion in 2007 to $43 billion today now seems an easy next step.

Of course the Government talks big about reform but fails to deliver. It has form in the “fail to deliver” stakes.

I could not believe my ears when I heard the Prime Minister use the GFC as an excuse for reneging on election promises. Usually if a politician breaks an election promise it is because the election promise costs too much money. Our Prime Minister spends $90 billion more and still breaks his election promises. Fewer computers in schools, costly changes to superannuation and a clear broken promise on private health insurance are just three of the many examples.

We will not walk away from our commitment to reform. One area of reform is privatization. It clearly defines the role of Government as against the role of the private sector in a modern economy.

There are some activities that are best left to the private sector. There are some Government entities like Medibank Private that behave as if they are in the private sector.

There is now plenty of competition in private health insurance.  To name just a few companies, HCF, NIB, MBF, Peoplecare, HBF, SGIO, SGIC, Australian Unity, Health Partners, all offer health insurance services in competition to Medibank Private.

There is no longer a need for a government owned health insurer to ensure competition in the market.  Medibank Private operates as if it is in the private sector so it should be sold to the private sector.

We believe in smaller Government and we believe in less government debt. So I announce today that the Coalition will sell Medibank Private and use every dollar from the proceeds to help pay down Labor’s debt.

We estimate the sale of Medibank Private would raise between $3.5bn and $4.5bn to help pay off Labor’s debt.

Reducing the level of government debt quickly is essential for the future prosperity of all Australians.

My final comments are about the cost of living and interest rates.

Everyday Australians are facing enormous cost pressures on their own budgets.

Core inflation, which provides the most stable measure of inflationary trends, has been at or above the top of the RBA’s target band of 2% to 3% for 2½ years.  Over the year to the December quarter 2009 core inflation was 3.4%, still well above the top of the target band.

The main drivers of inflation have been home grown.   And they are cost increases that directly hurt the budgets of everyday Australians.  For example, among the top 10 increases over the year to the December quarter 2009 were Electricity prices up 15.7%; Water and sewerage up 14.1%; Gas up 9%; Secondary education up 7.6% and Preschool and primary education up 7.5%.

Of course, some items also went down.  Among the biggest declines were Audio visual and computing equipment down 12.4% and Overseas holiday travel and accommodation down 4.4%.

The latter items are discretionary, not essential.  Australian families can tighten their purse strings by choosing not to buy the latest electronic goods or to take an overseas holiday.

But they can’t choose to do without electricity, gas, and water, and they can’t choose to not send their children to school.

The Prime Minister promised to help with the family budget. In January 2008 the Prime Minister said that the biggest challenge facing the Australian Government was inflation.  He declared war on inflation, and announced a five point plan to control inflation, which included cutting government spending and increasing the budget surplus.

Mr Rudd also said in 2008 that his government would

“assist working families dealing with the housing affordability crisis…..and other matters which help the family budget as well” (Press Conference 4 March 2008).

The Prime Minister has comprehensively failed to deliver on his commitments to the Australian people.

I have copped flack from time to time from my political opponents about drawing the link between continued government wasteful spending and higher interest rates, despite the fact that they themselves had done so for years.

I believe it is worthwhile running through the arguments again.

In the setting of macro- economic policy there is a direct tradeoff between fiscal policy and monetary policy.  At a time when the overall thrust of policy is imparting too much stimulus to the economy – a situation I would argue we find ourselves in now – there is a choice as to which arm of policy is wound down. 

The Government is arguing that it does not wish to change its spending program which was designed in 2008. Given that the economy is performing much better than expected, this places the burden of adjustment squarely on the shoulders of the RBA.

But don’t take my word on this.  There is no doubt the Government fully understands this tradeoff between fiscal and monetary policy.  To quote no lesser an authority than the Prime Minister:

"I believe there is a strong economic case for budget belt-tightening by the national Government if we want to do our bit in budget policy to make the job of the Reserve Bank easier over the course of 2008 to keep interest rates as low as possible.''
(Kevin Rudd, AAP, 04/02/2008)

And if that is not enough the Governor of the Reserve Bank in his own unique language confirmed the economic principle:

“There may well be attractions for fiscal authorities in committing to a path of relatively rapid fiscal consolidation, thereby allowing monetary policy to be more accommodative than otherwise. This would have the advantage of keeping down the costs of servicing public debt in the meantime. It would also reduce the potential for the ‘crowding out’ of private investment normally associated with high fiscal deficits and upward pressure on interest rates…”

In short by returning the Budget to surplus more quickly interest rates will be lower than otherwise. This would reduce the burden on taxpayers of servicing the debt, and would leave more funds available for the private sector to build their businesses and employ Australians.

The bottom line is that the Government can reduce the upward pressure on interest rates by cutting its spending.  But it chooses not to. Moreover the money they allocate has budget blowouts writ large.

That is a sad truth for home buyers, for individuals using their credit cards and personal loans to make ends meet, and for small business.

And that is why it is imperative for the Coalition, on assuming office, to re-implement a fiscally conservative and responsible economic policy.

Thank you.

[ENDS]