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Address to CEDA - State of the Nation Conference

Monday, 24 June 2013

 

ADDRESS TO CEDA - STATE OF THE NATION CONFERENCE

GREAT HALL, PARLIAMENT HOUSE

MONDAY, 24 JUNE 2013

 

**CHECK AGAINST DELIVERY**

In the lead up to the election we have had significant and important debates about Australia’s fiscal position and what the Coalition will do about it.

There can be no doubt in anyone’s mind that the Budget is in a mess.

After promising surpluses the Government is now promising deficits.

The difficulty is that we don’t know the real state of affairs and probably won’t until after the election.

In my recent speech to the National Press Club I identified three headline areas where the Budget numbers are quite unbelievable and since then, I have been proven correct.

Firstly the carbon tax revenue assumptions continue to look ridiculously optimistic.

Similarly the mining tax revenue also looks ridiculously high.

Finally the expenditure associated with illegal boat arrivals looks ridiculously low given that the boats are arriving at double the rate forecast in the Budget.

Repairing the Budget will be a prolonged process because unlike previous repair jobs, this time we don’t have the luxury of a long list of valuable assets to sell. 

The NBN is no Telstra and it has no real commercial value. And, self-evidently, Medibank Private is, in scale, no Commonwealth Bank.

So there is no easy path to convert assets into cash to pay down debt.

The only way we can sustainably undertake fiscal repair is to deliver consistent surpluses.

The Coalition is well practised in cleaning up Labor’s mess. And we are ready to  do it again by putting the Budget back on a sustainable footing through cutting waste and unnecessary programs and reducing the size of government.

 

The Legacy

Without in any way diminishing our commitment to that task I do want to broaden the national discussion to address some of the economic challenges that lie ahead.

Our economy is now entering a significant transition period much quicker than many expected. 

The mining investment boom is peaking and the stimulus from high commodity prices is waning.

We need the non-mining sectors to grow more quickly than anticipated and take up the slack.

The challenge now is that, under this Government, the great structural reforms put in place by successive Governments of both political colours over the last thirty years have stalled and in some cases been wound back.  

Since 1983 there had been a continuous and often bipartisan approach to the deregulation of the Australian economy. It’s one of the key factors which has contributed to the resilience of the Australian economy and underpinned our ability to respond to adverse external shocks

But that’s changed in the last five years.

Under the Rudd/Gillard Government the economy has gone backwards in key areas, with more taxes, a much heavier regulatory burden on business, less flexible labour markets and less competition in key sectors such as banking.

My fear now is that under Labor the non-mining sectors of the economy have become more brittle and inflexible. The noise from dramatic growth in the mining boom muted out the cries from the rest of the economy for continuing positive reform.

For example, it’s relatively painless to re-regulate the labour market when massive wage growth occurs in mining and mining services despite it just being 2% of direct employment.

But as the sound and fury of a boom calms down the structural costs of poor regulation become apparent.

So these structural errors must be fixed.  Whilst my top priority is fixing the Budget we will need to kick start growth and jobs by removing the shackles around the non-mining economy.

 

An Economy in Transition

The mining industry has been undergoing the biggest boom in Australia’s history.  Investment in mining now comprises around 60% of all business investment in Australia, up from just 15% ten years ago.[1]

But having risen to the highest level on record, business investment as measured by the ABS capital expenditure figures peaked in the September quarter last year and has fallen in the two quarters since. 

Within this, mining investment looks to have topped out in the last quarter or two. (Although there is some debate about whether there may be a little more upside in the near term.) 

What is troubling is investment in non-mining businesses has been sliding for the last eighteen months and in the March quarter this year was 17% below its September 2011 peak.

The latest national accounts confirm this story of variable economic activity.

The increase in overall GDP of 0.6% in the March quarter and 2.5% over the year shows that the economy is still growing but at a below trend pace.

Digging beneath the numbers shows that all of the March quarter growth was due to the trade sector, with net exports contributing a full 1% to growth in the quarter.

Other measures such as domestic demand or gross national expenditure actually declined in the quarter.  That is, domestically focussed economic activity shrank.

And look at the States. There has been six quarters of consecutive contraction in state final demand in Tasmania, three quarters of contraction in South Australia, and two quarters of contraction in Western Australia.

This slowing in growth is seen most clearly in a softening labour market.

The national unemployment rate currently stands at 5.5%, significantly higher than the low of 4% in February 2008.

More concerning is the high level of youth unemployment, with fully one quarter of Australians between the ages of 15 to 19 years being unemployed. 

That is 123,000 young Australians actively looking for work who cannot find a job. 

And the underemployment rate is now 7.4%, much higher than the 5.9% achieved in February 2008.

We can do better.

I want to remind you of the economic fundamentals that a new Government will inherit.

 

1.      New Regulation

Firstly, this Government has compounded the difficulty of doing business with a massive program of reregulation.

Since the 2007 election, Labor Governments have imposed an additional 39 new and increased taxes along with an additional 21,000 new regulations on Australian businesses and community. So much for its promise of one in, one out. It has repealed just 1,000 regulations.

This is a Government that wants to be big. Only yesterday the Treasurer was boasting that this Parliament has been “the most successful ever” having passed an amazing 582 pieces of legislation.

Now, over the next four days the Government together with the Greens are going to guillotine 55 important bills through the Senate. That is nearly twice the number in one sitting week as the entire number of guillotines used by the Coalition in three years.

All this comes at a cost with poorly thought through legislation that is often unclear and sometimes contradictory.

Poor process means poor outcomes.

It is therefore no surprise that the entire debate on the Gonski education package is reduced to a debate of two hours and 45 minutes in the Senate this week.

Moreover under this Government we have seen a reregulation of the workplace, additional regulations on behaviour from broadcasting to alcohol consumption, new regulations on financial services, increased environmental requirements, and the list goes on.

Sometimes individual industries are hit multiple times. For example there are separate pieces of legislation before the Parliament to require foreign workers on offshore oil and gas projects to hold visas, to reduce access to 457 visas for temporary workers, and to apply new environmental regulations to coal seam gas and coal projects that will essentially duplicate state assessments.

These incredibly onerous regulatory requirements impose structural rigidity on our economy.

They apply across all industries and will make the transition towards non-mining activity much harder than expected.

 

2.      Financial Services

Secondly, we need a competitive financial services sector to ensure credit is readily available and affordable.

At a retail level the market share of bank housing loans outstanding to the big four has significantly increased from 75% in December 2006 to its current level of around 85%.

At a wholesale level the GFC has had some impact with a number of major international banks reducing their presence in Australia.

And although some others like Chinese and Japanese banks have become more active here there is a widely held view that there is simply not enough competition in funding.

In October 2010, to a few howls of outrage, I proposed a nine point plan to lift competition in financial services.

If we win Government there will be a “son of Wallis” root and branch inquiry into the financial system. Amongst many things we will ensure that the interests of depositors, borrowers and shareholders are met by a competitive financial services industry.

 

3.      Tax Volatility

Thirdly, this Government has introduced a series of capricious and unpredictable tax grabs as a result of its fiscal incompetence, which have come with a very heavy cost to business and consumers.

No country ever taxed its way to prosperity yet the May Budget added a further nine increases. 60% of the announced policy saves over the forward estimates are in fact new or increased taxes.

Increasing the number and complexity of taxes on businesses will not encourage increased investment. Tax complexity will not boost economic activity and will not create job security.

The paradox is that this Government claims it is a low taxing Government.

But in quoting its low tax to GDP ratios it conveniently forgets that the huge shortfall between tax and spending is made up with non-tax revenue and borrowings. 

Those borrowings are tomorrow’s taxes.

When we add up the Government’s total call on resources relative to the economy we find it will be higher in 2014 than at any time under the Howard/Costello Government. 

And the ratio during Labor’s term in office has been more than two full percentage points higher than under the Coalition.

That is the clearest evidence there is that this is a big taxing and big spending Government.

 

4.      Industrial Relations

Industrial relations has gone backwards under this Government

The facts speak for themselves.

The number of industrial disputes commenced over the year to March quarter 2013 was 212.  The number of working days lost over that year was 289,500. 

Compare that with the record of the Coalition.

In the last year of the Howard Government the number of industrial disputes was almost half, with 134 disputes, and 49,700 working days lost - less than one fifth the current rate.

What we are seeing now is the tip of the iceberg.

Massive new regulation burdens through Fair Work Australia and the abolition of the ABCC have left employers and unions with a bitter confrontational infrastructure.

A system that allows increased levels of industrial disputation and a greater number of productive days lost is not good for workers, it is not good for business, and it is certainly not good for the country.

Whilst the Coalition will not bring back Workchoices our announced policy rebalances the debate.

 

5.      Low Confidence

One of the factors inhibiting the re-booting of the non-mining sectors is low business and consumer confidence.

Maintaining confidence is crucial to underpinning economic growth. It’s a game changer

Confident businesses will keep investing, growing their businesses, improving productivity and creating wealth and jobs.

Confident households will keep spending, buying houses, travelling and so on.

Confidence can help an economy cope with adverse shocks.

But equally, a fall in confidence can precipitate lower business investment and greater caution by households.

And right now neither businesses nor households have any levels of high confidence.

Business confidence[2] slipped back in April and remained there in May to be well below the series long-run average level.

Mining confidence is now close to its weakest level in four years, reflecting concerns over the outlook for commodities demand. 

But confidence in the non-mining sector is also at below-average levels. 

The May report noted the weakness in the domestic economy appears to have offset the benefits of the lower dollar and the RBA’s decision to cut the cash rate last month.

On the consumer side, confidence slumped following the Budget, and even in June remained 8% lower than its peak early in the year.

It is often difficult to identify the factors which drive consumer confidence but in the case of the recent fall, the dominant concern was the economy and how this may affect job security.[3]

So we can understand that the Budget’s forecasts for even slower growth and higher unemployment would not be providing much comfort.

Weak consumer confidence is reflected in the continued high household savings rate, which in the March quarter crept back up to 10.6%, and remains not far off quarter century highs.

It should be no surprise that worried households don’t spend.

 

6.      Trade

This Government’s wilful disregard for Australia’s interests is demonstrated clearly in the area of trade.

Australia is a medium sized relatively open economy with a significant trade sector.

We benefit hugely from open access to world markets and for a long time we have been an active participant in negotiating more freedom in global trade arrangements.

With global trade negotiations stalled, progress has continued under bilateral and regional free trade agreements.

Or at least it had.

This Government seems almost uninterested in making further progress on removing impediments to trade.

Bilateral FTA negotiations are underway with China, Japan, Korea, Indonesia and India but they have not made much progress.

We are being outdone on this by our neighbour across the Tasman.

The Howard Government commenced negotiations for a Free Trade Agreement with China in 2005. So did New Zealand. New Zealand concluded its Free Trade Agreement with China in 2008. Our negotiations have stalled.

Trade Minister Emerson has described a Free Trade Agreement between Australia and China as ‘overrated’. This is an odd statement given that at the time we started talking in 2005 it was predicted it could be worth an increase to our GDP of about $25 billion by 2015.

New Zealand’s Free Trade Agreement with China has trebled the trade relationship between the two countries.  More than 90 per cent of New Zealand’s products are going into China duty free.

Australia is now at a competitive disadvantage to New Zealand.  That fact alone makes New Zealand a more attractive place to invest in export industries as an alternative to Australia.

The Government's failure to conclude a free trade agreement with South Korea has likewise resulted in the loss of real export income.  The United States is now capturing a large part of the beef market into South Korea, at the expense of Australian beef producers.

 

The Coalition Plan

There is a pressing need to reboot the dynamism of the non-mining sector.

The Coalition will bring a different mindset to these challenges.

The current Labor Government believes in big government which needs to be at the centre of everything and must be part of the solution.

We don’t.  

We think Labor’s approach has been part of the problem. 

The solution is not more government, it is less.

We need to reduce the burden of government on business so that business can get on with doing what it does best.

Our solutions are driven by our fundamental belief that prosperity does not come from government, it comes from business.

It comes from business investing for the future, driving productivity gains, creating wealth and jobs.

And the contribution from government to this process is to get out of the way, get out of the capital markets, minimise the tax burden, lighten the regulatory load, foster a competitive market place and provide a stable and predictable environment.

We have to remove the regulatory shackles and reduce the taxes so that businesses can focus on what they do best.

We have to restore economic growth to its potential as quickly as possible.

The centrepiece of our economic agenda is to facilitate the creation of one million new jobs within five years and two million jobs within ten years.

Our Plan has already been carefully laid out by Tony Abbott and the economics team including myself, Andrew Robb and Mathias Cormann.

We will lighten the tax load.  We will abolish the carbon and mining taxes as a first order of business.  And we will deliver personal income tax cuts without the carbon tax.

We will also explore reforms to the operation of the tax office to ensure taxpayers get a fair go while still paying their appropriate share of tax.  We want the operations of the Tax Office to be transparent and predictable.

We will lay the groundwork for higher productivity. 

We will lift workforce participation through our Paid Parental Leave scheme and measures to improve outcomes for mature and young workers.

We will reduce regulation, including putting in place a one stop shop for environmental approvals. 

We will commission inquiries by the Productivity Commission into business competition, and industrial relations to ensure market places are efficient and fair.

As I have noted we will have an inquiry into the financial system to ensure the system continues to competitively serve the interests of depositors, borrowers and shareholders while remaining safe and stable.

We will ensure infrastructure spending delivers value for money.

We will make incremental improvements to labour market regulation within the boundaries of the Fair Work system.  Our policy seeks to improve the current Fair Work laws by providing common sense solutions to practical problems such as ensuring right of entry provisions are sensible and not abused, and providing practical help to small businesses within the Office of the Fair Work Ombudsman.

We will ensure that access to individual flexibility arrangements cannot be restricted in enterprise agreements which will ensure that all workers can ask for fair and protected working arrangements if they want, subject to the worker being better off overall. 

And we will also tackle lawlessness on building sites and construction projects by re-establishing the Australian Building and Construction Commission.

We will foster closer relations with Asia, broadening the economic relationship to include services such as education and health and other non-mining industries. This will include moving to conclude free trade agreements with China, South Korea and Japan, consistent with Australia’s interests. We will also be focussing on Free Trade Agreements with India, Indonesia, the European Union, and the Gulf countries.

But perhaps even more important than these individual steps, we will foster a cooperative and predictable environment. 

We want to re-establish trust in government. 

Business must know that the rules of the game won’t be changed while the game is being played. 

Households want to know that government will keep its word, and will do what it says.

This new compact between the people and the government should help boost confidence about Australia’s future prospects. 

Consumers will spend when they are not constantly worried about keeping their job.

Businesses will invest for the future when they are confident the government is committed to economic growth and will lay down clear and stable ground rules.

What We Will Do to Avoid a Possible Downturn

Finally, in response to recent commentary, I want to say that that whilst economists must always contemplate the possibility of economic downturns, it is the responsibility of policy makers to reduce that risk.

It is the height of hubris to dismiss out of hand dire warnings of a possible downturn from respected observers. It is wise to listen and prepare. 

The Australian economy has proved resilient over more than two decades against very severe global shocks.  I believe the ingenuity and innovative spirit of Australians will continue to overcome adversity in the years ahead.

We are a great country with a great people – all we need for continued prosperity is a great government.

Nevertheless, I would not be doing my job if I had not already given some thought as to how economic activity could be safeguarded should the downturn in the private sector become more protracted.

Australia has not experienced a significant downturn in over 20 years and I am determined that it will not occur on my watch if we are elected on September 14.

Protracted downturns in economic activity are very damaging in terms of lost output and lost jobs and it can take a very long time for the damage to be made good.

This could only occur if the normal cyclical fail safes of lower interest rates, a lower Australian dollar, and the automatic fiscal stabilisers were unable to provide a complete countercyclical boost.

In that case additional well considered government action could be appropriate.

But I can make this promise. You won’t see the Coalition sending $900 cheques to dead people. We will not be spending billions of dollars installing pink batts and then millions more removing them. And we will not be spending billions of taxpayer dollars on overpriced school halls that schools don’t want and which do nothing to raise the standard of education.

 

Conclusion

It will be my number one imperative to safeguard the economy against a significant downturn and to turbo charge economic growth and jobs.

The resources boom has made a wonderful contribution to Australia’s prosperity and the mining industry will continue to be an important industry sector but we must prepare for the day when the boom times are gone.

We must Budget for reality rather than hope.

We must plan our economy based on reality rather than exception.

The 90% of the Australian economy that is not involved in the mining and resources sector will now need to shoulder more of the burden of growth.

This next election will be the most important in a generation.

It will also be the clearest choice in a generation.

If we are given the privilege of victory, an incoming Coalition Government will do everything it can to overcome the economic and fiscal wind-back of six years of a bad Labor Government.

The task is great but we are most definitely ready for the challenge.

[ENDS]

 

 





[1] ABS catalogue No 5625.0

[2] NAB Monthly Business Survey, April and May 2013

[3] Westpac Melbourne Institute Index of Consumer Sentiment, 12 June 2013