The Global Age of Responsibility, Reinventing Bretton Woods Committee Conference
Thursday, 10 April 2014
Check against delivery
It is of course 20 years since the establishment of the Reinventing Bretton Woods Committee.
Over the last two decades the Committee has played an important role championing the international infrastructure that underpins and strengthens the global economic ecosystem.
This week the G20 and Bretton Woods Institutions such as the World Bank and the International Monetary Fund, will continue our work to strengthen the international financial framework and to boost economic activity.
Six years on from the most severe financial crisis since the Great Depression, improving economic growth remains an almost elusive challenge for many economies. As a result far too many people in far too many economies remain without a job.
The G20 is acutely aware of the growth challenge.
G20 members have been working together to boost global growth since the Pittsburgh summit in 2009, when the G20 launched its “Framework for Strong, Sustainable and Balanced Growth.”
Many countries have already relied heavily on fiscal and monetary stimulus to bolster their economies, particularly in the aftermath of the global financial crisis.
This has been a challenge for central banks as they learn to operate in an unconventional monetary policy environment.
In truth accommodative monetary policy is an easy but, over the long term, unsustainable tool to promote growth.
We all have to work hard, we have to earn growth. Economic reform ultimately makes stronger economic growth a long term reality.
Recent events have also been a challenge for governments that are trying to balance the need to stimulate their economies whilst engaging in fiscal consolidation to reduce their public sector debt.
This is certainly part of the economic challenge we face in Australia.
Beyond these immediate tests, many developed economies are also facing a set of longer-term structural shifts arising from the ageing of our populations.
The facts are clear.
Last year, the United Kingdom’s Office for National Statistics estimated that 1 in 3 babies born in the UK would live to 100.
So whilst we are living longer as individuals we are also ageing as a society.
By 2050 a quarter of the total population of all the advanced economies will be over 65 years of age. The UN estimates that by 2050, over 65s will number 336 million – more than the entire population of the United States today.
Australia is no exception. We are an ageing society and our birth rate does not replace our population.
Even with a significant immigration program that is equal to an increase in our population of approximately 1 per cent per year, and a higher birth rate than many comparable nations, we still have a major demographic bulge confronting our economy and our Budget.
In Australia, between 2010 and 2050 the number of people aged 65 to 84 is expected to double, and the number of people 85 and older is expected to quadruple.
Of course we should celebrate the fact that we are all living longer. It is good news but only if we have a good quality of life and only if our wealth can facilitate ageing with independence and dignity.
Population ageing is not just an advanced economy issue. China is also on the cusp of a decline in its working age population. Its longstanding one child policy has created the most significant demographic bulge in history. As a result there is a danger that China may get old before it truly gets rich.
It is the economic and fiscal impact of an ageing society that too many governments have chosen to ignore for too long.
In Australia we have debated this issue through our commissioning every 5 years of a national “Intergenerational Report” that looks over the horizon at demographic shifts and their impact on the economy and sustainable public finances.
Between 2010 and 2050 the number of people of working age to support people over the age of 65 in Australia will almost halve. This will inevitably have an impact on the affordability of health care, aged care, pensions and discounted services for older communities.
In fact the IMF Fiscal Report released just a few hours ago identified that Australia’s increased healthcare and pension spending alone, based on current settings, would mean an extra $93bn of Government spending per annum by 2030. That is the equivalent of an extra $61bn a year in today’s dollars or the equivalent of an extra 4 per cent of today’s GDP.
To pay for the growth in health and pension expenditure, the Government would need to raise the equivalent of the existing company tax.
Alternatively, that is more than all the revenue collected by our GST.
As the IMF warns, the Australian Government must make some difficult decisions. We will need to improve competition and efficiency in the delivery of healthcare and we need to ensure that access to the pension system is prioritised for those most vulnerable.
The IMF goes on to warn that increasing the pension age is a worthy consideration.
The IMF also notes “Age-related spending for public pensions and health care is often the largest item in government budgets, accounting for 40 per cent of primary spending in advanced economies and 30 per cent in emerging market economies, on average. Absent further reforms, expenditure in pensions and health care is projected to increase by 3 per cent and 2 per cent in these two country groups over the next two decades.”
And in a final guidance the IMF notes that “the main objective is to stabilise the ratio of public health spending to GDP without adversely affecting health outcomes”.
And of course the truth of the matter is that the real economic impact of this demographic shift will not dramatically affect people over the age of 65 now. It will, however, obviously most affect younger generations who follow.
Even despite the fact that many older Australians will be working longer, the total participation rate in the workforce will fall. This decline has already begun and will only continue to become more pronounced.
In coming decades, the ageing of our population will slow economic growth, reduce growth in tax revenue, and create additional demands on government spending, particularly in health, income support for older Australians, and aged care.
Over the next decade, spending on our age pension is projected to increase by around 70 per cent in today’s dollars.
These trends will have a big impact on the sustainability of our budget.
There is no easy solution.
We can of course increase our birth rate.
One of my predecessors as Treasurer encouraged Australian families to have “one baby for mum, one baby for Dad and one for the country”.
In that time I did my bit and I have three children under 9 years of age today. So it worked with me!
But it is obviously not going to help with our more immediate demographic challenges.
Nor is increased migration, which can help ameliorate these demographic trends in individual countries but not for the world as a whole.
So we need new approaches to ensure our per capita growth is sustained in the years ahead.
Improving economic growth through real reform and improved productivity is the only lasting way to build national prosperity. It will continue to lift people out of poverty, preserve social harmony, provide needed government services like health and education, and provide for those in our community who genuinely need our assistance.
With this in mind, at the 2013 G20 meeting last September global leaders committed to develop comprehensive growth strategies to be formalised later this year in a ‘Brisbane Action Plan’.
Building on this, in Sydney in February, G20 finance ministers and central bank governors adopted a landmark agreement to develop new measures with the aim of raising the level of G20 output by at least an additional 2 percentage points above the currently projected level in the next five years.
To do this G20 countries will need to develop new measures that go beyond previous government commitments, and those new initiatives must substantially respond to growth gaps in their own economies.
Australia takes the development of our comprehensive growth strategy very seriously.
Today I can give you some insight into the actions we are taking.
To many of you Australia seems like the Lucky Country. We have now enjoyed over 22 years of continuous economic expansion, a record almost unparalleled in the developed world.
But the continuation of that record is by no means assured. We are now grappling with growth stubbornly below trend as our economy rapidly transitions from the end of the resources investment boom, with rising unemployment and a deteriorating budget position.
Without any policy change, Australia’s budget is projected to be in deficit for the next decade. This will follow six years of persistent deficits, all of them larger in nominal terms than anything previously recorded in our economy outside of a war. This is unacceptable.
But the Australian government has an economic action strategy to turn this around.
The Australian government is committed to making the necessary decisions essential for fiscal repair while still supporting and encouraging economic growth.
We know that this means we need to make difficult decisions. Achieving long-run fiscal sustainability will require winding back some spending that our population have come to take for granted.
This will require every sector of the community, including households, corporates and the public sector, to make a contribution. The onus is on us to explain why these decisions need to be made.
We will follow some key principles.
Waste and inefficiency in government spending must be rooted out. Government must live within its means.
Government benefits must be sustainable, fair and targeted to those in genuine need.
Welfare must be a safety net, not a cargo net. We cannot allow vast numbers in society to remain in an entitlement culture.
Those members of the community that are able to do so must make appropriate contributions to the cost of government services.
And all members of our community must be encouraged and assisted to enter and stay in the workforce. We must not assume that age, disability or language are automatic impediments to workforce participation.
In approaching Australia’s domestic challenges, our overriding philosophy is that the Government should be active only where it is needed and where the private sector cannot adequately fulfil the function. Government should not and cannot eliminate or insure against every risk.
Personal and corporate responsibility is fundamental.
Government support for industry is one area where our new approach is well underway. The Australian government is committed to maximising employment in Australia, but we recognise that this won’t be achieved through widespread industry protection, tariffs and taxpayer subsidies.
Of course when it comes to industry assistance governments are poor at picking winners but losers are good at hitting up governments.
The new Australia rejects the illusion that we can subsidise our way to prosperity.
We recognise that it is the enterprise of individual workers and businesses that will drive economic growth and prosperity.
Government can help by removing red and green tape, reducing taxes, delivering greater workplace flexibility and by facilitating infrastructure that improves productivity.
We can also get on with the job of facilitating freer trade. In our first six months in office we have now finalized new free trade agreements with Korea and, as recently as last weekend, Japan.
This is our government’s response to engendering a new age of personal and corporate responsibility in Australia.
I have observed before that it is time for global action to end the age of entitlement. It is now time for governments to facilitate a new age of responsibility.
Effective competition is a vital element of ensuring a strong economy. Competitive markets benefit consumers through putting downward pressure on prices. They encourage efficiencies to reduce costs for business, and promote innovative new products and services. This is why competition will be one of the key topics of discussion when G20 Finance Ministers and Governors meet tomorrow.
We are focussing on getting the economic and policy fundamentals right. These include low, simple and fair taxes, stable and predictable policy settings, prudent, frugal and effective administration, and more efficient and targeted delivery of services.
And we are not alone – many of these themes resonate with other G20 members, and with the sort of advice the IMF and others regularly provide member countries.
Through domestic reforms in Australia that we will roll out over the next few years, we aim to sustain and even improve our potential growth rate of 3 to 3¼ per cent.
And through these efforts we will play our part in lifting the output of G20 nations by more than 2 per cent above the current trajectory by 2018.
I will provide more detail on our plans when I deliver the first budget of the new government next month.
The Growth Ambition we have set ourselves from the Sydney meeting is indeed ambitious. But it is very deliverable.
Tomorrow, I will be encouraging my G20 colleagues to work together to support each other in our quest to deliver better economic growth.
We will share our wisdom and take home lessons from other economies that may best serve our domestic needs.
We will also heed the lessons from our shared experiences so that the most successful solutions are best used for common problems.
Most importantly we will be honest and forthright with each other so that there will be no confusion as to what the impact will be of our own decisions on others.
The “New Age of Responsibility” also extends to our collective actions to get the most out of multilateral development organisations. In particular, we have a collective responsibility to boost their role in providing assistance to the poorest countries, with a renewed focus on investment.
This will be a key step to continue to alleviate poverty and to boost the standard of living of our most disadvantaged global citizens.
We owe much to that fateful Bretton Woods Conference 70 years ago. The enduring institutions that were born from that meeting need modernising in order to continue to deliver real and meaningful outcomes for communities. I am encouraged by recent decisions by the World Bank Group to boost its lending capacity and improve its ability to better tailor its financing terms to the needs of its members. I believe we will hear more about this in coming days.
Regional development banks are also taking new and innovative approaches to address the infrastructure challenge. For example, the Asian Development Bank is considering a proposal to merge its concessional lending arm, the Asian Development Fund, with its ordinary capital resources. This will allow it to significantly expand its lending capacity without impacting its AAA credit rating.
The problems in getting projects off the ground are often not a lack of finance, but may reflect weak in-country regulatory regimes or projects not being in a sufficient state to be ‘bankable’ and attractive to private sector involvement.
I therefore welcome the work that the World Bank is doing on a proposal for a Global Infrastructure Facility. Rather than seeking to create a large pool of funding, this proposal would provide more integrated support for infrastructure investment by providing a single platform for developing countries to tap the great variety of services offered by the World Bank Group.
Actions by individual countries and by the multilateral and regional development organisations to help boost growth and development are essential, but they are not enough. Stability in the global economy is an essential requirement for countries to grow and develop. We have a global responsibility to work together to protect the world economy from volatility, risk and uncertainty and to make the global economy more resilient to future shocks.
To do this we need to ensure a sound financial regulatory framework and we need to maintain a credible and effective international monetary system and global financial safety net.
The G20 is playing a central role in all these areas.
In November 2008, Leaders of the G20 set out principles for financial reforms and established an ambitious 47-point action plan.
Taking up the baton, the Financial Stability Board and other standard setters focused the global regulatory agenda on addressing the deficiencies. This precipitated a regulatory shift towards a more intensively regulated and supervised financial system.
Safe and stable financial markets are critical to facilitating a steady and robust flow of investment, something that is essential to underpin global growth and development.
But as the agenda has expanded, the complexity and burden of implementing the commitments has become overwhelming.
Following our February meeting in Sydney, G20 members are focusing their efforts on substantially completing a few key aspects of the core reforms in time for the Brisbane summit. The four core objectives are to build resilient financial institutions, address the problem of institutions that are too big to fail, address shadow banking risks, and make derivatives markets more transparent with greater accountability for market participants.
This will facilitate a transition from crisis response to a more steady state of operation for the financial regulation agenda.
As part of the effort to streamline outcomes and process it is timely that the Financial Stability Board is reviewing the structure of its representation. The focus should be on inclusiveness and effectiveness, to ensure that the Financial Stability Board is well prepared to respond to the full range of challenges as we transition from the crisis response phase.
The second element to building a resilient global system is maintaining an effective global financial safety net. This is where the IMF, for nearly 70 years, has played a critical role as a credible and legitimate lender of last resort.
Its sound economic policy advice has helped foster growth and stability for economies across the world, while its strong track record of deploying its lending firepower when necessary, provides much-needed confidence to the global economy.
That is why the governance and effectiveness of this important institution is so critical. We all have a responsibility to get this right.
Implementing the IMF reforms agreed in 2010 and pursuing further reform through the 15th General Review have been key priorities of the G20. Securing all elements of the 2010 reforms is critical to ensuring that the IMF remains legitimate, effective and central within the global financial safety net.
That is why I am deeply disappointed that the IMF quota and governance reforms that the G20 agreed to in 2010 have still not been implemented and that the path forward for ratification is now highly uncertain.
The 2010 reforms would have doubled the IMF's permanent resources and led to a major realignment of voting shares to better reflect the changing relative weights of countries in the global economy. It looks likely that there will be substantial delays before another opportunity arises.
These delays are laid firmly and uniquely at the feet of the United States Congress. It was the United States that aggressively drove these reforms. It was a grand initiative in the spirit of the long post-world war US leadership of the global financial system. It sustains continued American leadership but has been frustrated by the inability of the American political system to deliver the outcome.
The failure to finalise this issue diminishes America’s global standing instead of enhancing it.
As a close friend of the United States we will always call it as we see it from Australia. And in relation to the reforms of the IMF this impasse in the United States is letting everyone down.
In recognition of the difficulty the United States is experiencing in resolving its IMF reform commitments we will be holding a joint IMFC/G20 meeting on Friday to discuss the practical way forward.
I am sure we will be united in calling for United States ratification of existing reform proposals. During the inevitable delay, however, I believe the international community must look at ways to ensure that the resources of the IMF are adequate to meet all needs into the future. Moreover we must work to deliver more balanced representation at the Fund.
The challenges the global economy faces are complex and will test our individual and collective will and capabilities.
The core of our response must be recognition that a new global age of responsibility has begun.
We all have a responsibility to put in place actions that will deliver strong, sustainable and balanced growth.
All participants, from national governments to regional and multilateral development organisations and global institutions, must work together and shoulder their share of the burden.
I am confident that, through our collective effort, we have the necessary tools to get the job done.