Speech - Transitioning to a Stronger Future




"Transitioning to a Stronger Future"




Thanks Michael, it's really great to be back at CEDA – an organisation right at the forefront of our public policy institutions. CEDA's mighty contribution to our public debate has been on display in recent times through its research on water, energy, health care, and on women in leadership. It's not afraid to take on the big issues. CEDA's focus over the years has been on how to improve our economy, how to make it more efficient, fairer, and better able to adapt to the many challenges the world throws at us. That's a focus I share as Treasurer, and it's what makes my job so rewarding despite the sometimes tough moments in public life. We've done quite a lot of reform and policy improvement over the last six years, and there's plenty more I still want to do. I want to see fast, high capacity broadband for every business, every farm, every town and every city, every home in Australia. I want to see the full evolution of our new demand-driven university system. Already the results of the first year or so are encouraging, with a big lift in enrolments in health, sciences, and engineering. I want to see our school reforms rolled out across the country to give every kid the chance at a fulfilling, rewarding and productive career. I want to see Infrastructure Australia continue progress in assigning national priorities to new productive infrastructure in Australia, and directing public money to supporting the most rewarding projects. I want to see COAG challenged to finish the work we need to do in energy, in transport, in water, in hospitals, in occupational standards, in vocational training and in infrastructure development. I think we can do more to encourage women in the workforce, and to encourage older Australians to remain in the workforce, with both sets of initiatives helping to grow our workforce and sustain our prosperity. I want to build on reforms to corporate taxes, such as our loss carry-back, to drive investment and entrepreneurship and support the growth of new Australian success stories.

So there is plenty we can do to improve, reform, and build upon our strengths to sustain our prosperity. But as we press ahead, we can't lose sight of our achievements. It's no small thing to have low unemployment, contained inflation, sustained output growth and rising living standards in a developed world where these outcomes are now the exception not the rule. We also shouldn't lose sight of the enduring improvements in our productive potential that we have accumulated in recent years. I sometimes read assertions that Australians have been complacent and profligate consumers of the benefits of the mining investment boom, leaving them ill prepared for lower commodity prices and terms of trade.

It seems to me this diagnosis misses a lot of important developments in recent years, such as the restraint Australian households have shown in response to the terms of trade boom. As a share of either nominal or real income, household consumption is well below its average in the ten years to 2003, the beginning of the boom. You need to go back to the 1970s to find household consumption representing a smaller share of GDP than it has been since the GFC. Household saving has been correspondingly higher – spectacularly so after the global financial crisis, but beginning well before that. Again, the numbers remind us that Australians have not been feckless in their experience of the terms of trade increases over the last 10 years. This has helped us finance our huge investment boom in mining without blowing out the current account deficit, as we have in the past.

Total investment in Australia today isn't far short of 30 per cent of GDP – a far higher share than in the major advanced economies, such as Germany Japan, the US and the UK. Yet in the year to the March quarter, we only had a current account deficit of around 3¼ per cent of GDP.

This is well below the average of the thirty years since the float despite investment as a share of GDP being above average. That's because Australians saved so much income from the boom. In just the last quarter alone, net saving by Australian households was a massive $44 billion of their disposable income. That's the highest quarterly household savings total in our history. It's four times as much as households saved in net terms a decade ago, when the terms of trade boom began. That combination of high savings and high investment reassures me that we are not wasting our good fortune. On the contrary, we're saving and investing like never before, and restraining our current consumption to a share of income well below where it was a decade ago. Our investment boom has increased our net capital stock – excluding dwellings – by around 60 per cent in real terms in the decade to the last financial year.  That big increase in capital stock will continue to drive output gains in Australia for years to come. So we've been making very solid improvements to our physical capital. At the same time, and perhaps more importantly, we've been making solid improvements to our human capital through greater investment in education, training and skills.

Compared with a decade ago, a higher proportion of Australians are at university or in formal vocational training. A higher proportion of kids are completing high school. As a result of these investments, the skill level of the workforce has markedly increased. As our school reforms are rolled out, and as our new university funding model and investments in VET training mature, we'll see better schools, higher participation and stronger outcomes in education. And the recent improvement in labour productivity growth reassures me that we are not running out of puff. Productivity gains have been disappointing over the past decade or so. Partly because of the impact of high commodity prices and the immense increase in mining investment. Partly because of developments in the water and electricity industries. And party because of a lack of reform in the decade prior to the global financial crisis.  More recently, we've seen the beginnings of what I think may well be a sustained improvement in our productivity performance. The numbers have been volatile as they usually are in productivity. But the 2.0 per cent gain in labour productivity in the market sector through the year to March was above the average of the last decade. I recall reading quite a lot about the productivity growth slowdown over the last decade, but I can't say I have read a lot about its recovery. And wage increases have been quite moderate, so the improvement in productivity means that real labour costs per unit of output have been very restrained. In fact in the year to the March quarter, real unit labour costs fell 1.0 per cent, even though workers' incomes continue to rise.

The final point I would make in response to the claim that Australians have been profligate during the commodity price boom is simply to point at our commitment to hard work. It's a touch off its highs, but the proportion of Australians over age 15 participating in the workforce is not only at historically high levels. it is also higher than it is in the US or Germany, with the US participation rate exceeding ours in the 30 years prior to the GFC. I think we can do more to increase women's workforce participation, but I'm also proud that female participation in the Australian workforce is now higher than it is in the US, Japan and for the EU as a whole.  So while we continue to press for faster and broader reform, for more improvements in the way we do things, we should never forget the significant gains we've made as a nation. The numbers on investment and capital stock, savings and consumption, the current account, education and training, and now on productivity and unit labour costs should put this beyond doubt. If we ignore or discount these achievements we undermine the confidence and optimism we need to approach the next stage of our development as one of the world's most successful economies.

There has been a lot of commentary recently about the challenges we're facing as we transition from mining investment to other drivers of economic growth. Part of our challenge is relative weakness in the global economy, with the US growing below trend, Europe in recession, and Japan only just starting to recover from its third recession in the past five years. We're in the unusual circumstance where the world's two biggest economies - the US and China - are both looking to normalise accommodative monetary policy stances. The Fed is moving very gently and very slowly to wind back some of its bond buying program in recognition that the outlook for the US economy is improving. In that sense, it's welcome news. As for China, I think most of us would prefer that China deals with the excessive leverage provided by its so‑called 'shadow banking system' now rather than later, when it may be more difficult to rein in.  Of course, our own transition won't be seamless. Mining investment has increased from around 2 per cent of GDP in 2002-03 to around 7 per cent of GDP now, and we expect this to plateau this year or next. But we should also remember that non-mining business investment is around 1½ times as large as mining investment. If we add in dwelling construction and public investment, each of which is around five per cent of GDP, then the total of non-mining investment is nearly four times the size of mining investment.

Of course mining investment is lumpy, but we're still likely to see fairly flat mining investment for a year or two before it begins to tail away.

So there's enough time for these other components of investment – at four times the size of mining investment today - to take up the slack as mining investment declines. We're already seeing encouraging signs of that, with the outlook for both housing and non-mining business investment improving. After a decade of lacklustre growth, new dwelling investment is already up by 10 per cent over the past year – its largest annual rise in a decade – with forward indicators pointing to a further recovery. In addition, the most recent planned capital expenditure survey from the ABS showed that non-mining investment plans expected to strengthen in 2013-14. There is no indication of any kind of “capital strike” which one sometimes hears about on the fringe of the business commentariat. In fact, total investment, private and public, is close to 30 per cent of GDP – close to its highest level in 40 years.

Despite claims to the contrary, this has partly been driven by a very significant increase in infrastructure spending since we came to office. It's also important to remember that the import content of mining investment is generally larger than that for non-mining investment, residential construction and public investment. This is partly the reason why the mining investment boom hasn't overheated our economy in recent years, and it will also provide an offset as mining investment starts to detract from growth. We should also remember that the recent surge in mining investment is already starting to generate a very big increase in mining exports. In volume terms they've increased very substantially over the last few years, but we're still to see the full benefit from the investment boom. Iron ore exports are still ramping up, and we've barely begun to see the boom in LNG exports from massive investment in new extraction and processing facilities. New LNG facilities will start to enter into production from around 2014‑15, with LNG exports expected to grow by nearly 120 per cent over the following three years. On these forecasts, Australia should become the world's largest LNG exporter by the end of the decade.

Now, I can't conclude this discussion of the transition in our economy without mentioning the Australian dollar. There's no doubt the high Australian dollar has checked the growth of manufacturing in Australia as well as important service export industries such as tourism. It's obviously also hurt our farmers and hit profitability in mining. So it's good to see the Australian dollar depreciating, as it should as our terms of trade weaken and as the US begins the very long journey back to normal monetary policy settings. This should make the transition towards non-mining sources of growth a bit easier, although even at current levels it is still putting a handbrake on activity in some sectors. But we can also acknowledge that the higher dollar has increased the real incomes of Australians and helped keep inflation contained, helping the RBA to take interest rates down to record low levels. With a cheap currency, I doubt we could have got through such a big investment boom without high inflation and higher interest rates. Instead, we've been able to successfully manage the investment boom without feeling a lot of the pressures we experienced in earlier commodity price booms such as the early 70s and 80s. So as we begin this new period of transition, we should take confidence in the fact that we've already come through some extraordinary economic events in very good shape.

In setting fiscal policy we have been mindful of the need to support the transition, which I talked about a lot in handing down my sixth Budget.

Earlier in the year I copped a lot of criticism because we were looking at deficits this financial year and next instead of the surpluses I expected when I brought down the 2012-13 budget over a year ago. In this Budget, we put in place a more gradual fiscal consolidation, which is not only consistent with an outlook for solid growth and low unemployment, but also contained inflation and low interest rates. In doing this, we have continued our disciplined fiscal policy, with tax constrained as a share of GDP, and firm control of spending, and with a surplus achieved on a responsible timeframe. In all the reactions to this year's budget, I haven't encountered any serious view that we should've made savage cuts to spending. On the contrary, most of the criticism last year was that getting back to surplus as quickly as I planned threatened our economic performance. There has also been quite a lot of criticism of the deliberate increase in our spending in response to the global financial crisis.

All I can say to those critics is that I rank our response to the GFC as our proudest achievement. We got through it with very little injury compared to the vast bulk of the developed world. I don't claim that the fiscal response was the only reason for our good performance, but I do claim that it was critical in keeping Australia out of recession. And we began to reverse the stimulus as soon as it seemed safe for the economy, by putting in place a responsible fiscal consolidation. This quarter we are closing out the 22nd year of uninterrupted expansion in the Australian economy.

If we look at the structure of the economy today we can see that we are very well placed to continue that expansion for quite a while.

We sometimes read or hear the mining boom has ended. But it hasn't. With apologies to Winston Churchill, we haven't even seen the beginning of the end, but instead only the end of the beginning. We still haven't seen much of the expansion in gas production which won't come on stream for another couple of years. And we have plenty of expansion in iron ore and coking coal production yet to come.

Even so we know there will come a point in the next decade or so when mining output growth will slow down. Australia's continuing prosperity will increasingly depend on the four fifths of our economy which is not mining or farming or manufacturing, and which except for construction and utilities is all services. We'll depend on services growth for our increasing living standards, and to grow our imports without an unsustainable trade deficit. More specifically, we will depend on increasing productivity in services – increases in output of services per worker. We won't be able to sustainably and continuously increase productivity in services unless we expand the market for them through exports. Unless we acquire the enabling technologies such as national broadband to create and distribute services in greater volumes at greater speeds and above all, unless we continue to educate and train Australians for more demanding jobs in more complex services.

That's where the future lies, in my opinion. That's not at all to say our mines and farms and factories are not important – there are still enormous opportunities to these parts of our economy. But critically, our success in the next couple of decades depends on the quality of our workforce.

We need high speed omnipresent broadband, better transport infrastructure in our cities, a stronger focus on export markets, and better schools, vocational training and universities. That is a mighty challenge. But we have three great advantages. The first is the rapid expansion of the Asian economy, which will provide access to expanding and increasingly prosperous markets. Not only for minerals and energy, or beef and wheat, and our manufactured products, but increasingly for services. The second is that we meet the challenge from a strong base of saving, investment, skills and education, and high productivity. The third advantage is the policy settings this government has been putting in place across the five pillars of productivity: skills and education, innovation, infrastructure, tax reform and regulatory reform. These investments and reforms have been strengthening our economic foundations and expanding our opportunities from day one laying the basis for this transition to a services export economy and an upswing in productivity growth through our commitment to broadband, to increasing the quality and quantity of our school education, and to our vocational training. Through our commitment to fostering greater innovation, and putting in place more and better infrastructure. These big economic reforms lie at the heart of our plan for Australia's economy.  Our plan for the future.

Thank you. I look forward to taking your questions.