Speech to the 2018 Outlook Summit
11 October 2018
I wanted to reflect on why reform is so hard and then move to some risks, realities, and a focus on some propositions and priorities.
Why is reform so hard? I’m not sure it’s just down to a lack of political issues.
First, context matters enormously. In the absence of a crisis, it’s hard to get urgency.
Some things are too complicated.
The process is often terrible, but not always. But most importantly we don’t often understand the problem we’re trying to fix.
So, let’s start with some problems we have to fix.
Let me go to wages first.
Wages growth, as measured by the Wage Price Index, has been running at record low levels. Real per capita incomes have gone sideways for six years. Fact.
But incomes can be driven by external factors, which does rely on a bit of good luck, or by productivity growth.
In the 90s, productivity growth ran at an average 2.2 per cent a year. That was also the pace of real income growth. Fact.
In the 2000s, real income growth also ran at about the same rate, but slower productivity growth was offset by the record terms of trade.
Now that terms of trade boom is over. Productivity growth is around 1.2 per cent a year since 2010. And surprise surprise, look what’s happened to real wages.
So we can’t control commodity prices, but we can do something about productivity – so why don’t we?
Household debt is at a record high. It continues to rise. The household saving rate is back at its lowest level since the GFC.
The HILDA survey tells us one in five owner-occupied households have experienced a financial difficulty over the past 12 months. We might want to get worried about that.
What sits behind the GDP growth isn’t as good as it should be.
Half of that GDP growth in the June quarter reflected household and government spending.
You have to question the sustainability of that.
New business investment fell in the June quarter, and is now 12.3 per cent of GDP. That is as low as it was coming out of the 1990s recession.
And of course on the back of all that, the world is a strange and risky place.
As we learned 10 years ago, you never know when the next global crisis is around the corner.
As a small, open economy we’ve got very few placed to hide.
As an example, the IMF has already downgraded our growth projections, partly reflecting trade tensions between the US and China.
We don’t know what will happen to Australia if trade tensions become a full-blown trade war.
Against these backdrops we’ve got very little policy ammunition.
Interest rates are now 1.5 per cent, they were 7.25 per cent before the GFC.
Net debt is 18.6 per cent of GDP. At the GFC it was negative 3.4 per cent. The Budget was in surplus.
We are making progress on the budget but we are vulnerable if we take our eye off fiscal discipline.
So I guess the summary of the risks is that it’s mostly about cumulative risk.
The combination of global risks, high household debt, high government debt, weak wages and low productivity. Question - is that a recipe for resilience in a volatile world?
Let’s go to realities.
The link between productivity and wages hasn’t broken.
Fact: over the past twenty-six years, productivity is up 51 per cent and real consumer wages are up 54 per cent. The link is inextricable.
Reality two, it is private enterprise in its totality that matters.
Fact. Business is responsible for 80 per cent of economic output. Business is responsible for 86 per cent of all jobs. Five out of six workers are employed by a business.
Proposition: the policy divide between big and small is futile. The fact is the relationship between small, medium and large enterprises is fundamental to driving the economy, it is worth about $500 billion a year.
Large businesses employ about one-third of people working in business and over 40 per cent of the business community’s economic output.
Spend any time in a regional community and you won’t hear anyone arguing about big and small businesses. They need investment.
They need big and small working together.
Another reality: The contribution of the private sector actually matters to budgets.
The company tax take reached $86 billion last financial year, and is estimated to be over $100 billion by 2021-22.
The top ten taxpayers paid one-quarter of all company tax in 2015-16.
So why do we want to blow private enterprise out of the water?
Why do we want to cripple our competitiveness – it will actually fall to the bottom line of every worker and every government in Australia.
Reality 3: Inequality – The Productivity Commission found that over nearly three decades, inequality has risen only slightly in Australia. (That said, some sources reveal no clear trend for income inequality.)
But, sustained growth has delivered significantly better living standards for the average Australian in every income decile.
So why don’t we shift that conversation to entrenched disadvantage. Why don’t we focus on that?
There are around 720,000 people on Newstart, and a growing number of those people have been on it for years.
Next reality: governments have also been eating into our after-tax wages.
As David Uren’s report in The Australian last year noted:
“… the cost of goods and services with prices set by the private sector has increased by just five per cent during the past five years.
But where prices are set or substantially influenced by the government, costs have escalated by twenty-seven per cent, more than five times that pace.”
So, a couple of propositions to think about.
If we are serious about income growth, job creation and fairness, we might get serious about productivity and competitiveness.
By productivity, I'm not talking about people working harder for less money. What I am talking about is companies expanding, innovating and investing so that people can work more efficiently.
Productivity drives real wages.
Ultimately, productivity is driven by investment.
We need to do something about business investment because investment drives expansion, it drives productivity, and it drives wages growth. This is basic economics.
So, if we are incapable as a country of lowering the corporate tax rate, let’s do something else to increase investment.
We should at least tidy up the small business rate. The government has announced that today, good.
Should we look at other ways to make our company tax system more competitive, let's look at investment or depreciation allowances?
Why won’t we double down on red tape regulation?
Why can’t you buy certain things in Australia, at certain times on certain days of the week – when you can buy them on Amazon.
Why does it take years to get major planning approvals?
Why does it cost so much money to employ just one person? Let’s fix that.
On inequality: if we are serious about fairness let’s not create a false class war, why don’t we tackle entrenched disadvantage.
Why don’t we develop a vision for regional Australia?
Why don’t we fix the skills system?
Why don’t we tackle literacy problems?
Why aren’t we encouraging people to accumulate wealth and rather than punishing them every time they do?
We should certainly not weaken our capacity to create jobs which is a recipe for more disadvantage and lower wages.
Simple: If you wreck the economy. And you have weak employment. You’ll never get wages up.
If the focus of public policy is to spend more money, raise more taxes, and punish people for getting ahead, it will only deliver a low-growth, high-debt, poorer economy with poorer living standards.
If we are serious about energy, if we’re serious about getting prices down why don’t we act on the 106 recommendations of Finkel and the ACCC.
If we are serious about reliability why don’t we implement reliability obligation of the NEG.
If we are serious about driving down wholesale prices then we will open up supply by either forcing the lifting of the absurd state moratoriums or finding an affordable way of getting gas to the East Coast.
We will streamline approval processes, remove green tape and stop third-party protest and activist groups delaying access to much needed fuel supplies.
If we want more dispatchable generation, why don’t we secure investment certainty in existing plans?
If we are serious about emissions reduction, why don’t we get a framework that ensures an orderly technology transition, particularly for dispatchable generation, and not policies that pick winners or just force economic adjustment?
And, if we are serious about a decent workplace relations system and fairness we will not blow up Labor’s workplace relations system to favour the power of big unions over the majority of Australian workers.
We will not make changes that compel all businesses and their workers – small and large – to be part of a ‘sector-wide’ agreement.
We will not call non-union members ‘free riders’. Does that mean we are now going to charge every Australian worker for the privilege of participating in an EBA process that will actually be run by big unions?
We will not call companies ‘wage thieves’ when they have, through the EBA process, given wage increases.
Take Qantas, for example, a 3 per cent wage increase under its EBA and $300 million of discretionary bonuses to non-executives. How’s that for wage thieving?
Reform is hard but not impossible.
There are lots of practical things we can do actually that would address real problems and real risks versus entrenched ideologies.
Things might have to be broken down into chunks.
We might even get very brave and act on the recommendations of multiple inquiries by multiple experts.
But I’m concerned as we approach an election more gets taken off the table than left on.
More gets ruled out, than ruled in.
That reduces our freedom to respond.
And of course we could just do nothing. But that doesn’t mean nothing will happen.
To quote from the Economist magazine:
“Australia is one of the best managers of adversity the world has seen – and the worst manager of prosperity.’’
And the problem with that is, when we wait for a crisis, someone out in Australia lost their job that didn’t need to.
How fair is that?