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'Defining our future' - address to the Institute of Economic Affairs, London
HON. J.B. HOCKEY Treasurer
INSTITUTE OF ECONOMIC AFFAIRS LONDON 13 OCTOBER 2014
‘DEFINING OUR FUTURE’
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Thank you Mark for hosting me today.
This is my first trip to London since I was appointed Treasurer just over twelve months ago.
Perhaps no city in the world over the last five hundred years has witnessed the highs and lows of global economic change more than this town.
So it is encouraging to see an ocean of cranes across the London skyline.
It certainly confirms that the City is back open for business following the terribly dark days of the Global Financial Crisis.
As some of you may recall, I addressed the Institute of Economic Affairs two and a half years ago with a speech entitled “The End of the Age of Entitlement”.
My speech addressed one of the key issues that most governments in the twenty-first century face, that is, how to ensure that community expectations of government are in line with what communities can afford.
It remains a self-evident truth, governments cannot keep borrowing money from future citizens to pay for today’s entitlements.
Given the devastating impact of an entrenched entitlement culture, which is so evident in parts of Europe, successful governments now recognise that they must only commit to affordable spending.
Of course this requires difficult and consistent decision making.
It also requires a fair measure of bi-partisan support.
The Australian Government has recently delivered one of the most significant Budgets in its history.
It was a Budget that was focussed on meeting the medium and long term challenges for an economy dealing with both horizontal and vertical change.
The horizontal changes see key sectors of the economy shifting over time. In particular, we are moving from a massive surge in resource investment, to a production phase that will not provide the same stimulus to growth. As a result there is more pressure on the remaining ninety per cent of the economy to lift its growth performance.
The vertical economic change is associated with the ageing population, that, over time, will require better health care and better aged care. We also need to provide more opportunities for those Australians who can and want to work longer.
So our first Budget was forward looking.
It made the necessary and unavoidable calls early to ensure that Australia did not have to make far more difficult decisions over the next thirty years.
Reform, of course, is never easy.
When the challenges are obvious, either through recession or high unemployment, the need for change is more obvious.
Australia is now in its twenty fourth consecutive year of economic growth. Previous reforms have helped to make that happen. Today’s decisions will deliver a continuation of that extraordinary story.
There is, however, a temptation to sit back and relax. In Australia the term is “she’ll be right”.
Well “she’ll be right” is not going to work.
The world keeps changing and governments and society need to respond to these changes. That is the only way we can maintain prosperity. It is also the best way to build future prosperity.
Ultimately, it is the only way we can ensure that those who follow in our footsteps have a better quality of life.
Today’s reality, is that the world is changing faster. Economies, and their enterprises, that are slow to adapt will be left behind.
Let me illustrate.
The Ford Motor Company, which revolutionised manufacturing and the auto industry in the 20th century, currently has a market capitalisation of $53 billion after 110 years of operation. Google is more than 7 times larger in just 15 years.
Thomas Edison’s General Electric Company, widely regarded as one of the most innovative enterprises in modern history, is less than half the size of Apple Computers which was founded in the back of a garage less than forty years ago.
Of course there is a conga line of companies that have emerged in the last twenty years that have immensely changed the way we live. All of them started as a small business with good ideas. All of them have grown at a phenomenal scale in a very short period of time.
Some have simply commoditised old products like Amazon, eBay and YouTube. Others have created new products like Microsoft, Twitter, and Facebook. But all of them are forcing us to think again about what our future looks like.
We are altering the way we do things in our daily life to get the best advantage out of change.
For tradesmen, the mobile phone has been a godsend. Clients can contact them at any time.
For musicians, YouTube is a global stage.
For small retailers, eBay and Alibaba is their customer base.
Wikipedia has, sadly, left our old World Book or Encyclopaedia Britannica gathering dust on the shelf.
ESPN has revolutionised sport and the list goes on.
In Silicon Valley they call this “disruptive technology”.
Every part of the world and everyone in it is affected.
So the question for government is how to prepare for the future.
Will we have the right environment that will foster entrepreneurial spirit and let these new ideas flourish?
For people, for companies and for governments, technological advancement can be challenging and confronting.
These disruptive technologies will impact on our economies in a multitude of ways. From the health services we receive, to the food we eat, to the taxes we pay.
So not only do governments need to create the right enabling environments and incentives, they must keep pace with this change. This requires governments to move faster than ever before.
Governments need to ensure that they have integrity, resilience and sufficient flexibility within their regulatory and legislative frameworks.
The objective of the Australian government is to grow the economy and improve prosperity and ensure all Australians are able to share in it. We did this under the Howard Government and, with the right policies, we can do it again.
As a result we must undertake new structural reform. This will lay the foundation for a more promising and secure future.
Over the next decade, the traditional macroeconomic levers of monetary and fiscal policy will not deliver enduring growth.
Monetary policy is currently highly accommodative. Interest rates are at historically low levels. The capacity of monetary policy to do more to stimulate growth is very limited.
Indeed, this long period of low interest rates has seen many classes of assets rise in value, rather than a comparable increase in real activity. The wealthy, who hold the majority of these assets, have indeed got wealthier.
In addition, fiscal policy since the beginning of the financial crisis has been stretched to its limits. Many advanced economies are running excessively high budget deficits as a result of the enormous amount of debt servicing they are required to undertake.
With fiscal policy constrained and monetary policy limited, the only alternative to facilitate growth is to undertake further structural reform in response to global change.
Structural reform is indeed the key plank of Australia’s economic strategy under the Abbott Government.
As good economic managers we are determined set in place a programme of modern structural reforms.
The first area of reform is competition.
A competitive economy is a strong economy. It is the key driver for increasing productivity and promoting innovation.
Existing competition laws define the market boundaries as within the borders of Australia. Of course new technologies mean we live and work within a global market place. We have real time competitive tension from the four corners of the earth, in markets as diverse as financial services, retail and mining.
Rather than trying to regulate competition in increasingly global markets, we should look at ways to empower consumers so that they have better opportunities in the face of global competition.
So we have commissioned an independent Competition Policy Review. This will help identify ways to build an economy that promotes growth and job creation, and provides durable benefits for all consumers.
The next area of structural reform will ensure that we have a strong and stable financial system, which can continue to evolve and meet the needs of a changing society.
To this end, we have commissioned an independent inquiry and thorough examination of Australia’s financial system.
By understanding the future direction of the financial services, this inquiry will facilitate greater efficiency in the system and more productive use of funds.
It will help facilitate economic growth in the coming years while delivering financial sector stability.
It will ensure that funds flow through the economy to support jobs, help businesses and individuals meet their investment needs, and support individuals’ ability to fund their retirement.
The work we do here will complement the work that we are doing in the G20 through the Financial Stability Board.
Last month I chaired the G20 Finance Ministers and Central Bank Governors meeting in the vibrant town of Cairns, Australia.
We achieved a huge amount of success with our focus on delivering on our four key priorities in financial regulation.
That is, implementing the Basel III liquidity and capital requirements, addressing the problem of too-big-to-fail through bail-in requirements, ensuring over the counter derivative markets are adequately regulated and finally, recognising the systemic importance of shadow banking.
How did we get there in Cairns? Well modern technology helped us along the way.
As you may know, the Bank of England Governor Mark Carney came to Cairns to chair the FSB meeting, but had to return quickly to London for the results of the Scottish referendum. Unfortunately he could not attend the G20 meeting.
But, as Chair of the Financial Stability Board, Mark needed to be in the room while the crucial decisions were being made.
So we brought him back to Cairns.
We beamed him into the meeting via satellite video link. We took advantage of our new national broadband network.
Incredibly, it was the first time this has ever been done at a G20 meeting.
This all happened in a town right on the Great Barrier Reef.
This is a great example of a world connected by technology and the desire to advance a common cause for the betterment of our citizens.
The third area of structural reform we are considering in Australia is in the area of taxation. You can’t build a competitive and dynamic economy without considering the role that taxes play.
To that end, we will set out our plan for taxation reform in our white paper on the Reform of Australia’s Tax System. This will provide a longer-term approach to tax reform by examining how our tax system should support future economic growth and improve living standards.
Put simply, the Australian Government wants taxes that are lower, simpler and fairer.
Given the international mobility of capital, you also need an integrated international approach that can be enforced. You need an international tax system that is ready for the future.
The G20 and the OECD, under the Australian Presidency, is halfway through delivering the two-year 15-point Base Erosion and Profit Shifting Action Plan. This is to ensure that the international tax rules can keep up with advances in changing business models.
The G20 will also develop far-reaching initiatives to identify and catch tax cheats through the automatic exchange of information using a Common Reporting Standard.
These reforms help prepare Australia for the future.
In our first 14 months of government, we have set about restoring fiscal sustainability and, with it, restoring confidence in our public finances.
In our first Budget in May, we laid out a strategy to bring the Budget back into surplus.
We detailed a measured approach to reduce the budget deficit within a realistic time frame.
We chose a path that returned the Budget to surplus without hurting our prospects for sustainable broad-based economic growth.
We started by reining in wasteful spending. This means making the government both efficient and effective.
We abolished a carbon tax that didn’t reduce global emissions, but was stifling business activity with higher costs.
We abolished a mining tax that didn’t raise revenue, but was damaging Australia’s international reputation.
We ended business uncertainty by dealing with almost 100 announced but unlegislated tax measures, which we had inherited from previous governments.
And we have removed around 10,000 redundant pieces of legislation and regulation, and cut over $700 million of red tape for business and community organisations.
That is not to say we indiscriminately cut programs. Yes, Governments do have certain obligations, such as providing affordable healthcare, access to education, as well as personal and national security.
We will look after those most in need and, with good policies, help those affected in any transition.
But ladies and gentlemen, these services must be provided in an affordable and sustainable manner and in a way that encourages citizens to pursue meaningful lives.
We are creating an environment where businesses can plan with confidence. Where they can take calculated risks and take advantage of emerging opportunities. Where future generations can feel secure about their prospects.
The inevitable aging of the population and the rising frequency of disruptive technologies, also requires governments to take a longer term approach to policy and legislation.
It is for this reason, that we are undertaking an Intergenerational Report that looks at our fiscal challenges for the next 40 years, taking into account the impacts of demographic changes.
Don’t ever doubt the key role that Finance Ministers have with the implementation of structural reforms. Each sector of the economy is linked, and it is up to Finance Ministers to take a whole-of-economy perspective.
And it’s a more difficult task when the economy, like the Australian economy, and many others, is in the midst of a generational economic transformation.
In recent times, we have benefited from the largest resources boom in our history. Mining output as a proportion of the Australian economy has doubled over the past decade.
But as the resource boom declines, I want to make sure Australia is in the best position to take advantage of the world’s next major boom. That is, the rise of Asia.
Our resources sector has benefited from the growth in Asia, in particular China. As a result of the significant increase in demand for commodities, investment in the resource sector grew dramatically over the past decade, and has been a key driver of growth in Australia.
Yes, the resources sector will be a more moderate contributor to growth over the next few years.
But for Australia, many areas of our economy will gain momentum to counter this decline. In particular, residential construction and infrastructure investment are expected to strengthen.
Yet even while Australia will have solid growth in the near future, the transition we face is enormous, and no-one should under estimate this challenge.
We know from experience that transitions of this magnitude could well be bumpy and that economic indicators may well be more volatile in the short term.
Many new industries will be created and some will fade. This is the nature of transition.
I mentioned infrastructure investment is expected to strengthen. Investing in infrastructure for the future is another part of our plan for Australia’s economic transformation.
There is a tendency for some governments to look only to the short term, to the next election. If we are truly to invest in the future, we must look much further ahead.
In our first year of government, we announced Australia’s biggest ever infrastructure program. Over the next six years, government investment in infrastructure will catalyse over $125 billion of new additional infrastructure.
We will build better roads and highways that will create a more interconnected network and improve the productivity of our economy.
But more than that, it will save hours of commuting time for many people. More time to spend with their families - a value that can’t be measured in terms of GDP.
While this is Australia’s largest ever infrastructure program, I say again that far more needs to be done, and must be done.
Australia needs to look beyond its borders.
We know that modern economies are connected across nearly every sector. No country can afford to act in isolation.
Australia is no longer an island. International developments can impact on domestic economies in the blink of an eye.
The technology revolution and the integration of markets have transformed the way we do business and the way we interact with consumers.
Markets and financial systems are now more connected than ever, and capital can move freely between economies in a way that was unimaginable only a few years ago.
This has delivered big benefits for both businesses and individuals.
Global forces continue to reshape countries’ natural advantages in ways that governments cannot anticipate.
There are fundamental forces shaping global economic activity.
Countries around the world are turning to Asia. More specifically, the emerging middle classes in China and India, will be the next sources of global growth, bringing new consumers to the market.
On present trends, there could be close to 2 billion Asians in middle class households within the next 7 years.
Industries such as education and agriculture are already benefiting from this growth, and Australia is enjoying the benefits of this.
Education exports from Australia to Asia have doubled in the last 20 years.
China’s share of Australia’s wine exports is now five times what it was five years ago.
Asia is likely to increase its demand beyond just better quality housing and food.
A broader range of services will be a key part of this rising demand. In areas such as tourism, financial services, and educational services, to name only a few.
Another example is medical research technology which has many untapped possibilities. There are advances every day in disease prevention, management of chronic illness, and aged care to name a few examples.
The Medical Research Future Fund, another measure we put in place in our first Budget, is designed to undertake world leading research into the critical health challenges facing our populations. It is positioning Australia as world leader.
There is undoubtedly going to be huge demand from Asia for such health services, and we will be ready to meet this demand.
Being a world leader won’t come easily. Australia will be competing with the rest of the world for Asia’s growing middle class.
Australia is already positioning itself to take advantage of these huge markets. We have recently signed free trade agreements with Korea and Japan, and we are working towards an agreement with China.
These agreements are important as we cannot take our position for granted.
As I like to remind my fellow Australians, the distance from Berlin to Beijing is less than that from Brisbane to Beijing.
Friends, we have spent the last six years dealing with the after effects of the global financial crisis.
It has been one of the most dislocating periods since the Great Depression. That goes without saying.
The global economy has been in intensive care and now we need to speed up the recovery.
Just like our citizens do every day, we have to do the hard work.
We need to act now.
Procrastination is our enemy. Sensible, mature, bipartisan debate is our ally.
I believe that with hard work, greater collaboration and conviction, we can once again have a truly prosperous global economy. One in which there are jobs and opportunities for all citizens in all nations.
That’s what Australia is doing with its leadership of the G20. That’s what we are doing in Australia with our economic strategy.
We are working hard to implement that strategy because we want Australians to feel confident about their future.
We want Australians to have well-paid and secure jobs.
We want businesses to thrive.
We want to usher in a new era of opportunity and prosperity for all Australians.
We will not walk away from this responsibility and I want others to take up the same challenge.
Thank you and I look forward to hopefully speaking here again in the future.