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Address to the AFR Banking and Wealth Summit, Sydney



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The Hon. Scott Morrison MP Treasurer

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“MINING THE SMART ECONOMY” ADDRESS TO THE AFR BANKING AND WEALTH SUMMIT, SYDNEY WEDNESDAY 4 APRIL 2018

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Of all the features of our Australian economy, the most impressive is its resilience.

A resilience anchored in the indefatigable will of an Australian people that refuses to be denied their prosperity.

The compounding effect of continued growth in the face of decades of economic upheaval, financial crises, globalisation, floods, droughts, commodity cycles and technological disruption has underwritten our modern wealth as a nation and as individuals.

Growth has been our goal and constant.

But recently, maintaining our growth through the momentous transition from our once-in-a-hundred-years mining investment boom has been arguably our most extraordinary act of economic defiance.

The importance of this fact cannot be understated.

At the G20 in Shanghai, I met with the former Chinese Finance Minister Lou Jiwei.

He was amazed that as a commodities sensitive economy, we were managing to emerge from our mining investment boom without going into recession. This was something he observed to me that few countries, if any, have managed before in their economic history.

Two years on, Australia’s successful exit from the mining investment boom eclipses passing through the GFC, not least because emerging from the GFC was aided and abetted by the upswing of our mining investment boom and external factors like the strong Chinese stimulus.

The truth is that Australia was not exposed to the same monumental impact of the GFC on our economic activity or the composition of our GDP as it did in other nations, where it was viewed in recessionary terms. In the United States, they refer to it as the Great Recession.

In Australia, the threat was to our financial system, which proved resilient, thanks to the prudential architecture put in place a decade earlier by Treasurer Costello and the sound management of our banks. In comparison to so many other countries, during the crisis our banks continued to lend. That is why we survived the GFC.

Compare this to the shock of the unravelling of our mining investment boom.

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More than $80 billion of mining investment disappeared from our economy in the years following the peak of the boom in 2012; a colossal six per cent of our economy, that’s equivalent to the entirety of our iron ore exports. Gone.

The mining investment boom has also had a sizeable impact on wage growth. As Treasury research revealed last year, this was manifested by real consumer wages pitching above productivity levels, propelled by an income shock from rising commodity prices.

This was not normal. We were always going to have to return to normal as the boom ended. This has been part of the reason why wages growth has been so sluggish in recent years, along with spare capacity in the labour market and lower inflation expectations.

This also occurred when company profits were on average declining.

The normal transmission channels that linked wages growth and productivity in the Australian economy were rudely interrupted by the mining investment boom.

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In dealing with this our Government was left with another major problem.

Unlike Labor who had the starting point of the Howard and Costello budget surpluses when they responded to the GFC, by the time the mining boom began to subside, Labor had left the fiscal cupboards bare.

Labor spent every cent on an egregious and ill-considered shopping spree of bad ideas that not only cleaned out the cupboards, but put our nation deeply into debt, spending the proceeds of a mining boom that was never going to last.

Labor had gone hard, gone households, and then gone was the surplus and all of our fiscal buffers.

So here we are now in Labor’s debt, literally.

We have patiently worked our way through these challenges with no help from Labor or the Parliament. Despite setbacks we have remained on track for a projected surplus in 2020-21 for five successive budget updates.

This has enabled us to so far keep our AAA credit rating.

We have also kept taxes as low as possible, while addressing tax sustainability and integrity issues and made the savings needed to keep Government spending under control. At 1.9 per cent, real spending growth is now at the lowest level of any Government in the last 50 years.

We are also no longer borrowing to pay for every day expenditure, for the first time in a decade.

Our borrowings are now raised to pay for critical infrastructure and defence spending, key components of our national economic plan, rather than pensions and unemployment benefits.

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Thankfully, this difficult period is coming to a close and a new chapter is opening, as noted by the Governor of the Reserve Bank.

And we are seeing this in recent economic data.

While mining investment is bottoming, new investment in the non-mining sectors of our economy has returned, growing at 12.4 percent over the last year. Not that long ago, non-mining investment was going backwards by 8 per cent per year.

We have also seen an almost 10 per cent increase in investment in plant and equipment.

This is a baton change; an economy retooling and re-investing.

And this retooling hasn’t happened by accident. It is one that has been pursued, assisted and secured by the Government’s policies.

Our national economic plan for jobs and growth has been getting results.

 Tax cuts and incentives for small and medium sized business, including new start-up businesses and family businesses.  Investing in our science, technology and entrepreneurial capabilities.  New export trade deals generating new business opportunities.  A $75 billion national infrastructure investment plan that is building the runways,

railways and roads Australia needs to remain competitive, and create jobs.  Record investment in Australia’s defence industry, creating jobs and supporting new high tech companies; and  Ensuring the Government lives within its means.

At the same time we have been guaranteeing the essentials Australians rely on, whether it is Medicare, hospitals or schools. And putting downward pressure on living costs with our National Energy Guarantee that will reduce power bills by $400 for households, or delivering tax cuts for first home deposit savings.

And we are keeping Australians safe, delivering on secure borders and protecting Australians from the threat of terrorism and gang violence.

While it is true that normal transmission in our economy is being restored, we also know that it will still take some time for the reception to be fully picked up in all areas of our economy.

That is why it is so important that we stick with the plan. We need these benefits to flow through, that is how you ensure no-one is left behind - by sticking to the plan.

Our economy is now entering a new chapter in which Australia is well positioned to prosper, but no one can take that prosperity for granted.

There is a lot to gain, but also much to lose, if handled the wrong way.

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One of the key components of our national economic plan is our practical focus on science and technology that is transforming our way of life.

It always has, whether we like it or not.

The way we do business, the way we interact, has changed forever. It continues to be amplified by the sheer scale of digital adoption and the pace of technological change.

There is a reason for this. People like the benefits that these changes bring.

This will keep happening.

To secure Australia’s future, we must continue to adapt to be successful in this new economy - this smart economy - by mining its benefits and our own capabilities in science and technology, to ensure that Australians are not left behind.

And this is not just about white coats. It is about applying technology and research to our traditional economic strengths - mining, agriculture, the medical industry and financial services - to create and secure more real jobs in these areas and beyond.

For small business, it gives them the tools to grow their business, create jobs, sell and export more and, importantly, stay competitive.

I think Australians understand this. I think they know it’s true at a big picture level. But I also think many doubt that it will mean anything good for them and their job.

Globalisation, digitisation, robotics, artificial intelligence, algorithms, quantum computing, the internet of things, the gig economy, blockchain - Amazon, Apple, Ali Baba.

For many this just sounds like a list of threats to their job or the jobs of their children.

They are genuine fears. Fears of being left behind. Fears that this may be all ok if you’re a physics PHD or were born with an iPad in your hand, like younger generations, but not otherwise.

But the truth is, like the mining industry, the economic benefits of the new smart economy extend well beyond those who are directly employed in the science and technology field.

There are many rings of jobs that flow out from our success in science and technology. Like dropping a rock in a pond.

For example, how much more secure would your job be if you worked for a small business whose suppliers paid their bills on time. Advances in financial technology are already making this a reality. That will secure jobs.

Of course it is true that jobs are replaced by new technologies. But it is also true that value created by the new inventions and advances by Australians in science and technology can be just as valuable as what we dig out of the ground.

Just like minerals, they will bring wealth and incomes to Australia that will drive further growth in our economy, which means more jobs and higher wages right across our economy.

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The Department of Industry, Innovation and Science estimates that product innovation across all businesses lifts turnover growth by 3.3 percentage points.

The OECD in 2015 attributed around 50 per cent of annual economic growth in its member countries to innovation alone.

Businesses that have invested in technology have also rewritten the rules and disrupted traditional markets and the share of profits.

McKinsey and Company estimates the share of company profits in developed markets that these nimble operators have snatched away from the big players is now more than 31 per cent - up from 17 per cent in 1999.

In considering the impact, we also need to update our thinking on where the jobs are in our economy.

Almost 80 per cent of Australians are now employed in service sector jobs.

This has more than offset the decline in routine manual jobs in manufacturing and mining that has largely occurred through automation and technology.

Growth in high-skilled creative jobs officially took the lead in the employment share in 2007 and has grown to occupy a 36 percent share of the labour market. Routine manual jobs represent around 30 per cent.

High-skilled creative jobs are paid around 40 per cent more on average than other jobs, and are growing at a faster pace.

Under the Government’s national economic plan, which includes a strong focus on science and technology, almost a million jobs have now been created, with more than 420,000 in the past year.

Of those, one in five, were created for men over the age of 55 - that’s more than 80,000 jobs. These are the workers that others said were supposed to be left behind.

This is just the beginning of what is being achieved from our national economic plan.

There will be more jobs where these came from if we stick to this plan and position Australia at the leading edge rather than the losing edge, in this new smart economy.

But to pretend there is a better way forward is to ignore reality.

Whilst acknowledging the angst, we cannot walk away from what is taking place around us.

Some will seek to play on people’s fears and tell them that they can stop all this and make things like they used to be.

I call this doona economics, just pull the doona over your head and hope it all just goes away.

Those who propose this are not on your side. This will not only cost you your own prosperity, but that of your children and grandchildren.

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So beware those who say, what have you got to lose. The answer is plenty.

We owe our children better than the past. And the past was never as great as we sometimes romantically remember.

We are facing one of those ‘sliding doors’ moments.

Will we let our fears drive our choices. Will we play politics and indulge populism, and give our opportunity away.

If so, there are plenty of countries who will cut our lunch and steal our jobs, our wages and the investment that would otherwise come here.

As a Government, we made our choice some time ago.

To prepare our children and our current workforce for the future they will live in, not one imagined by sentiment, and build the infrastructure and policy support that will be needed to make this happen.

The Innovation and Science Australia 2030 Strategic Plan references the fact that Australia is currently competing in a $1.6 trillion global innovation race in which the winners not only increase their share of global wealth, but improve the living standards of their people.

Right now we are running in the middle of the pack. We need to move up through the field.

We are making progress but we have more work to do.

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A feature of our commitment to science and technology has been our $1.1 billion National Innovation and Science Agenda released in late 2015, supporting businesses to cultivate their ideas, embrace risk and embark on change.

Nineteen of the twenty four measures have been implemented. A further three are pending the passage of legislation - namely access to company losses; intangible asset depreciation; and bankruptcy and insolvency reforms.

The two other measures are on track, but have longer timeframes for implementation, including the Square Kilometre Array radio telescope.

More than $700 million has been poured into funds that are commercialising research and focusing on high value areas like Biomedical science.

More broadly, we have opened up new avenues for innovation start-ups to receive capital funding from investors, legislating tax incentives for angel investors and early stage venture capital partnerships.

This has led to an 80 per cent increase in the amount invested through the government’s early stage venture capital program in innovative Australian businesses, that is around $300 million.

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This is in addition to the more than 12,000 businesses whom the government has invested in through our research and development tax incentives, our CSIRO partnerships and Entrepreneur Partnerships.

These are high-tech businesses like Morse Micro that is creating the next generation of wifi chips, or Silicon Quantum Computing developing what its name suggests, with a special $25 million investment.

These are research firms like ProTA Therapeutics who are working to eradicate peanut allergies, Armaron Bio trialling drugs to prevent cell death resulting from heart attacks, or Colvera Clinical Genomics producing new technologies for the early detection of cancer in DNA fragments.

These are entrepreneurs boosting the potency of our agricultural crops, seeking advantages in energy storage and using our data to achieve better outcomes.

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Our focus on technology is also helping us foster a cutting edge FinTech industry, delivering real benefits for consumers and causing welcome disruption in our financial sector.

Our regulatory sandbox allows FinTechs to develop their ideas and test their products in a controlled environment, without jumping regulatory hurdles.

We have introduced an equity crowdfunding framework to help entrepreneurs raise the capital that will put flight to their bright ideas.

We are implementing Open Banking, putting power back in the hands of consumers by giving them unfettered access to their own banking data.

Just watch the start-ups and entrepreneurs flock to the market with innovative products that help consumers find a better deal, especially now the new payments platform is up and running.

This change, the establishment of a consumer data right, will be used as a beach head for a data-led revolution in a host of other key sectors, particularly in utilities, and especially electricity and gas.

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While we recognise the need to invest in these critical fields, it is not about writing blank cheques to everyone that has a good idea. That is not the Government’s role.

Our involvement needs to be targeted to achieve maximum results.

This was the key message that flowed from the R&D Tax Incentive review which the government is carefully considering and will make our response to in the Budget.

The review included recommendations to improve the effectiveness and integrity of the programme, and improve research collaboration with businesses.

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The Turnbull Government is committed to backing in R&D investment and the economic opportunities and jobs it generates. But it is also important to ensure that the taxpayer’s significant investment in R&D, through this incentive, is generating maximum benefit for the economy and the Australian public.

This is not a tax incentive for business as usual. This incentive has been taken for a ride by some and integrity needs to be restored.

It is not a tax concession designed for businesses to exploit as a proxy for achieving a lower tax rate. We agree that the corporate tax rate should be lower to create jobs. That is one of the problems with having a higher tax rate, it encourages the mining of tax incentives by large firms. But lowering the tax burden on business should not be achieved by allowing arbitrary use of tax incentives, it should be done by cutting the rate.

Our focus is to relaunch an R&D tax incentive that is all about R&D additionality, things that would not have happened anyway, and rewarding the intensity of that effort.

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Finally, just like in the old economy, in the smart economy no-one gets rich selling things to themselves.

In Australia, companies that look beyond the domestic economy and export are upwards of 10 per cent more likely to innovate.

Australia’s manufacturing sector knows these principles well, having been forced to refocus and reinvent themselves after a difficult period post the end of the commodities boom when their profits margins were brutalised.

Wise manufacturers recognised an emerging opportunity to not only create high-tech finished products, but add value throughout the global supply chain.

Consider the case of Textor Technologies, a Melbourne-based manufacturer supplying textiles for local car manufacturers.

Instead of walking to an inevitable end, they invested $17 million to upgrade their automation facility and used the government’s innovation tax incentives to ramp up their research and development, collaborating with the CSIRO to develop 3D moisture-trapping fabric.

That fabric is now used in the millions of nappies that are churned out of factories in Sydney, the United States and across Russia.

From Holdens to Huggies.

Textor Technologies now manufacturers 100 million square metres of fabric each year and exports its own raw product across the Asia-Pacific.

This is why we have been pursuing export trade agreements with our major trading partners - to accelerate the export opportunities for our firms and boost jobs and growth.

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We have negotiated key trade deals with China, South Korea, Japan, together with our ground-breaking TPP which opens the trade doors right around the rim of the Pacific.

Our trade engagement is based on securing win-win outcomes, as was recently demonstrated in our arrangements with the US on steel and aluminium.

This enormous opportunity also puts the onus on our own SMEs to get digital and expand their horizon beyond their own bricks and mortar.

Around 15 percent of global goods are sold through e-commerce giants Amazon and Alibaba alone; acting as the perfect launching pad for entrepreneurs to get their product to the world quickly and efficiently.

A greater adoption of digital technology has the potential to increase Australia’s economy by 0.7-1.2 per cent.

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Conclusion

Going forward our task is to keep investing in science and technology as it remains a key part of our national economic plan for jobs and growth.

The Australia 2030 Innovation Plan we commissioned provides an important guide to direct our next steps.

Investing in the national research infrastructure that provides the platform and building blocks for research and development more broadly in the economy, from both the private and public sector.

Investing in supporting Australians to be successful in the new smart economy - through our entrepreneurs programme, supporting small business to embrace new digital technologies that can help their business and our transition to work programs that help Australians gain the skills they need as the economy changes.

Continued investment in the science, technology, engineering and maths - or STEM - education of our children, especially girls, so they are equipped to deal with the even more advanced world they will live in.

Continue to leverage science and technology in the areas of our strength and greatest opportunity, whether that be in agriculture, resources, health or financial services.

Continue to foster the collaboration between business, entrepreneurs, research scientists, students, government agencies, universities and schools as a part of a natural, vibrant and self-propelling innovation ecosystem.

All of these measures are creating the jobs that Australians will rely on both now and in the future. And, as part of our national economic plan for jobs and growth, we are committed to secure those jobs and thereby secure Australia’s economic future in this new smart economy.

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To realise these jobs and ensure the benefits flow through our economy and leave no one behind, it is important that we stick to the plan.

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Contacts: Andrew Carswell 0418 505 376, Kate Williams 0429 584 675 The Hon. Scott Morrison MP, Sydney